China’s real estate market has experienced a continual downward trend since 2022, with investment and sales significantly decreased. The land premium rate is at the lowest level in a decade, while the combined passed-in and withdrawal rate of auctioned and listed land parcels remains persistently high.
According to data released by the National Bureau of Statistics, last year the area of land purchased by real estate developers decreased by 53.4% compared to 2021. The value of land transactions declined by 48.4%, the newly started area of housing fell by 39.4%, the sales area of commodity housing contracted by 24.3%, and development investment shrank by 10%.
To prevent systemic risk against this negative industry backdrop, the central government at various levels has implemented a series of laws, regulations and policies to stabilise the real estate market while adhering to the principle of “housing is for living in, not for speculation”.
These measures have been tailored to different cities and cover various aspects such as development, construction, investment, financing and sales, with the aim of supporting both rigid and upgraded housing demands and promoting stability of the real estate industry.
KEY INITIATIVES
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At the forefront of land supply and development, a succession of implemented policies targets market orientation “guaranteeing housing delivery, people’s livelihoods and social stability”. These policies prioritise marketisation and the rule of law to address risks faced by real estate developers, ensuring smooth completion and delivery of projects.
The Circular on Regulating People’s Courts’ Preservation and Enforcement Measures to Ensure Use of Commodity Housing Pre-sale Funds for Project Construction – jointly issued in January 2022 by the Supreme People’s Court, the Ministry of Housing and Urban-Rural Development and the People’s Bank of China – requires that good faith and civilised enforcement should be strengthened with the principle of proportionality upheld when implementing preservation and enforcement measures on escrow accounts for pre-sale funds.
The objective is to prevent delays in payment of interim construction costs to construction companies, which could hinder the progress of commodity housing projects and negatively impact their completion and delivery, compromising the rights and interests of homebuyers.
Subsequently, the China Banking and Insurance Regulatory Commission released the Circular on Work Relating to Replacement of Escrowed Pre-sale Funds with Letters of Guarantee Issued by Commercial Banks. The circular allows the use of letters of guarantee as a replacement for escrowed pre-sale funds, enabling reputable real estate developers to utilise those funds effectively.
Additionally, several regions in China – including Shanghai, Guangdong, Sichuan, Wuhan and Nanjing – have introduced supporting policies. These include: accepting demand guarantees as a valid form of performance guarantee for participation in land auctions; adjusting quotas for escrowed pre-sale funds based on developers’ credit records; and allowing developers to withdraw and use funds more than the prescribed escrow amounts to improve liquidity.
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On the other hand, relaxing restrictions feature highly in various policies to boost sluggish housing sales. These focus on meeting reasonable housing demands while reducing the costs and risks of home buying.
In 2022, the People’s Bank and the China Banking and Insurance Regulatory Commission jointly issued the Circular on Establishing a Long-term Mechanism for Dynamic Adjustment to Interest Rate Policy for New Individual Housing Loans for First Homes, which outlines a phased reduction of interest rate floors for commercial individual housing loans for first homes in eligible cities.
Also in the same year, the Ministry of Finance and the State Taxation Administration released the Announcement on Individual Income Tax Policy for Supporting Residents’ Purchase of New Houses Following Sale of Existing Houses, which entitles a taxpayer who purchases a new house in the market within one year of selling his or her existing house to a refund of all or part of the individual income tax paid on the existing one. The refund is determined based on the difference between the purchase price of the new house and sale price of the existing house.
In 2023, the Ministry of Natural Resources and the China Banking and Insurance Regulatory Commission jointly issued the Circular on Making Concerted Efforts to Provide Real Estate “Transfer with Mortgage” Services for the Convenience of People and Businesses. This circular emphasises the need for interdepartmental collaboration to provide premium services for real estate transfers with mortgages.
The Supreme People’s Court’s updated guidance, the Reply on the Protection of Rights of Commodity Housing Buyers, further reinforces the rights of homebuyers. It specifies that if a buyer purchases a commodity housing unit for residential purposes and has fully paid the home price, a buyer’s claim for the property delivery takes priority over any preferential claims for construction costs, mortgage rights or other claims.
Additionally, local authorities have implemented various measures including: allowing transactions of pre-owned homes under mortgages; relaxing or even lifting restrictions on home purchases; lowering caps on real estate agent commissions; and piloting a “housing coupons” policy, which is a supplement to monetary compensation for existing residential housing subject to demolition or resettlement.
NEW DEVELOPMENT MODEL
As for investment and financing, the focus is on resolving debt risks in the real estate sector and facilitating a smooth transition to a new development model. In 2022, the People’s Bank of China and the China Banking and Insurance Regulatory Commission jointly issued the Circular on Ensuring Financial Support for the Stable and Sound Development of the Real Estate Market.
This emphasises the need to provide proactive financial services to support the guarantee of housing delivery and co-operate in addressing risks faced by distressed developers, tweaking financial management policies in a phased manner, and stepping up the financial support for housing leasing.
Several departments, including the Development and Reform Commission, the China Securities Regulatory Commission and Asset Management Association of China, have also issued documents to guide participation of private capital in urban development, construction and operation.
They promote pilot programmes for real estate investment trusts (REITs) in the infrastructure sector and expand the scope of underlying assets of REITs to include affordable rental housing and commercial properties. These measures aim to create opportunities for investment exit.
Local policies have also been implemented in provinces such as Henan and Anhui to support reputable developers in issuing bonds for financing, as well as facilitating M&A of distressed projects. These policies also emphasise the importance of urging commercial banks to strengthen financing support for the real estate market and effectively utilise real estate relief funds.
According to the Guiding Opinions on Actively and Steadily Promoting the Redevelopment of Urban Villages in Megacities and Supercities adopted by the State Council in July 2023, active and steady promotion of urban village redevelopment in megacities and supercities is crucial to improving people’s livelihoods, expanding domestic demand, and enhancing high-quality urban development. This sends a clear signal for stimulating domestic demand as well as consumption potential.
Additionally, during a subsequent meeting of the Political Bureau of the Central Committee of the Communist Party of China (Politburo), it was indicated for the first time that real estate policies should be optimised and the policy toolkit should be fully utilised according to the specifics of different cities, to accommodate the new situation in China’s real estate market where supply and demand has changed significantly. The purpose of this is to better meet residents’ rigid housing demand and desire for better housing, boosting steady and healthy growth of the real estate market.
The Politburo meeting also required that efforts should be made to build and provide more affordable housing; vigorously promote the redevelopment of urban villages and construction of public infrastructure for ordinary and emergency uses; and revitalise and renovate various types of idle properties.
It is expected that the central government and local authorities at various levels will roll out more real estate policies with a higher level of market support and a greater variety of support tools.
POLICY PROGRESS
Based on data released by the National Bureau of Statistics for January to June 2023, the implementation of these various policies to stabilise the real estate market has led to a moderation in the overall downward trend.
That being said, the real estate market in general is still in a low phase, and market confidence has not yet fully recovered.
In the short term, the central task remains the prevention and resolution of debt risks in the real estate sector. This has created hotspots and opportunities in the legal services market, including debt restructuring, bankruptcy reorganisation, dispute resolution, and opportunistic investment for real estate companies.
In the meantime, as the characteristics of the real estate industry continue to evolve towards “inventory-based development, industrialisation, and financialisation”, the real estate market will undergo a transformation and upgrading process despite the challenges. This transition may involve some growing pains but is essential for the industry’s long-term development.
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