CITIC Securities believes that the transformation in the real estate sector signifies the end of simple expansion and reproduction. Policy attitudes have shifted from encouraging supply volume to supporting supply quality enhancement. 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 the second half of 2025 will mark a pivotal moment for China’s real estate industry.
The transformation means that the traditional model of rapid, large-scale residential development 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 upgrades. Supply-side capacity is gradually being rationalized, leading to a dramatic reshaping of the industry’s competitive landscape. This change not only alters the rankings of companies but also significantly impacts the social influence of various players across the entire industrial chain. We attribute this shift partly to policy adjustments but fundamentally to the evolving societal demand for housing, which has diverged from that of a decade ago. The new paradigm for real estate development implies a macro-level redefinition of the industry’s narrative. Real estate development investment has declined for three consecutive years since 2022. Due to sluggish large-scale development and a shrinking market share in third- and fourth-tier cities, we anticipate that development investment, new construction starts, and completions will continue to decline for an extended period. While the drag of housing prices on consumption is expected to gradually ease, regional land fiscal revenues may become increasingly polarized. At the micro level, companies face the most challenging residential inventory clearance 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 capabilities in consumer insight and space operation being refined and reorganized, potentially giving rise to more successful new business models. However, since new models only hold value if they outperform peers, our investment focus prioritizes capabilities while also considering resources. We contend that 2025 will bring a transformative moment for China’s real estate industry, potentially second only to the 1998 housing reform in magnitude and exceeding any cyclical changes over the past two decades. Although the real estate sector differs markedly from the automotive industry in technological application and scale economies, the current transformation in supply-demand dynamics, policy orientation, competitive structure, and product innovation parallels the automotive industry’s transition toward electrification and intelligence a decade ago.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 seeing 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 real estate enterprise operations. We are facing the most challenging residential sales environment in history, yet simultaneously benefiting from the most favorable cash flow conditions for 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 operation to achieve more flexible capital returns in the future. Of course, companies still require more time to deleverage and reduce inventory. Reserve policies will facilitate inventory digestion as the industry enters an active innovation phase. 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 nurtured by new supply-demand dynamics, not shaped by policy. Examples include replicating heavy-asset commercial operation capabilities in light-asset service sectors, the potential emergence of new leaders in centralized long-term rental operations, consumer insights monetized through C2M models, new productivity driving product upgrades, and property services converging with the silver economy in communities. Risk warnings: Operational assets may face oversupply overall, and companies lacking experience that hastily enter the market could encounter cash flow disruptions and operational losses. While the light-asset operation model is attractive, its viability depends on companies possessing capabilities exceeding industry averages. Thus, only a few firms are likely to successfully transition from heavy to light assets. Some developers burdened with non-performing assets may find reserve policies insufficient, leaving their prospects uncertain. Additional risks include continued price declines in core cities and ineffective policies in H2. Investment strategy: Focus on capabilities while balancing resources. Compared to late 2024, we no longer emphasize land-to-sales ratios or view post-2022 inventory proportions as the sole determinant for developers. Inventory quality remains important, but operational competence in core assets and product development capabilities may now be more critical.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. Naturally, we continue to emphasize the importance of dividend willingness and corporate governance.
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