In Depth: Does Zhengzhou Hold the Answer to China’s Millions of Unsold Houses?

China is actively addressing its sluggish real estate sector, concentrating on the unsold housing inventory as a key area for intervention [para. 1]. On May 17, the State Council, China's cabinet, encouraged local state-owned enterprises (SOEs) to acquire properties from developers and transform them into affordable housing. This initiative follows Zhengzhou's precedent, which has been addressing the issue since 2021. As more cities adopt the Zhengzhou model, attention has shifted to the model's financial and sustainable aspects [para. 1][para. 2].

Zhengzhou, the capital of Henan province, faced a significant downturn in its property market by late 2021 after experiencing a property boom until 2019. Prices for commercial apartments dropped by nearly half, reaching 2016 levels [para. 4][para. 5]. In July 2021, Zhengzhou initiated the bulk buying of new homes from developers, focusing mainly on commercial apartments. However, progress was slow due to market fluctuations and funding uncertainties [para. 6].

By mid-2022, a liquidity crisis halted many pre-sale projects, leading to a boycott of mortgage payments by disillusioned homebuyers. Zhengzhou's authorities mobilized SOEs and financial institutions to help developers complete unfinished projects [para. 7][para. 8]. By May 2024, Zhengzhou had purchased over 100,000 units, primarily commercial apartments, totaling more than 4 million square meters from various developers, including notable ones like China Resources Land Ltd. and Longfor Properties Co. Ltd. [para. 9].

The Zhengzhou model's pricing strategy has been crucial for its expansion to other cities. From July 2022 to the end of 2023, Zhengzhou Urban Development bought 29 projects for around 12.6 billion yuan ($1.74 billion), averaging 6,664.55 yuan per square meter, lower than the market price [para. 10]. Developers faced losses selling to the government, but it ensured immediate cash returns, a preferable option for cash-strapped developers [para. 12]. However, not all developers accepted the lower prices, demonstrating the conflict between the government's and developers' pricing goals [para. 14][para. 15].

By the end of 2023, China’s national commercial housing inventory was 1.75 billion square meters, requiring significant government purchases to reduce the inventory cycle to manageable months, imposing financial pressures on local governments [para. 18]. GF Securities suggested combining demand-side policies, like interest rate cuts and tax benefits, to revive the housing market [para. 18].

Zhengzhou also introduced a trade-in program in April 2024, facilitating the exchange of old homes for new ones. This initiative is expected to have a greater impact on market demand than direct purchases. As of June 30, about 10,000 second-hand housing units were registered in the trade-in program, with more than 700 agreements signed [para. 21][para. 24].

Both new home purchases and the trade-in program require substantial funding. Zhengzhou Urban Development has spent over 30 billion yuan in the past two years on home purchases, with additional funding for the trade-in program [para. 27]. About 80% of these acquisitions were financed through bank loans at around 3% interest rates [para. 28].

Central and local government subsidies are crucial for sustaining these initiatives. Despite some financial assistance, such subsidies are often delayed, creating financial strains on Zhengzhou Urban Development [para. 31][para. 32].

The ultimate success of these programs depends on converting acquired homes into affordable rental housing. Zhengzhou has turned 30,000 acquired units into rental apartments, aiming for a positive cash flow [para. 35]. The company may consider real estate investment trusts to recover purchase costs, with the requirement to hold and operate rental apartments for at least years before selling them [para. 38].

In essence, navigating the complexities of pricing, funding, and market demand will be key for China to effectively address its real estate sector's challenges and ensure sustainable housing solutions.