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In some core cities, the “old, dilapidated and small” houses that were once called for to be abandoned as soon as possible have started to show their own trends this year. For example, in Shanghai and Hangzhou, small second-hand houses in the urban area have been sold in large quantities since May, and the sales of such houses continued to be hot until July, and have extended to more cities, such as Guangzhou.

The sudden surge in the price of old, dilapidated and small second-hand houses surprised many people, but there is a special type of buyers who understand the mystery. They saw the opportunities that emerged after the frequent interest rate cuts and the sharp price cuts of second-hand houses, similar to the "Davis double-click" in stock investment.

An investor who recently bought several small apartments in Guangzhou told China Business News: "In the areas we select, we basically buy every apartment that is put on the market in the near future. The criteria for selecting an area are whether the price is low enough and whether the apartment is easy to rent out."

There are signs that with the continuous decline in bank deposit rates and the increase in the rental-to-sale ratio after the decline in housing prices, some funds have begun to re-consider real estate as an investment option. However, the current selection criteria of this group of investors for real estate targets are completely different from the past.

Transaction Logic

Li Meng (pseudonym) is a financial practitioner in Guangzhou. He has been looking at houses intensively in his free time recently. "To be precise, we are not looking for old, dilapidated and small houses, but all low-priced houses. It's just that old, dilapidated and small houses have been reduced in price more and have a lower total price, which makes it easier to meet investment standards. We mainly look at second-hand houses within a few kilometers around commercial areas. The age of the building is not important, as long as the rent meets the requirements."

The so-called meeting the requirements mainly refers to whether the rent can cover the interest on the mortgage. If you follow the general housing mortgage loan, the rent of some houses is not enough to cover the mortgage interest, but if you apply for a business loan through a company, the situation is different.

Li Meng's account book is like this: Take a house that previously cost more than 3 million yuan, for example, it can now be bought at around 2 million yuan, and the business loan can be about 1.8 million yuan, so he only needs to pay 200,000 or 300,000 yuan to buy it. The business loan is for five or ten years, and the interest is repaid monthly and the principal is repaid at maturity. Now the interest rate of business loans is as low as 20,000 yuan, and the interest of tens of thousands of yuan a year can basically be covered by rent. When the loan expires in the future, you can apply for a loan transfer, and if the house price rises during this period, you can make a profit.

According to Li Meng's investment logic, as long as the loan interest rate is lower than the rental return rate, the account can be calculated. Of course, this is an investment layout under the asset shortage, and it is also an asset allocation. It is not ruled out that house prices will continue to fall, but they believe that the decline will not be too large, and if it is put into a five-year or even ten-year period, there are some rebound opportunities that are still worth a try.

Zhuge House Search Data Research Center selected data from 50 key cities across the country and found that the rental return rate (rental return rate = annual rent of the house/total price of the house) in the first half of 2024 in the key 50 cities increased by 0.07 percentage points from the previous year to 2.03%, outperforming the current 5-year deposit rate of large state-owned banks.

"The average rental return rate in Shanghai is definitely less than 2% now, and the average rental return rate for elevator apartments is around 1.5%, but there is a type of house that can have a rental return rate of more than 3%." Dong Wang, an investor in Shanghai, showed reporters a 30-square-meter property located in an old residential area in the core area of ​​Pudong. The listing price of the house is only more than 1.8 million yuan. According to Dong Wang, after a simple renovation, the rental price of such a house can be close to 5,000 yuan/month, and the rental return rate can exceed 3.3%.

Dong Wang told reporters that investors have always been one of the important buyers of "old, dilapidated and small" houses. They buy "old, dilapidated and small" houses in the city center mainly because of the land value. Some people buy them to "win demolition", while others buy them to allocate assets and obtain considerable rental income. "When prices were inflated a few years ago, many people withdrew, and now people are entering the market one after another."

Lu Wenxi, a senior analyst at Centaline Property, said that the number of inquiries about investing in "old, dilapidated and small" houses has indeed increased recently. "Some of the people I have contacted do want to buy this type of house because its investment return rate is stable. The current deposit interest rate is only in the 100s, while the rental return rate of this type of house is more than 2%."

Dong Wang believes that investors are also entering the "old, dilapidated and small" market in Hangzhou. "The price of an old house of 50 square meters in downtown Hangzhou is about 1.5 million yuan. Now the down payment for the first house is only 15%, which means a little over 200,000 yuan." He said that with the relaxation of the purchase restriction policy, it is allowed to allocate assets in multiple core cities at the same time, which of course can better share the risks.

Market reversal

The reason why this housing investment model has reappeared in the market is not only that the decline in housing prices has led to a significant improvement in rental returns, but also that the qualifications for buying a house have been relaxed.

In the past six months, many core first- and second-tier cities have lifted the restriction on a household purchasing two homes. For example, at the beginning of this year, Guangzhou announced that housing larger than 120 square meters would not be included in the purchase restriction, and the policy supports "rent one and buy one". If a household obtains a housing rental registration certificate, the number of households under the household can be reduced accordingly when purchasing a new home.

For example, Hangzhou has completely lifted housing purchase restrictions in early May this year, and the first home purchase standards have also been relaxed. Only the housing conditions in the district, county (city) where the purchased house is located will be verified. This means that not only can outsiders buy houses in Hangzhou, there is no limit on the number of houses, and the down payment threshold has been lowered to a very low level.

These conditions have created a relatively relaxed environment for investors, who can use a small down payment and a higher leverage to buy multiple houses in core cities for rental and enjoy the benefits of the low interest rate era. As early as May this year, when Hangzhou lifted the purchase restrictions, local media in Hangzhou reported that buyers from Shenzhen, Jinhua, Wenzhou, Taizhou and other places went to Hangzhou to buy "old, broken and small" houses. Shangguan Jian, director of the Hangzhou Shell Research Institute, also told China Business News that the average daily transaction volume of "old, broken and small" houses after the new policy increased by 38% compared with before the new policy, and there were obviously more buyers from other places.

In real estate transactions, it is usually difficult to accurately count the proportion of investors in a certain stage. The only thing that can be confirmed is that in the past two or three months, second-hand housing transactions in many cities have continued to increase, and some popular cities have even seen a downward trend in listed properties.

Data shows that in June 2024, 23,900 second-hand residential properties were sold in Shanghai, a three-year high; in July, a total of 20,400 second-hand houses (including commercial properties) were sold in Shanghai, breaking the 20,000 mark again. The transaction volume in Guangzhou's second-hand housing market in June also hit a new high since April 2023, with the number of online signings reaching 10,500 units and 9,299 units signed online in July. Hangzhou's second-hand housing transaction volume in June hit a 15-month high of 8,849 units; in July, Hangzhou still sold 8,341 second-hand houses, a year-on-year increase of 72%. Chengdu's second-hand housing transaction volume in July once again ranked first in the country, with monthly transactions reaching 21,200 units...

An interesting phenomenon is that the increase in second-hand housing data in many cities is closely related to the surge in the transaction volume of "old, dilapidated and small" housing. According to data from the Shanghai Real Estate Trading Center, from June to July this year, about 16,000 "old, dilapidated and small" housing units were sold in Shanghai, of which 5,700 were "old, dilapidated and small" housing units that were the only one in the family and within the outer ring road. Yu Jingqi, director of the Shanghai Lianjia Operation Management Center, told Caixin that after the "5.27 New Policy", the proportion of customers who purchased "old, dilapidated and small" housing units (houses older than 15 years and less than 70 square meters) within the outer ring road of Shanghai increased compared to before the new policy.

In Guangzhou, the core area of ​​Zhujiang New Town has seen active sales of small-sized houses recently. Among the 47 second-hand houses sold in this area in July, 33 were small-sized houses with a total price of less than 10 million yuan, accounting for 70%. According to the Hefu Research Institute, some old second-hand houses in Guangzhou can be sold from listing to transaction within a week or even a few days, while the average transaction cycle of second-hand houses in Guangzhou exceeds 130 days.

In Hangzhou, transactions in old residential areas in the city center such as Chaohui Community, Gudang New Village, Xizhao New Village, Caihe Community, and Cuiyuan Community have been very active in the past two months, ranking at the top of the community transaction list.

In the eyes of investors like Li Meng, the most direct factor for choosing old, dilapidated and small houses is the "large price drop". "Before, many people shouted to abandon old, dilapidated and small houses, which made many owners eager to sell, and there was a lot of room for bargaining. As the price drops, the value will be revealed."

A person in charge of an agency in Guangzhou who is familiar with second-hand housing transactions revealed to China Business News that housing prices fell sharply twice in September last year and early this year, with the price of most second-hand houses falling by more than 20%, and some even falling by 40%, which made investors smell opportunities. "In June, our store sold four houses, two for investment and two for self-use," the person in charge said.

Several other property owners who are currently listing their homes for sale confirmed to China Business News that, based on the potential buyers they have met, investors often have some notable characteristics: First, they don't pay much attention to the condition of the house itself, such as how new it has been, how big it is, how it faces a certain direction, etc.; second, they try their best to suppress housing prices and try to close the deal at the lowest possible price; third, they may ask the owner to cooperate with them in getting a high appraisal and high loan, that is, to sign a contract price that is higher than the actual transaction price, in order to obtain more loans from the bank.

Opportunities and risks

Most industry insiders believe that "housing for living, not for speculation" will be the basic logic of the new real estate development model. The investment model that hopes to make profits from skyrocketing housing prices is basically unlikely to reappear. Instead, the rental return rate may become the new "value anchor" of real estate investment.

On August 9, the central bank released the "China Monetary Policy Implementation Report" for the second quarter of 2024, which pointed out that rent is the core variable affecting housing value. Assets are valuable because they will bring future cash flow income. In theory, the value of housing is mainly affected by the future rent discount. The residential attributes of the house and the overall stable rent discount determine the base price and foundation of the property.

The report also stated that the housing "rental-to-sale ratio" has generally rebounded in recent years. Market institutions have estimated that the current rent-to-sale ratio in first-tier cities is close to 2%, and in second- and third-tier cities it has risen to around 3%. For long-term housing assets, the growth rate of rent is also very important, which will increase the return on rental housing. With the gradual recovery of the economy, rents are expected to rise steadily in the long run. In the past ten years, the rent sub-item in my country's CPI has increased by more than 1.2% annually. Assuming that such a rental growth rate can be maintained in the long term in the future, compared with the established housing purchase cost, the total return on rental housing is expected to increase to more than 3% based on the static rent-to-sale ratio, which will be higher than the return on most assets.

Regarding the current annual rental return rate, Lu Wenxi said that the samples of statistics from various institutions are different, so there are slight deviations in the results. Overall, the average rental return rate of residential properties in Shanghai is 1.6%-1.7%, and the "old, dilapidated and small" properties in the city center are indeed higher, basically above 2%. "There are also properties with a return rate of more than 3%, but they are relatively rare. Once they are released, they will attract the attention of customers." Yu Jingqi said that judging from the rents and real estate transaction prices in July, there are also some properties in Shanghai with a rental return rate of more than 3%, mainly concentrated in popular business districts such as Expo, Pengpu, and Xinhua.

Zhang Hongwei, founder of Jingjian Consulting, told reporters that according to the general investment logic in the real estate industry, the rental return rate must generally reach 4%-5% to be worth investing in. This value is also consistent with international standards. According to this standard, the current rental return rate of some "old, dilapidated and small" properties is still lower than the standard for investment value.

Lu Wenxi believes that many investors are currently in the stage of looking at houses and considering, and have not yet "taken action". Although the transaction volume of "old, dilapidated and small" houses is higher than before, it is not very active, because investing in "old, dilapidated and small" houses is profitable but also risky.

The biggest risk is a further sharp drop in housing prices. "If housing prices continue to plummet, falling by 40% or 50%, then this investment will fail." Li Meng, an investor in Guangzhou, also considered this possibility when assessing risks, but he is still optimistic about the long-term trend of housing prices in the future: "Our estimate is that even if housing prices continue to fall, it will only be a 10 to 20 percentage points. With the implementation of various policies, the housing price plunge should have passed. You can't buy at the lowest price, but you can buy at a relatively low price now."

What worries people in the real estate industry is that although the surrounding facilities of "old, dilapidated and small" houses in the core area are mature and commuting is convenient, the quality of the houses is inferior to that of new houses, and their liquidity is poor in the long run. Lu Wenxi believes that although "old, dilapidated and small" houses are cheap and affordable with stable rental returns, it is difficult to realize assets in the future and the customer base is limited.

But in the eyes of investors, as long as they buy it cheaply enough, the safety cushion is thick enough. Reality is not static. Who can accurately judge the possibilities of the future?