Why government acquisition may work best for China's house trade-in modes

Editor's note: Ren Yingxue is the associate director of corporate ratings at S&P Global Ratings China. Zhang Renyuan is the director of corporate ratings at S&P Global Ratings China. The article reflects the authors' opinion and not necessarily the views of CGTN.

China has recently rolled out an array of pro-real estate measures in a bid to reduce the inventory of unsold houses, spur homebuyers' demand and stabilize the property market, including initiatives to trade in old houses for new ones and promote property trading. In our view, these policies may not provide substantial help for property developers in general at present. Compared to the "trade facilitation mode" where sales agencies, developers and homebuyers are encouraged to work together to reach more deals, the "government acquisition mode," where local governments or SOEs buy pre-owned houses using their own money, should bring better implementation outcomes. The fewer restrictions on the eligibility of pre-owned houses and new homes to be bought, the better the effect will be under the acquisition mode.

Across the nation, house trade-in modes primarily take the forms of government acquisition, discounts and subsidies, and trade facilitation. Specially, the trade facilitation mode is mainly adopted in first-tier cities, with the aim of mitigating friction cost for trading in properties. The government would not provide funding support in this case and the ultimate transaction volume would still be determined by market-oriented factors. We expect this mode to promote house trade-ins and unleash some demand from move-up homebuyers (defined as a homeowner who sells their current home and buys a larger or nicer one). Yet a streamlined purchase process could not stimulate massive home-buying demand, given that market-oriented mechanisms have already been in place for property trading.

In comparison, the acquisition mode and discount and subsidy mode are both backed by government funding support to some extent, which would make it easier to boost residents' willingness to trade in old houses and accelerate the destocking of unsold homes. Under the acquisition mode, local SOEs would acquire eligible old properties directly from the home sellers, who would then use the proceeds they receive to buy new houses within a designated scope. This would lower the thresholds for buying homes and release residents' purchasing power in the quickest and most straightforward way. In addition, pre-owned houses bought by SOEs would typically be transformed into affordable houses and rental houses, creating a synergy between the old house trade-in campaign and affordable housing supply and moving a step forward in implementing a dual-track mechanism emphasizing market rules while at the same time promoting house affordability. 

For the government acquisition mode, the fewer restrictions on the eligibility of new houses and pre-owned homes and the broader the pilot scope, the greater the stimulating effect would be. Being the most representative of the government acquisition mode, the "Zhengzhou pattern" is conducted through Zhengzhou Urban Development Group Co. – a government-designated entity responsible for acquiring old properties. Zhengzhou Urban Development Anju Co. – a wholly-owned subsidiary of Zhengzhou Urban Development – is responsible for relevant operations. Specifically, the value of pre-owned properties will be appraised based on market-oriented rules. Once the home purchase offer is accepted, Anju will ask financial institutions for new loans to complete the deal. Except for the amount reimbursed to the home seller to pay tax, the remainder of the proceeds from selling the house will be directly transferred to the property developer as payment for buying the new property. Under the "Zhengzhou pattern," eligible new properties are completed properties filed with a certificate of completion, but the scope of qualified developers is not restricted and includes both central and local SOEs, as well as private developers at present.

Unlike Zhengzhou, most other cities limit the sources of new houses under the government acquisition mode to projects developed by the SOEs responsible for acquiring old properties, indicating a clear intention for targeted destocking. A limited number of eligible property projects and a small pilot scope pose apparent constraints on house resources. Therefore, these cities should enjoy less flexibility in boosting housing trade under such a mode, impacting the destocking progress as a result. In addition, detailed policies in different regions vary regarding whether an old house can be traded in for one or more new properties, and whether finished or off-plan properties could be considered eligible new houses. There are also different appraisal methods for pre-owned houses and the ratio of appraised value of old houses to the value of new properties. In general, we think the more flexible the trading mechanism and the less restrictions, the more catalysts could be provided for unleashing replacement demand.

Under the government acquisition mode, the stronger the funding support, the better the outcome. Stable access to long-term funds at a low cost forms the foundation for the viability of the acquisition mode. Amid tight fiscal balance across local governments and unfavorable funding conditions for local government financing vehicles (LGFVs), funding support from higher government levels should be kept an eye on for the next stage. 

In our view, the house trade-in policies are at the exploratory stage and should make a limited contribution to the improvement of sales for mainstream developers, especially given the prudent moves across the nation in expanding the scale and modes of pilot programs and numerous restrictive conditions amid an obvious lack of funding support. The targeted purchase of new properties developed by SOEs responsible for acquiring pre-owned homes can be seen as an attempt to lower costs for destocking.