Many Regions Intensify Renovation of Urban Villages and Dilapidated Houses: Can Second- and Third-Tier Real Estate Markets Leverage This to "Halt Decline and Restore Stability"?

Against the backdrop of continuous adjustments in the real estate market, intensifying the implementation of urban village renovations and dilapidated housing renovations is considered an important measure to promote urban development and stabilize the property market. Regions including Guangdong Province have set clear goals and related measures in this regard.

According to information released on May 7 on the official website of the Guangdong Provincial Government, Guangdong will implement a special action plan to boost consumption, covering areas such as promoting employment and income growth for residents, and supporting residents' security and upgrading bulk consumption.

To better meet housing consumption needs, Guangdong proposed to make good use of the policy allowing local government special bonds to be used as capital, actively and steadily advancing urban village renovations under the new model. The province will also solidly promote the renovation of old residential communities, with no fewer than 600 old communities to start renovation in 2025, and initiate the replacement of 26,500 old residential elevators.

Analysts believe that the statements in the consumption-boosting measures regarding better meeting housing consumption needs imply that policies related to real estate are more focused on boosting domestic demand and consumption, based on people's aspirations for better living conditions, thereby releasing potential housing consumption demand. The inherent market demand and the momentum formed in the process of meeting this demand will objectively play a role in stabilizing the market.

"Intensifying the implementation of urban village renovations and dilapidated housing renovations can not only release the rental and purchase demands of young people and new urban residents but also meet the housing upgrade needs of existing urban residents. This is the most significant component of the structural demand in China's large cities. As most urban residents' housing needs shift from availability to quality, the comfort of living for some residents in urban villages and dilapidated housing has not been fully met. This group is expected to become the core and important subject of future housing consumption," said Li Yujia, chief researcher at the Guangdong Housing Policy Research Center.

In fact, not only Guangdong but also Henan, Shanghai, Chongqing, and other regions have recently made arrangements for urban village renovation work.

On March 17, the Henan Provincial Development and Reform Commission (NDRC) published a report on the execution of the 2024 National Economic and Social Development Plan and the draft of the 2025 National Economic and Social Development Plan on its official website. Regarding the construction of livable and resilient cities, the report clearly stated that Henan will improve the urban renewal promotion mechanism, increase the renovation of old residential communities and urban villages, orderly implement the renovation and reinforcement of urban buildings, strengthen the supply of affordable housing in key cities, renovate 416 urban villages and 1,459 old residential communities, and add 57,000 units of affordable housing.

According to information released on April 18 on the official website of the Shanghai Municipal Housing Administration, Minhang District held a meeting on April 16 to advance the renovation of urban villages. During the meeting, the district housing authority reported on the overall progress of urban village renovation in the district and outlined the work objectives and tasks for 2025.

On April 28, the Chongqing Municipal Development and Reform Commission issued a notice soliciting public comments on the "Implementation Plan for Chongqing's Special Action Plan to Boost Consumption (Draft for Comment)." Regarding the promotion of healthy development in housing consumption, the plan proposed that Chongqing would seek funding support through multiple channels to ensure the construction of affordable housing and rental housing, and would continue to advance the renovation of urban villages and dilapidated housing in urban and rural areas.

Analysts from Guolian Minsheng Securities noted that after Minister Ni Hong of the Ministry of Housing and Urban-Rural Development proposed in October 2024 to implement an additional 1 million urban village and dilapidated housing renovations through monetary housing resettlement, many localities have responded positively.

"Monetary resettlement for urban village renovation can enhance residents' home-buying capacity and promote the release of improvement demand. With the support of special loans, special bonds, and other funding, it is expected that many cities will actively advance this initiative," analysts from Guolian Minsheng Securities stated.

It is worth mentioning that after five years of pullback in the scale of shantytown renovation monetization, the market effects driven by urban village and old neighborhood renovations have once again attracted attention. Consequently, researchers have compared urban village renovation with shantytown renovation, arguing that the expansion of urban village renovation does not equate to shantytown renovation 2.0.

Researchers have indicated that there are significant differences between the current round of urban village renovation and the previous round of shantytown renovation in terms of scale, funding sources, and renovation cycles.

From the perspective of scale, the Liu Qinghai team from Founder Securities' Real Estate and Construction Division pointed out that from 2014 to 2018, policies strongly supported monetary resettlement for shantytown renovation, setting targets of 18 million and 15 million units over three-year periods, respectively. During these five years from 2014 to 2018, a total of 29.12 million housing units were actually renovated nationwide. The current target of 1 million units for urban village renovation represents a significant difference in scale compared to the previous round of shantytown renovation.

The team also noted that, according to government announcements, during the 13th Five-Year Plan period (2016-2020), over 23 million shantytown renovations were initiated nationwide, with total investment reaching approximately 7 trillion yuan. The funding primarily came from four major sources: Policy-Based Financial Instruments (PSL), bank loans, special bonds, and general fiscal expenditures, with a disbursement ratio of approximately 4:3:2:1.

In terms of funding sources, the previous round of shantytown renovation primarily relied on PSL (Pledged Supplementary Lending) and special bonds, whereas the current round of urban village renovation is included in the scope of support for local government special bonds. Regarding renovation cycles, shantytown renovation projects generally have a relatively small scale and involve relatively fewer stakeholders, resulting in shorter renovation cycles. In contrast, individual projects in urban village renovation are larger in scale, involve more stakeholders, and have longer renovation cycles.

Analysts from Founder Securities believe that while the expansion of urban village renovation projects in cities differs from the previous round of shantytown renovations in terms of funding sources and scale, it underscores the determination and direction of higher authorities to stabilize the real estate market.

"Both the current round of urban village renovations and the previous round of shantytown renovations aim to reduce inventory, with monetary compensation as the primary means of resettlement, and both have covered third- and fourth-tier cities. Therefore, the expansion of the current round of urban village renovations is expected to drive a significant influx of capital and resources into second- and third-tier cities, promoting the recovery of the real estate markets in these cities, and thus gradually spreading the trend of 'halting the decline and restoring stability' from first-tier cities to second- and third-tier cities," said the aforementioned analyst.