CITIC Securities believes that the transformation of the real estate sector signifies the unsustainability of simple expanded reproduction. Policy attitudes have shifted from encouraging supply expansion to supporting quality improvement in supply. Although the industry differs significantly from the automotive sector in terms of technological application and economies of scale, the current transformation in terms of supply-demand dynamics, policy attitudes, competitive landscape, and product innovation is comparable to the starting point of the automotive industry’s shift toward electrification and intelligence a decade ago. We believe that the second half of 2025 will mark a pivotal moment for China’s real estate industry.
The transformation means that simple expanded reproduction can no longer be sustained, and policy attitudes have shifted from encouraging supply expansion to supporting quality improvement. The competitive landscape of the industry is undergoing significant changes. The macro narrative of real estate has dramatically shifted: while development investment may remain sluggish for a long time, the drag of housing prices on consumption is expected to gradually weaken, and regional land fiscal revenues may further diverge. At the micro level, companies are not only facing the most challenging residential sales environment in history but also the most favorable conditions for investment, financing, management, and exit of commercial real estate. The industry may enter a phase of frequent business model innovations, with the ability to understand consumers and operate spaces being refined and reorganized, potentially leading to more successful new business models. Of course, since new models only hold value if they outperform peers, our investment focus is on capabilities, supplemented by resources. We believe that 2025 will be a transformative year for China’s real estate industry, potentially second only to the 1998 housing reform in significance and exceeding any cyclical changes over the past two decades. Although the industry differs significantly from the automotive sector in terms of technological application and economies of scale, the current transformation in terms of supply-demand dynamics, policy attitudes, competitive landscape, and product innovation is comparable to the starting point of the automotive industry’s shift toward electrification and intelligence a decade ago. The traditional, extensive, fast-turnaround residential development model is no longer sustainable, whether in terms of product demand or financing support. The new demand primarily stems from improved housing needs, requiring companies to focus intensely on product quality rather than development speed. Policy incentives have fundamentally shifted from encouraging supply expansion to promoting quality improvement. Supply-side capacity is gradually being cleared, leading to a dramatic change in the industry’s competitive landscape. These changes not only involve shifts in company rankings but also significant alterations in the social influence of different players across the entire industrial chain. We believe these changes are related to policy adjustments but are fundamentally driven by the evolving societal demand for housing compared to a decade ago. The new model of real estate development signifies a reconstruction of the macro narrative for the industry. Real estate development investment has declined for three consecutive years since 2022. We anticipate that due to weak large-scale development and a declining share of third- and fourth-tier markets, development investment, new construction starts, and completions will continue to decline for an extended period.The good news is that as housing prices show signs of stabilizing and the average cost of residential mortgages declines, the proportion of real estate in household assets is decreasing. We anticipate that the drag of housing prices on consumption may weaken. Core cities, relying on developers’ focused strategies and potentially high-quality supply, are experiencing limited declines in land sales revenue, but other cities are not. This could have significant implications for regional development and the broader fiscal system.
The new model also signifies a dramatic shift in the operations of real estate enterprises. We are facing the most challenging residential sales environment in history, while simultaneously encountering the most favorable conditions for cash flow from operational real estate. Declining risk-free interest rates, the development of a multi-tiered REITs market, and policy emphasis on urban renewal and building function optimization are all aiding real estate companies skilled in asset management to achieve more flexible cash flow in the future. However, companies will still require more time to deleverage and reduce inventory. Reserve policies may facilitate inventory digestion as the industry enters a phase of active innovation. The new real estate model involves upgrading, revitalizing, and restructuring execution capabilities under two main themes: understanding consumer preferences and developing new operational spaces. We believe this model is fundamentally driven by entrepreneurship and emerging supply-demand dynamics, not just policy. For example, replicating heavy-asset commercial operational capabilities in light-asset service sectors, the potential rise of centralized long-term rental operators, consumer insights monetized through C2M models, next-generation productivity driving product upgrades, and the convergence of property services with the silver economy in communities. Risk warnings: Operational assets may face oversupply overall, and companies lacking experience may encounter cash flow disruptions and operational losses. While light-asset models are attractive, their viability depends on companies possessing above-average industry capabilities. Thus, only a few firms may successfully transition from heavy to light assets. Some developers burdened with non-performing assets may find reserve policies insufficient, leaving their prospects uncertain. Risks also include continued price declines in core cities and ineffective policies in H2 2024. Investment strategy: Focus on capabilities while balancing resources. Compared to late 2024, we no longer emphasize land-to-sales ratios or consider post-2022 inventory proportions as the sole determinant for developers. While inventory quality remains important, operational competence in core assets and product innovation capabilities may now carry greater weight.In the service sector, we largely maintain our 2024 perspective, believing that the moat built by capabilities and brand is the key to a company’s valuation advantage. Of course, we continue to emphasize the importance of dividend willingness and corporate governance.
Risk Warning and Disclaimer: The market carries risks, and investment requires caution. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situations, or needs of individual users. Users should assess whether any opinions, views, or conclusions in this article align with their particular circumstances. Investments made accordingly are at the investor’s own risk.
