Five ministries and commissions, including the Ministry of Housing and Construction, interpreted the “combo punch” of real estate. Among them, “monetized settlement” attracted a lot of attention.

On October 17, the Ministry of Housing and Construction said it will implement an additional 1 million urban and dilapidated housing units through monetized housing resettlement methods. Five of these policies support monetized housing resettlement. One focuses on supporting cities above prefectural level; the second is that development and policy financial institutions grant special loans; the third is to allow local authorities to issue special bonds; the fourth is to grant tax concessions; and the fifth is that commercial banks issue loans based on evaluations.

Looking back at the shed reform back then, if divided according to the form of shed reform and resettlement, China's shed reform process can roughly be divided into two sections according to 2015, with physical placement and monetized resettlement as the mainstream before and after, respectively. The so-called monetized resettlement means that the government department directly compensates the residents of the evicted shantytown in the form of money, and then the residents then go to the commercial housing market to buy housing.

In its March 2022 report, Shengang Securities concluded that the main source of funding for monetization settlement after 2015 was a supplementary mortgage loan (PSL) provided by the central bank, and the PSL loan balance peaked at about 3.6 trillion in November 2019.

Regarding the new round of urban reform funding, Shenwan Hongyuan Securities said in a report in November last year that judging from the capital composition, the central policy bank's special fund energy is high and is expected to remain the most important component. The share of special loans for shed reform in the current round will decline slightly, and local special debt may become one of the important parts; unlike shed reform, social capital and commercial banks are significantly more motivated to participate in urban reform. This is due to the fact that the current urban reform is mainly concentrated in high-energy Tier 1 and 2 cities. Land concessions are more certain, and the operating cash flow of some properties is higher Considerable; in addition, funding sources for urban reform It will also include aspects such as central subsidies and local funds.

Under the new round of policies, what the market is most concerned about right now is how much capital can this “monetization settlement” leverage? What are the major positive aspects? How long will it take to transfer to fundamental improvements?

Shen Wan Hongyuan: PSL issued a total of 3.38 trillion yuan from 2014 to 2018

Although it has been a long time since shantytown renovation began, the full-scale outbreak phase only began in 2014. However, the reason why shed reform can “speed up expansion” is that monetization and placement have played a direct role in promoting it. In 2014, the rate of monetized housing reform nationwide was 9%; in 2015, it rapidly rose to 29.9%; in 2016, this ratio even rose to 48.5%.

So how much is the total amount of resettlement funding? Where did it come from again?

Shen Wan Hongyuan wrote in the November 2023 report that PSL forms the main source of funding for special loans for shed reform, that is, loans are made to policy banks to support shed reform projects through PSL. In the future, policy banks will repay PSL's maturing debts after receiving debt repayment from local governments:

PSL issued a total of 3.38 trillion yuan from 2014 to 2018, and the two major policy banks issued a total of 4.96 trillion yuan during the same period, accounting for 68%, of which 90%, 90%, 82%, 50%, and 54% were respectively from 2014 to 2018, with an average value of 68%. From this, it can be seen that PSL is important for shed reform.

According to data from the Ministry of Housing and Construction, the Ministry of Housing and Construction plans to start a total of 23.6 million units in 2015-2018, and actually starts construction of 24.42 million units, with an estimated total investment of 6.26 trillion yuan, of which:

Special loans for shed reform: Special loans for shed reform provided by the two major policy banks, CDB and the Agricultural Development Bank, are the main source of funding. The cumulative scale of special loans for shed reform reached 4.53 trillion yuan in 2015-18, accounting for 72% of the total investment amount. 2015-18 accounted for 65%, 80%, 70%, and 74% of the current year's investment, respectively, with an average value of 72%.

2) Central subsidies/local own funds: The 2015-18 central subsidy/local capital estimate totaled 0.63 trillion yuan (based on estimates of shantytown renovation funds for affordable housing projects in the national public finance housing security expenditure), accounting for 11%, 12%, 9%, and 10% of that year's investment in 2015-18, respectively, with an average value of 10%.

3) Other resource sources: Resources of other nature (including commercial bank loans and special shelf reform bonds) totaled 1.09 trillion yuan, accounting for 18% of the total investment amount.

Regarding the resettlement area, according to official data, the monetization of shed reform in 2016 helped the local area absorb 0.25 billion square meters of property market inventory. Although since 2017, the housing and construction department has no longer announced the monetized resettlement ratio for shed reform across the country. However, according to industry estimates, around 60% in 2017 helped absorb 0.25 billion to 0.3 billion square meters of property market inventory.

The positive significance of the monetized placement of shed reform

Regarding the positive significance of shed reform and monetization for real estate itself and the macroeconomy, Shen Wan Hongyuan summed up three points:

1) The monetization and resettlement of sheds is beneficial to the removal of real estate inventory, driving the average sales area ratio of commercial housing across the country to 15%:

After the shed was converted to monetization and resettlement, the government actually guided the housing purchase needs of residents in the demolished shantytown area into the distribution of the commercial housing system. Demand was effectively expanded, which greatly helped the commercial housing system to remove inventory. Looking at driving sales, in the last round of shed reform, we estimated that in 2015-2018, the monetized inventory of the national shed reform was 0.15 billion square meters, 0.25 billion square meters, 0.31 billion square meters, and 250 million square meters, respectively, accounting for 14%, 18%, and 17% of the national residential sales area in 2015-2018, with an average value of 18%; accounting for 12%, 16%, 18%, and 14% of the national commercial housing sales area in 2015-2018, with an average value of 15%.

2) The monetization and placement of shed reforms is conducive to boosting local investment and consumption, thereby boosting macroeconomic GDP recovery:

After the introduction of shed reform, the impact of upstream and downstream investment in the real estate industry chain was quite obvious. Furthermore, residents in shantytown areas in the original third- and fourth-tier cities had low income and low consumption. After experiencing the monetization of shed reform, in addition to generating demand for housing purchases, the government also promoted a sharp increase in residents' wealth by acknowledging the real estate value of the original shanty towns and revitalizing the assets of the original real estate.

3) The monetization and resettlement of sheds is conducive to promoting livelihood projects:

Following the monetization and resettlement of shantytowns, the government revitalized the real estate assets of shantytown residents, greatly increasing their household wealth, thereby improving their various living standards, which is very acceptable to shantytown residents.

Regarding financial results, Shen Wan Hongyuan said that the PSL issuance was delayed for about 3 quarters until the improvement of fundamentals:

We found that after PSL was launched in 2015 Q2, the third- and fourth-tier cities saw a significant year-on-year increase in sales area in 2016 Q1, reaching 31% year-on-year; judging from PSL quarterly sales, 2016 Q1-Q3 ushered in a peak period, with sales volumes reaching 313.6, 280.7, and 252.6 billion yuan in a single quarter, while the next peak on the commercial residential sales side occurred in 2016 Q4, 2017Q1, and 2017Q2. The sales area was 18%, 28%, and 19%, respectively.

We believe that under the monetized placement method of shed reform, the delay in the transmission of PSL issuance by the central bank to improving sales in third- and fourth-tier cities is about 3 quarters. It is worth noting that while sales in third- and fourth-tier cities improved, GDP also improved in response to the same period, so it can be assumed that the delay in transferring the central bank's PSL issuance to GDP improvement is also about 3 quarters.