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Reform to enhance growth in the real estate sector

The „Resolution on Further Deepening Reform Comprehensively to Advance Chinese Modernization“, issued by the third plenary session of the 20th Central Committee of the Communist Party of China on July 18, has set the stage for the future direction of the real estate industry in China. This resolution has outlined key measures to prevent and mitigate risks in the real estate sector, small and medium-sized financial institutions, and manage local government debt.

One of the key challenges facing the real estate industry in China is the disparity in rental yields compared to other global cities. Cities such as New York, London, and Tokyo have significantly higher rental yields than major Chinese cities like Beijing, Shanghai, Guangzhou, and Shenzhen. This disparity could potentially lead to further declines in housing prices in Chinese cities, impacting both real estate companies and buyers.

Real estate companies in China are facing challenges with weak financing capabilities and sluggish commercial housing sales. This has increased the risk of defaults on payments, which could have a ripple effect on banking risks and erode buyers‘ wealth. The decline in the real estate sector has also impacted banks‘ ability to prevent or minimize risks, leading to bad debts and reduced profits.

To address these challenges, the third plenum’s resolution emphasizes the importance of regular and smooth housing supply. The country aims to establish a housing system that promotes both rental housing and home-buying, with a focus on scaling up the building and supply of government-subsidized housing to meet the needs of salaried individuals. However, the construction of affordable housing faces obstacles such as financing, land allocation, and targeted supervision mechanisms.

To promote the construction of affordable housing and meet the housing needs of people with varying income levels, China needs to establish a multi-level housing financial system. Drawing inspiration from countries like Singapore, which has a successful public housing model, China can improve its strategic planning and coordination to address the challenges in the real estate sector.

The resolution also grants city governments greater decision-making powers to devise their real estate policies and regulate the market. Some cities will have the flexibility to adjust housing purchase restrictions and criteria based on local conditions. Additionally, measures may be taken to optimize housing purchase restriction policies in first- and second-tier cities by easing eligibility criteria and lowering interest rates on loans.

Furthermore, the resolution aims to remove restrictions on real estate supply, such as the „90-70“ policy, to align with market demand. Reforms will also be implemented to change the financing structure of the real estate sector and improve the advance housing purchase system. While the taxation system for the real estate sector will be improved, the introduction of real estate tax legislation may be delayed until after the industry undergoes intensive reforms.

In conclusion, the resolution on further deepening reform in the real estate sector in China sets a clear path for the industry’s development. By addressing key challenges, promoting affordable housing construction, and implementing reforms to improve financing and taxation systems, China aims to create a more sustainable and resilient real estate market that meets the diverse housing needs of its population.

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