How much investment did the historical "monetization settlement" drive?

Ministry of Housing and Urban-Rural Development and other five ministries interpret the real estate "combination punch", with "monetized resettlement" attracting much attention.

On October 17, the Ministry of Housing and Urban-Rural Development announced the addition of 1 million sets of urban villages and dilapidated house renovations through monetized resettlement housing. Five policies support monetized resettlement housing, including a focus on supporting cities at or above the prefecture level, development and policy financial institutions providing special loans, allowing local governments to issue special bonds, granting tax incentives, and commercial banks issuing loans based on evaluations.

Looking back at the shantytown renovation in previous years, if classified according to the resettlement form, China's shantytown renovation process can be roughly divided into two stages around 2015, with physical resettlement and monetized resettlement being the mainstream before and after. Monetized resettlement refers to the government compensating residents of demolished shantytown areas directly in monetary form, and then residents purchasing housing in the commercial housing market.

Shenwan Hongyuan Securities summarized in a report in March 2022 that the main source of funds for monetized resettlement after 2015 was the People's Bank of China providing supplementary loans secured by collateral (PSL), with the PSL loan balance reaching approximately 3.6 trillion yuan in November 2019.

For the new round of urban renovation funds, Shenwan Hongyuan Securities stated in a report in November last year that in terms of fund composition, central policy banks' special funds are expected to remain the most important component, with the proportion of the last round of shantytown renovation special loans accounting for 72%, which is expected to slightly decrease in this round. Local special bonds may become an important part; unlike shantytown renovation, the participation enthusiasm of social capital and commercial banks in urban renovation is significantly higher, mainly due to this round of urban renovation focusing on high-energy level first- and second-tier cities, with higher certainty in land transfer and some property operating cash flows being considerable; in addition, urban renovation funds will also include central subsidies, local self-owned funds, and other aspects.

Under the new round of policies, what the market is most concerned about now is, how much funds can be leveraged by this "monetized resettlement" this time? What are the major positive implications? How long will it take to transmit to fundamental improvement?

Shenwan Hongyuan: PSL accumulated a total of 3.38 trillion yuan from 2014 to 2018

Although the shantytown renovation started a long time ago, it only entered a comprehensive outbreak stage in 2014. Monetized resettlement played a direct role in accelerating and expanding the shantytown renovation. In 2014, the national monetized resettlement ratio for shantytown renovation was 9%, rapidly increasing to 29.9% in 2015, and further rising to 48.5% in 2016.

So, how much total resettlement funds are there? And where do they come from?

Shenwan Hongyuan wrote in a report in November 2023 that PSL constitutes the main source of funds for shantytown renovation special loans, that is, providing PSL loans to policy banks to support shantytown renovation projects, and in the future, policy banks will repay PSL maturing debts after receiving repayment from local governments:PSL accumulated a total of 3.38 trillion yuan in new issuances from 2014 to 2018, while the two major policy banks issued a total of 4.96 trillion yuan during the same period, accounting for as high as 68%. The proportions for 2014 to 2018 were 90%, 90%, 82%, 50%, 54%, with an average of 68%. This shows the importance of PSL in shantytown renovation.

According to data from the Ministry of Housing and Urban-Rural Development, from 2015 to 2018, the Ministry planned to start construction of a total of 23.6 million sets, with actual construction starting on 24.42 million sets, with an estimated total investment of 6.26 trillion yuan, including:

Special loans for shantytown renovation: The main source of funds for shantytown renovation comes from the special loans provided by the China Development Bank and the Agricultural Development Bank. From 2015 to 2018, the cumulative scale of special loans for shantytown renovation reached 4.53 trillion yuan, accounting for 72% of the total investment. The proportions for 2015 to 2018 were 65%, 80%, 70%, 74%, with an average of 72%.

1. Central subsidies/local self-owned funds: From 2015 to 2018, central subsidies/local self-owned funds were estimated to total 0.63 trillion yuan (based on the estimated funds for shantytown renovation in the national public finance housing security expenditure). The proportions for 2015 to 2018 were 11%, 12%, 9%, 10%, with an average of 10%.

1. Other sources of resources: Other sources of resources (including commercial bank loans, special shantytown renovation bonds) totaled 1.09 trillion yuan, accounting for 18% of the total investment.

As for the resettlement area, official data states that in 2016, the monetization of shantytown renovation helped local areas digest 250 million square meters of housing inventory. Although since 2017, the Ministry of Housing and Urban-Rural Development no longer discloses the national monetization resettlement ratio. However, according to industry estimates, in 2017 it was around 60%, helping to digest 250-300 million square meters of housing inventory.

Positive Significance of Monetization Resettlement in Shantytown Renovation

Regarding the positive significance of monetization resettlement in shantytown renovation for the real estate sector and the macroeconomy, Shenwan Hongyuan summarized three points:

1) Monetization resettlement of shantytown renovation helps reduce housing inventory, boosting the average proportion of national commercial housing sales area to 15%:

After the monetization resettlement of shantytown renovation, the government effectively guides the housing demand of residents from demolished shantytowns into the distribution of commercial housing, effectively amplifying demand, which greatly helps reduce housing inventory in the commercial housing system. In terms of boosting sales, in the previous round of shantytown renovation, we estimate that from 2015 to 2018, the monetization of shantytown renovation helped reduce inventory by 150 million square meters, 250 million square meters, 310 million square meters, and 250 million square meters respectivelyAccounting for 14%, 18%, 22%, and 17% of the national residential sales area from 2015 to 2018, with an average of 18%; accounting for 12%, 16%, 18%, and 14% of the national commercial housing sales area from 2015 to 2018, with an average of 15%.

2) Monetization of shantytown renovation is conducive to boosting local investment and consumption, thereby driving the macro GDP recovery:

After the shantytown renovation, the investment driving effect of the real estate industry chain is more significant. In addition, residents in the original third- and fourth-tier cities had low income and low consumption. After the monetization of shantytown renovation, residents not only generate housing demand, but the government also recognizes the original real estate value of the shantytown area, revitalizing the assets of the original real estate, thereby significantly increasing residents' wealth and stimulating their consumption demand.

3) Monetization of shantytown renovation is conducive to promoting people's livelihood projects:

After the monetization of shantytown renovation, the government revitalized the real estate assets of shantytown residents, greatly increasing their family wealth, thereby improving their various living standards, which is very acceptable to shantytown residents.

Regarding the monetary effects, Shenwan Hongyuan stated, "The transmission of PSL issuance to fundamental improvement lags by about 3 quarters:"

We found that after the surge in PSL in 2015Q2, third- and fourth-tier cities saw a significant increase in sales area year-on-year in 2016Q1, with a year-on-year increase of 31% in sales area in third- and fourth-tier cities in 2016Q1; looking at the quarterly issuance of PSL, there was a peak in 2016Q1-Q3, with quarterly issuances reaching 313.6 billion, 280.7 billion, and 252.6 billion yuan, while the next peak in sales of commercial housing occurred in 2016Q4, 2017Q1, and 2017Q2, with year-on-year sales area increases of 18%, 28%, and 19% respectively.

We believe that under the monetization of shantytown renovation, the lag time for the transmission of PSL issuance by the central bank to the improvement in sales in third- and fourth-tier cities is about 3 quarters. It is worth noting that as sales in third- and fourth-tier cities improve, GDP also improves correspondingly during the same period, so it can be considered that the lag time for the transmission of PSL issuance by the central bank to the improvement in GDP is also about 3 quarters.