On January 20, 2022, the central bank lowered the one-year LPR from 3.80% to 3.70%. After reducing 5bp in December 2021, it lowered 10bp again. The LPR over five years decreased from 4.65% to 4.60%, the first time after 21 months.
Comments
The tone of stable and loose monetary environment in 2022 is basically determined. The LPR over 5 years is lowered for the first time after 21 months, and the adjustment range of 5bp is basically in line with expectations. From the historical deduction, driven by the decline of policy interest rate, the LPR over 5 years will usually be reduced accordingly. Therefore, since the central bank cut MLF and reverse repo interest rate 10bp at the same time on January 17, the market’s expectation of the reduction of 5-year LPR this month has been increasing. Since the first announcement of LPR over 5 years in August 2019, LPR over 5 years has been reduced four times, all in the month of MLF reduction, and the range of the last three times is half of that of MLF reduction. Therefore, 5bp reduction is also expected. In November 2019, February 2020, April 2020 and January 2022, MLF decreased by 5bp, 10bp, 20bp and 10bp respectively, and LPR decreased by 5bp, 5bp, 10bp and 5bp respectively in the current month. The substantial reduction in April 2020 is mainly due to the timely counter cyclical adjustment of monetary policy after the outbreak of the epidemic; The reduction of 5bp is still based on the adjustment under the background of “stable growth and wide credit”, and the adjustment range is consistent with consistent logic. The LPR reduction in the 1-year period and over 5-year period this month is asymmetric, which reflects the policy determination of “no speculation in housing and housing” and the cautious attitude of waiting for changes in sales data to a certain extent. As the benchmark anchor of mortgage interest rate, LPR over 5 years has remained unchanged at 4.65% in the past 21 months, mainly because the tone of real estate regulation and control of “real estate without speculation” has not changed. After the Evergrande incident in the third quarter of 2021, the real estate enterprises experienced frequent thunderstorms. The regulators first paid attention to the superficial problem of the tight capital chain of real estate enterprises and began to promote the recovery of the financing environment of real estate enterprises. This is also one of the reasons why the one-year LPR representing the loan cost of enterprises took the lead in reducing 5bp in December 2021, and continued to reduce 10bp this month; However, the core contradiction of sluggish sales of real estate has not been solved. After a series of marginal adjustments of internal policies, the fundamentals of the real estate industry are still under pressure. At present, the regulators have paid full attention to the core problems of sluggish sales and lack of land acquisition. Therefore, the 5-year and 1-year LPR are reduced at the same time this month, but the reduction range of LPR over 5 years is less than that of 1-year, To a certain extent, we have adhered to the policy of “housing, housing and non speculation”.
The reduction of LPR over 5-year period has enhanced the confidence of home buyers to some extent, but its boosting effect on the total demand is limited, and the limited purchase qualification and wait-and-see mood are still in place. Judging from the deduction of the past cycle, the fundamentals will improve significantly only when interest rate cuts and industry easing occur at the same time. According to the data of the shell Research Institute, the national average mortgage interest rate has been corrected for four consecutive months, the decline has increased, and the lending cycle has been further shortened. In January 2022, the average mortgage interest rates of the first and second houses in China were 5.56% and 5.84% respectively, decreased by 8bp and 7bp respectively compared with December 2021, and decreased by 18bp and 16bp respectively in the past four months. The average lending cycle was reduced to 50 days, 7 days less than December 2021, basically returning to the level of June 2021. However, the de marketization situation has not improved significantly. Therefore, we believe that the credit environment needs to continue to be relaxed to support the release of reasonable housing consumption demand. At the same time, we need to observe whether the fundamentals have warmed up. If not, we need to add loose industrial administrative policies to stabilize the volume and price of the real estate market. From the past several cycles, the interest rate cut cycle is usually included in the industry policy easing cycle, and the upward sales starts 2-3 months after the interest rate cut. 1) From September to December 2008, the interest rate was cut five times. The time point of this round of industrial policy easing (since October 2008) is basically the same as that of the improvement of the macro environment. The sales area lags behind the macro and industrial policy easing for two months, and the cumulative year-on-year rise from – 14.7% in December 2018 to 53% in November 2009. The single month year-on-year growth rate of the average sales price increased from – 12.2% to 33.6%. PE in the real estate sector increased by 62%. 2) The two interest rate cuts from June to July 2012 are in the second round of easing cycle in the real estate industry. In November 2011, the real estate industry entered the easing cycle, and the easing time was ahead of the macro. However, due to the small adjustment of industrial policies from urban fine-tuning, the early sales were still low, and the sales basically synchronized with the interest rate cut, and began to rise significantly. From June 2012 to February 2013, the cumulative growth rate increased from – 10.0% to 49.5%, The month on month growth rate of average residential sales price in 70 large and medium-sized cities began to return to positive since the interest rate cut in June 2012 and gradually increased to 1.1% in February 2013, ending the negative month on month growth of house prices for up to eight months. Due to the limited easing of industrial policies in this round, the real estate valuation is basically stable at 13-16x. 3) In September 2014, the real estate industry entered the third round of easing cycle, with the first interest rate cut in November. Since then, it has experienced five interest rate cuts from March to October 2015. The sales area lags behind the first interest rate cut for three months, and the cumulative year-on-year growth rate has increased from – 16.3% in March 2015 to 34.5% in April 2016, In April 2015, the month on month growth rate of average residential sales price in 70 large and medium-sized cities returned to positive after 11 months of negative growth. PE in the real estate sector increased by 75%. 4) In November 2019, MLF lowered 5bp, the adjustment range was small, and the overall policy of the real estate industry was tight, so the sales boost was limited. In February 2020 and April 2020, there were two major MLF reductions again, mainly due to the loose policy after the epidemic, but due to the lack of relaxation of administrative policy, the fundamentals remained weak after short-term repair.
Therefore, we believe that the supply and demand side policies of the industry will be further moderately adjusted to promote a virtuous circle of the industry. In terms of policy suggestions, from the demand side, it is necessary to actually solve the core problem of sales depression, so as to release the rigid demand. At the same time, the house price also needs to be controlled within a reasonable range. We believe that considering the government’s policy determination on the main tone of “housing, housing and non speculation”, it is unlikely that the administrative regulation of purchase and loan restrictions will be fully opened in the short term. However, from the recent adjustment of provident fund loan policies in Beihai and Zigong, the reduction of down payment ratio may be reflected in the field of provident fund first. Different cities have different fundamentals, and the demand side policies will be liberalized in time and place: the core first and second tier cities with better fundamentals will probably maintain the current policies. There is a great possibility of structural support policies in weak second tier and third and fourth tier cities. The four types of pressure cities with high inventory pressure, rapid decline in house prices, cold cities, high financial dependence on land transfer fees and obvious population outflow are expected to be moderately deregulated on the demand side. The specific policy directions are as follows: 1) liberalizing the purchase restrictions of some people; 2) The interest rate of house purchase loan decreased; 3) Increase the amount of provident fund loans and relax the application conditions; 4) Government subsidies for house purchase; 5) The threshold for settlement continues to be relaxed; 6) Some cities may release house purchase resources by reducing lottery restrictions. However, if the industry fundamentals continue to decline to the end of the first quarter, we expect more concentrated policy adjustments.
From the perspective of supply side policy adjustment, the government should continue to increase land supply, control the price while ensuring the increment, and make more profits in land transfer, strengthen fine management, reasonably adjust the transfer conditions such as plot size, reserve price and binding restrictions, so as to protect the profit space of real estate enterprises to a certain extent. Finally, more effective support is needed at the financing end of real estate enterprises. In addition to M & A loans, real estate development loans need to be more liberalized to reduce the “one size fits all” operation of banks; At the same time, under the pressure of short-term sales, the measures to improve the sales collection rate of real estate enterprises mainly focus on the improvement of the collection rate, which can be achieved by accelerating the speed of bank mortgage lending and moderately relaxing the supervision conditions of pre-sale funds. Both in terms of land acquisition and sales scale, the proportion of private enterprises is high (about 55% and 73% respectively). The “lying flat” of private enterprises has a great impact on the local market and the real estate market. However, the beneficiaries of the current financing side policy are still mainly central state-owned enterprises, which can not be transmitted to private enterprises in the short term. The one size fits all policy can not solve the current difficulties of the real estate industry, We believe that the policy orientation should be guided by the normal operation of existing developers. We believe that if the “three red lines” can realize gradient management and distinguish the number of indicators and the duration of the transition period between central state-owned enterprises and private enterprises, there will be more room for private enterprises to make a soft landing. With the further improvement of industrial policies and marginal easing of the macro environment, sales are expected to stabilize in Q2, and the repair speed of hot first and second tier cities is better than that of third and fourth tier cities.
Investment suggestions:
Although the fundamentals of the real estate industry have not been improved and the transmission of macro easing to the market still takes time, the reduction of LPR over a five-year period is still good for boosting the confidence of the real estate market. From the perspective of sector investment, we adhere to the view that “the first quarter is a better allocation window period”, the expectation of policy improvement is still strengthened, and it is suggested to continue to pay attention to the opportunities of the real estate sector. We suggest paying attention to three main lines: 1) leading real estate enterprises with low credit risk, smooth financing channels and high security: Poly Developments And Holdings Group Co.Ltd(600048) , Gemdale Corporation(600383) , China Merchants Shekou Industrial Zone Holdings Co.Ltd(001979) , China Vanke Co.Ltd(000002) , Longhu group and China Resources Land. 2) Under the influence of macro and industrial policies such as interest rate reduction, elastic real estate enterprises with large marginal income: Xuhui holding group, rongchuang China, Seazen Holdings Co.Ltd(601155) , Jinke Property Group Co.Ltd(000656) , country garden. 3) At present, the real estate post cycle property sector with strong revenue determination, accelerated concentration, recent credit risk mitigation of related real estate enterprises and elastic reversal: Country Garden service, Xuhui Yongsheng life, xinchengyue service, Jinke service, China Resources Vientiane life and Baolong business.
Risk tips:
Real estate regulation continues to upgrade; Sales fell more than expected; Financing continued to tighten.
