China last week announced a plan to renovate an additional 1 million units of urban village and dilapidated housing through monetized resettlement.
The plan, coupled with monetized subsidies, could potentially drive the sales of nearly 100 million square meters of residential properties, according to estimates by multiple industry research institutions.
The terms “urban village renovation” and “monetized resettlement” have prompted some market observers to draw parallels to China’s previous large-scale shantytown redevelopment, which went through four phases. The pilot phase was from 2004 to 2007 and nationwide shantytown redevelopment was from 2008 to 2012, when over 12.6 million shantytown households were resettled, with over 400 billion yuan of central and local government investment. The peak phase was from 2014 to 2018, with more than 6 million units renovated annually, and from 2019 onwards, the program began to decline, with large-scale shantytown redevelopment largely concluded by 2020.
Typically, the proportion of monetized resettlement determines the degree of boost to the housing market. During the early stages of China’s shantytown redevelopment, monetized resettlement accounted for less than 10%, before rising to around 30% by 2015 and to about 50% by 2016-2017, according to Founder Securities. That means monetized resettlement reached 1.73 million units in 2015 and around 3 million units in 2016 – 2017.
Ni Hong, Minister of Housing and Urban-Rural Development, outlined the types of projects eligible for policy support, including projects with a strong desire among residents for renovation, those with significant safety risks, and projects with well-developed plans, particularly solid resettlement schemes.
Such mature projects are likely to be implemented soon, potentially releasing 1 million units by the end of the year, and if the scale can be reached within the next few months, it could help stabilize the housing market, though it may only be a “trial run,” said Zhang Hongwei, founder of Mirror Consulting.
Using the monetized resettlement in 2015-2017 as a reference, the 1 million-unit urban village and dilapidated housing renovation could drive nearly 100 million square meters of home sales, according to real estate research firm CRIC.
While the scale of 1 million units is smaller compared to previous shantytown redevelopment, the latest policy could still have a positive impact on the market, S&P Global Ratings noted.
Unlike previous shantytown redevelopment focused on smaller cities, this round will target medium- to large-sized cities, potentially injecting about 1 trillion yuan into the real estate market if all 1 million units use monetized resettlement, it estimated.
Given that China’s current annual home transaction volume is around 10 trillion yuan, the monetized resettlement could increase demand and help balance the supply-demand dynamics, the rating agency said.
The 100 million square meters of home sales would account for around 9% of China’s total residential sales in 2023 and 32% of the sales in 35 major cities, and if the policy is successfully implemented, it could have a significant impact on the market, estimated CITIC Securities.
Moreover, the “1 million units” is not the end of the story. Minister Ni said that in China’s 35 major cities alone, 1.7 million units of urban villages require renovation and 500,000 dilapidated houses nationwide need regrading.
That suggests room for the policy to expand into lower-tier cities and cover a wider range of projects, S&P said.
Over the next two to three months, it will be important to observe whether transaction volumes in large and provincial cities rebound and whether prices stabilize.
If the market experiences a downturn after the initial policy effect wears off, additional renovation projects may be rolled out in the coming years, possibly totaling 4-5 million units over three years, said Zhang.
This round of urban village renovations will be supported by additional funding policies, including special loans from development and policy banks, allowing local governments to issue special bonds, and allowing commercial banks to provide project loans.
With the combination of special loans, special bonds, tax incentives, and bank loans, this policy demonstrates strong government backing for urban village renovations and in particular, the expanded use of special bonds suggests that local governments are encouraged to fully utilize this tool to continue advancing renovation projects, said Yan Yuejin, deputy director of the E-house China R&D Institute in Shanghai.