Three main lines of reform push real estate development into a new era

2024-08-11

Industrial upgrading and agglomeration will bring new real estate demand to key urban clusters. Hua Shao/Map

Director of Guangkai Industrial Research Institute,

Chairman of China Chief Economists ForumLian Ping

Ma Hong, senior researcher at Guangkai Chief Industry Research Institute

According to the Communiqué of the Third Plenary Session of the 20th Central Committee of the Communist Party of China (hereinafter referred to as the Communiqué) and the Decision of the CPC Central Committee on Further Comprehensively Deepening Reform and Promoting Chinese-style Modernization (hereinafter referred to as the Decision), there are three directions for deepening reform in the real estate sector that deserve special attention in the future, including land reform, population migration, and urban governance. These key reforms will have a profound impact on future real estate development.

1. Deepen land system reform to create new demand and supply

The Communiqué and the Decision proposed to "deepen the reform of the land system" and "build a unified urban and rural construction land market". Land is the mother of wealth and an indispensable element for economic development. In the past, under the dual system, local governments relied heavily on land transfer, land resources were used extensively, and the overall scale of compensatory expenditures such as overall demolition increased significantly. Urban development mainly relied on high-consumption and high-investment land resources, which greatly raised the cost of housing for residents, widened the income gap between urban and rural residents, and greatly increased local government debt. Taking land system reform as a breakthrough point will help reverse the above-mentioned irrational development problems and establish a land fiscal taxation and income distribution system that is compatible with modern development.

The goal of land reform is to establish a land system in which the two types of land ownership are equal, the market is unified, and the added value is shared fairly, so as to promote a more rational allocation and use of land resources. Combined with the pilot reform of rural homesteads and the adjustment of the urban land auction system in recent years, the overall tone of the new round of national land system reform will focus on improving the allocation and use efficiency of land factors, which will have a profound impact on the real estate market. Specific rural and urban land reforms may follow the following paths:

First, we should steadily and prudently promote the reform of the rural land system. Considering the great differences in agricultural land in different regions, it is difficult to promote rural land reform in a comprehensive and synchronous manner across the country. The reform can be carried out in regions with relatively mature conditions. We should encourage qualified rural homesteads to enter the rural land circulation market, accelerate the registration and issuance of certificates for the use rights of homesteads that integrate real estate and land, and explore effective forms of separation of ownership, qualification rights, and use rights of homesteads. After the reform of the land system, homesteads will be transferred in a market-oriented manner, and will be transformed from having only use value to having both use value and asset appreciation space, becoming assets of the holders. The property income of farmers who own homesteads will increase sharply after transactions, narrowing the income gap between urban and rural residents, and thus bringing about a considerable increase in consumption capacity. More importantly, a substantial increase in property income can quickly enhance farmers' ability to settle in cities and towns, generating new demand for real estate.

Second, in the future, urban land reform will take an intensive path, and land use indicators will gradually tilt towards large cities. The Decision points out that "a coordination mechanism will be established between the allocation of new urban construction land indicators and the increase in permanent population". There are two main lines of urban land reform, one is based on residential land corresponding to permanent population, and the other is the land market for non-residential market. The main ideas of the two are consistent, that is, in the future, urban construction land will abandon the strategy of extensive external expansion. At the beginning of 2021, the Ministry of Natural Resources launched a centralized land auction system for 22 large cities, officially opening the road to intensive development of urban construction land during the "14th Five-Year Plan" period. Although local governments have made some adjustments to the "two-concentration" system for land supply in the past two years, and some cities have cancelled restrictive measures such as the number of centralized land supply auctions, the overall trend of reducing urban land supply in the country has already formed. By the end of June 2024, the annualized land supply area of 100 cities across the country will drop from 1.35 billion square meters at the end of 2020 to 1.03 billion square meters, with a cumulative decline of nearly a quarter. Currently, a few key cities represented by Shanghai and Beijing are facing the problem of insufficient land construction indicators. The supply and demand relationship in the real estate market of these cities has been distorted for a long time, resulting in their housing prices being high for a long time.

Third, in the future, urban land use indicators will gradually be aligned with "people, land, money", and the proportion of residential land in megacities and large cities is expected to increase. In the future, population mobility may show four important trends: first, the population continues to gather in large cities in the eastern and southern coastal areas, and Guangdong, Zhejiang, and Jiangsu have become the most attractive provinces; second, the growth rate of permanent population in first-tier cities has slowed down, while the growth rate of population in metropolitan areas will increase; third, the siphon effect of provincial capital cities in central and western regions is more obvious; fourth, the higher the level of public services, the more attractive the region is to the population. In the foreseeable new urbanization development cycle, as the population and industry migrate to key urban agglomerations and their surrounding affiliated towns, the new demand and supply increment of China's real estate industry in the future will be mainly concentrated in these areas.

Fourth, in the future, urban industrial and commercial land will pay more attention to the redevelopment and utilization of existing urban stock land. The Decision proposes to "optimize the use of urban industrial and commercial land, accelerate the development of the secondary market for construction land, promote mixed development and utilization of land, and rational conversion of land use, and revitalize stock land and inefficient land." According to the historical experience of urban development at home and abroad, the cost of developing stock land is lower than that of developing new agricultural land for urban use.

In the 1990s, the redevelopment of old factories in some cities in China was encouraged by allowing state-owned enterprises to redevelop land and sell land use rights, which provided financial incentives to promote faster land circulation and use. In September 2023, the Ministry of Natural Resources decided to carry out pilot projects for the redevelopment of inefficient land in 43 cities including Beijing, aiming to significantly increase the proportion of stock land and the proportion of new industrial projects.Floor Area Ratio, promote the application of land-saving technologies and models, and improve land supply methods, but in the actual process of promoting the redevelopment of existing land, it also faces some challenges.

First, most of the existing idle land belongs to industrial, commercial and residential assets with low demand, and there are relatively few counterparties to purchase the assets; second, some assets have property rights issues, including whether the state-owned assets involved can be completely disposed of in accordance with the marketization of private sector assets, which has yet to be clarified; third, the change in land use attributes requires comprehensive review by relevant departments. Therefore, the process of promoting land redevelopment across the country may be gradual.

2. Accelerate the urbanization of rural migrant population and promote real estate consumption and investment

The Communiqué proposes to "accelerate the urbanization of rural migrant population, deepen the reform of the household registration system, and improve the mechanism for providing basic public services in cities". Since the Third Plenary Session of the 18th CPC Central Committee, the goal of the reform of the new household registration system has been established. The new policy aims to fully relax the restrictions on settlement in established towns and small cities, orderly relax the restrictions on settlement in medium-sized cities, reasonably determine the conditions for settlement in large cities, and strictly control the population size of megacities. The Decision mentions that "Chinese-style modernization is modernization with a huge population scale", and the promotion of modernization and urbanization of the population are carried out simultaneously. By the end of 2023, the urbanization rate of the national permanent population will be 66.16%, and the urbanization rate of the registered population will be only 48.3%. The problem of the urbanization process of the agricultural population lagging behind the construction of cities is more prominent. In the process of the transfer of agricultural population to urban permanent residence, there is a lack of effective compensation for the population leaving the rural areas. The cities and towns that have absorbed a large number of agricultural population have not fully done a good job in social security services, resulting in this part of the transfer population having difficulty in enjoying the same rights and interests as the original urban permanent population in the fields of social security, medical care, children's education, and elderly care. The supply capacity of cities and towns to deal with a large number of agricultural transfer population, such as infrastructure construction and housing conditions, is relatively lacking. Between 2019 and 2023, the urbanization rate and household registration rate increased by 4.7 and 4.9 percentage points respectively, with the household registration rate increasing relatively quickly. This shows that after the comprehensive relaxation of restrictions on settlement in some cities, the obstacles to the influx of surplus rural labor into cities are gradually decreasing. The acceleration of urbanization will drive the growth of investment demand for urban infrastructure construction and affordable housing construction. Combined with the increase in residents' consumption and investment brought about by urbanization, it is estimated that the average annual increase in farmers' conversion to urban residents will drive GDP growth by about 1 percentage point and drive real estate-related consumption investment by nearly 1 trillion yuan.

There is still huge room for the current agricultural population to become urban residents. By the end of 2023, the rural population in China will be 477 million, and the floating population will exceed 380 million. In order to accelerate the urbanization process of the agricultural migrant population and promote the orderly integration of migrant workers, especially the new generation of migrant workers, into cities, the next stage of policy measures will focus on the following five aspects:

First, we will further relax restrictions on settling in cities except for a few megacities. Local governments will formulate specific settlement measures based on local conditions, improve the nationwide open and unified household registration management government service platform, and increase the convenience of household registration and migration.

The second is to improve the mechanism for providing basic public services in cities and towns, establish a mechanism in which basic public services are linked to the permanent population and provided by the permanent place of residence, steadily increase the number and level of basic public service items enjoyed by non-registered permanent residents in the inflow areas, and promote full coverage of basic public services in cities and towns for permanent residents.

The third is to improve the labor skills and quality of the agricultural migrant population, strengthen the basic public education guarantee for migrant children, and strengthen the protection of the labor rights and interests of migrant workers.

Fourth, consolidate and improve the level of social insurance coordination and coverage rate, promote the national insurance plan, steadily advance the national coordination of basic pension insurance, and gradually relax the household registration restrictions on residents' participation in social insurance in their permanent residence or place of employment.

Fifth, improve the supporting policies for the urbanization of rural migrant population, improve the central and provincial fiscal incentive mechanism for the urbanization of rural migrant population, increase the weight of non-registered permanent population factors in the central fiscal balanced transfer payments, and give priority to the construction of compulsory education school buildings and affordable housing construction land needs in areas with concentrated population inflows.

III. Improving urban governance capabilities and promoting the development of metropolitan areas

The Decision proposes that "integrated urban and rural development is an inevitable requirement for China's modernization" and "improve the institutional mechanisms for promoting new urbanization, promote the formation of a new system for smart and efficient governance of megacities, and establish institutional mechanisms for the integrated development of metropolitan areas". At present, key urban agglomerations and core cities have entered the era of metropolitan area construction. Looking at the global urbanization process, the formation of mature metropolitan areas is closely integrated with the two-way flow of modern production factors. By the end of 2023, the total permanent population of my country's four major urban agglomerations (Beijing-Tianjin-Hebei, Yangtze River Delta, Pearl River Delta, Chengdu-Chongqing) will account for about one-third of the national population, and the permanent population of metropolitan areas will account for about a quarter, which is a big gap compared with Japan (55%) and South Korea (about 50%). In the future, there is still a lot of room for development in the construction of metropolitan areas in my country's large cities.

The Decision proposes to "accelerate the transformation of the development mode of megacities and super-megacities, implement urban renewal actions, strengthen urban infrastructure construction, and build livable, resilient, and smart cities". This means that in the future, the construction of intercity railways in key urban agglomerations will be accelerated, the layout of hubs will be optimized, inter-city commuting and cargo circulation will be promoted, and the level of regional integrated development will be improved. According to data released by the Ministry of Housing and Urban-Rural Development, the per capita road area in my country will be 19.28 square meters in 2022. Among the 31 provinces, autonomous regions, and municipalities, 12 are below the national average. Among them, Shanghai (5 square meters) and Beijing (8.04 square meters) are significantly lower than 10 square meters per capita, highlighting the need to accelerate the construction of metropolitan areas in super-large cities.

Looking at the development history of urbanization around the world, the development of metropolitan areas is often based on the saturation of development of megacities or large cities. It is the second stage of urbanization development centered on the central urban area and with a commuting circle of about 1 hour. Currently, the cities in China that meet this condition are mainly concentrated in first-tier cities and some key second-tier cities.

The Decision proposes to "promote urbanization with county towns as an important carrier". County towns will be an important foothold for promoting the two-way flow of urban and rural factors. The GDP of small and medium-sized towns attached to some developed urban agglomerations in the world contributes more than 40% to the urban agglomerations. This is one of the shortcomings that my country's urbanization construction is making up for. During the 15th Five-Year Plan period, the county economy of the urban agglomeration will gradually play a more important role. With the loosening of the household registration system in large cities, the reform will promote the county areas of the urban agglomeration to absorb more population and drive the development of modern service industries, releasing more domestic demand potential. The development level of county towns in the urban agglomeration is expected to be further improved, and local finance will gradually increase the allocation ratio of public resources according to the progress of industrial-city integration development. The public service functions of urban and rural education, medical care and health are expected to be improved.

In recent years, a number of regions have proposed to accelerate the development of county-level commercial construction, and urban and rural logistics distribution centers, utility networks, e-commerce platforms and other fields will benefit. The reform of the construction land system will promote the construction of affordable rental housing in county areas to speed up the construction and better meet local housing needs.

In the medium and long term, key urban agglomerations and core urban metropolitan areas will serve as the most important "containers" of modern production factors. According to the development planning requirements of the "Decision", the main tasks of key urban agglomerations in the future are: to promote the coordinated development of Beijing-Tianjin-Hebei, the development of the Yangtze River Economic Belt, the integrated development of the Yangtze River Delta, the construction of the Guangdong-Hong Kong-Macao Greater Bay Area, and to promote the construction of the Chengdu-Chongqing Twin Cities Economic Circle. In addition to the three traditional economic growth poles, cross-provincial urban agglomerations such as the Chengdu-Chongqing region and the middle reaches of the Yangtze River may carry more innovative technologies, labor force and industrial capital. The construction of the above-mentioned urban agglomerations, metropolitan areas and county towns attached to large cities will become new growth points for the real estate industry, driving the further development of the real estate market.

4. Deepen reform along three main lines and promote the construction of a new development pattern for real estate

my country's population cycle will lead to a long-term slowdown in real estate demand. From historical experience, changes in urbanization and population growth trends have an important impact on the medium- and long-term trends of real estate demand and investment. In the next decade, my country is still in a stage where the pace of urbanization construction has slowed down but there is still room for development. The slowdown in population growth and the relative balance of the number of households per capita in the stock mean that the total annual housing demand will gradually decrease in the future. It is expected that during the "15th Five-Year Plan" period, the national housing demand may drop from 800 million to 1 billion square meters per year to 600 million to 800 million square meters.

The deepening of reforms in the land system, population migration and urban governance will further differentiate the domestic housing market demand. The population will further concentrate in advantageous areas, and the population agglomeration effect of megacities and metropolitan areas will be further enhanced. The main destinations for the urbanization of the agricultural population may be first-tier and second-tier coastal cities and provincial capitals in inland areas. Compared with the national average, the household registration system in these cities will be further liberalized, with stronger local fiscal strength and wider public fiscal coverage. The fiscal and livelihood expenditure guarantee capacity and public service capacity in related education, social security, employment, housing and other fields are more trustworthy.

Industrial upgrading and agglomeration will bring new real estate demand to key urban agglomerations. From the perspective of industrial clusters, the 20th National Congress proposed that the development of new quality productivity is an inherent requirement and an important focus for promoting high-quality development. In the future, key areas for scientific and technological innovation investment will also become the "new shoots" of real estate market demand. Most of the factories, R&D centers and headquarters of large-scale enterprises in emerging industries in China are located in coastal areas and the Yangtze River Economic Belt, basically covering the national industrial parks, high-tech development zones, bonded areas and characteristic industrial processing zones in first-tier urban agglomerations, the middle Yangtze River region, and the Chengdu-Chongqing region.

(This article was published in China Real Estate News on August 12, Page 11. Editor: Su Zhiyong)

Editorial Board Member on Duty: Li Hongmei

Process Editor: Liu Ya

Review: Dai Shichao

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Three main lines of reform push real estate development into a new era

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