Bond Focus: Heavyweight Policies Are Approaching! Is the CRE Recession Coming to an End?

As can be seen from Table 1, the purpose of establishing the Indemnificatory Housing Refinancing Program is to purchase unsold properties and utilize them as public housing. In brief, the Chinese government provides low-income households with social welfare housing, including low-cost housing and economically affordable Housing, which were previously built in a non-market manner without the involvement of real estate developers. After the introduction of new policies, the local governments stopped or reduced the supply of this kind of housing and have instead purchased properties from the market.

Since local governments are not financially sound, the central bank will lend to 21 commercial banks, including the big four banks, which in turn lend to local SOEs participating in the acquisition. In order to lower the debt risk of local governments and prevent misappropriation of funds, LGFVs are not allowed to take part in the acquisition. It is noteworthy that the refinancing rate stands at 1.75%, which is lower than the policy rate (2.5% for one-year MLF) and market rate (2.1% for one-year NCD). Coupled with the fact that the risk of purchasing completed properties looks insignificant, it's believed that the commercial banks involved in the Indemnificatory Housing Refinancing Program have an incentive to actively participate in the acquisition of unsold properties.

In terms of funding scale, PBOC will inject funding of RMB 300 billion, which could be amplified to RMB 500 billion bank loans if takes into account that PBOC releases refinancing in accordance with 60% of the principal amount. The RMB 500 billion worth of funds roughly accounts for 4.3% of the total nationwide property sales in 2023, suggesting that the stimulating effect looks rather powerful. Meanwhile, developers will participate in the program voluntarily and acquirers will purchase at a reasonable price.  Based on the current background of weak market demand and greater downward pressure on housing prices, we believe that the final purchase price will be slightly discounted from the market price, which is expected to be around 20-30%. In addition, the local governments will ultimately decide on the method of purchase, we expect that they may give priority to SOE developers.

To summarize, the governments' purchase of unsold properties, together with future land buyback, are unprecedentedly easing policies, reflecting the central government's determination to rescue the Chinese real estate market. The reduction of supply in properties will undoubtedly have positive impacts on property prices, and the stabilized property price will restore the investment value of real estate, generating a hope of emerging from the predicament. Furthermore, we believe that these policies are just the beginning of the supply-side regulation of the Chinese real estate market, and there may be a series of policies to be introduced in the future, like incremental fund injection from PBOC to property repurchase. If the policies are fully implemented, we do not rule out the possibility of a turning point in real estate fundamentals. 

Which Developers Will Be the Beneficiaries?

Following the introduction of new policies, an increasing number of cities have announced that they will be purchasing unsold properties for use as public housing. Undoubtedly, developers with properties on the acquisition list will be potential beneficiaries. Although it is not yet known to screen potential properties and other details, we could get a glimpse of the panorama through announced schemes. For example, the Linan District of Hangzhou plans to purchase 10,000 square meters of unsold properties for public rental housing and imposes two major requirements. Firstly, the developers have a good business reputation and sound financial and accounting system, and have no major credit violations over the past three years. Secondly, the construction area of the single unit should not be greater than 70 square meters.

Based on the aforementioned points, developers who could be able to participate in the program should have rather solid credit quality without material debt default in the open market. Besides, because of their use as public housing, the shortlisted properties should have fair quality and the average sell price should be pretty low, thus excluding a group of developers that focus on premium properties.  To wrap up the points above, we believe that the developers that can benefit most from the new policy are those that have different types of properties nationwide and have stable operating conditions, such as Vanke and Longfor. 

Rebound of Bond Price of Chinese Real Estate

We note that prior to the introduction of the new policy, the bond price of real estate developers saw a marked improvement. After the release of the new policy, the market reacted positively and there may be room for developers with robust credit profiles to further increase their bond price.  We have listed in the table below some of the real estate bonds or real estate-related bonds that are rising sharply. We would like to reiterate our view that despite bond price rebound for some high-quality developers, the overall real estate bond market is not attractive until the market fundamental experiences a remarkable improvement. Instead, investors should give consideration to non-property sectors.

Table2: Real Estate Bonds with Surge in Price Driven by Polices 

Conclusion

China's regulators recently introduced a new round of supportive policies for the Chinese real estate industry, including the government's purchase of unsold property projects and lifting of the mortgage loan interest rate floor. The unprecedented policies are expected to positively affect the real estate markets.

If the policies are fully implemented, there is a probability that the real estate market could come out of the predicament. Stimulated by the policies, the price of Chinese real estate USD bonds rebounded a lot, and some developers with relatively stable credit quality may have further room for bond prices to rise.