Guotai Junan: Real estate data shows slight improvement, focusing on addressing "dead inventory"

Guotai Junan Securities released a research report stating that according to the data from the Statistics Bureau, both real estate investment and construction area data improved in August, with a slight narrowing of the decline in data. All data showed no significant fluctuations. Considering that August has entered the final stage of the impact of policies implemented in May, there is still anticipation for new policies to provide support. Xie Haoyu of Guojun Securities expressed that the focus will still be on destocking existing projects, making "dead inventory" no longer "dead," because they are liabilities themselves and it is time to stabilize incremental growth and reduce existing inventory. In the past, the market paid little attention to dead inventory because it mostly viewed the real estate industry from an incremental market perspective. According to year-on-year data from the Statistics Bureau, the adjusted data showed improvement, with almost all indicators showing a slight narrowing of the decline. Overall, real estate investment and newly started construction area decreased by 10.2% and 16.7% respectively, with the decline improving by 0.6/3.0 percentage points from the previous month. Sales area/amount decreased by 12.6% and 17.2% respectively, with the decline improving by 2.8/1.3 percentage points. The worst-performing indicator was completed area, which decreased by 36.6% year-on-year, with the decline widening by 14.8 percentage points from the previous month. However, considering that completed area data itself has significant volatility, overall, the data showed some improvement. After the policies implemented in May, the overall performance over three complete months did not show a significant improvement, mainly with a significant improvement in June, while the improvement slowed noticeably in July and August. From June to August, real estate investment and newly started construction area decreased by 8.2% and 19.8% respectively, while in the first four months (excluding May due to the mid-month policy implementation), the decreases were 12.9% and 24.7%, showing some improvement but still far from significant improvement. There was no accelerated improvement from June to August; June saw a significant improvement, while July and August had similar performances. Similarly, sales area and sales amount data showed similar characteristics. It is important to note that the current "stabilization" of data is not below expectations. The current goal of the policies is still to prevent financial risks and ensure that the industry does not experience major ups and downs. The market is currently hoping for a V-shaped reversal and considers any policies that do not bring a reversal as below expectations, leading to a more pessimistic forecast. On the contrary, the bank believes that the current attitude towards the real estate industry is to prevent financial risks and is in a transitional period. The role of the real estate industry is more about stabilizing itself and allocating resources in a more favorable direction. Destocking existing projects will still be the focus in the future, making "dead inventory" no longer "dead" because they are liabilities themselves, entering a time of stabilizing incremental growth and reducing existing inventory. In the past, the market paid little attention to dead inventory because it mostly viewed the real estate industry from an incremental market perspective. Looking back at the market performance in 2021, both investors and real estate companies underestimated the impact of existing inventory. For example, the decrease in newly started construction will lead to a decrease in supply, these views are incremental thinking, which easily leads to misjudgments on market operations. The bank believes that the real estate industry will enter a period of destocking existing projects next, and revitalizing dead inventory is of great significance because inventory itself is an asset, and under high leverage, assets correspond to liabilities. Therefore, behind dead inventory is the liabilities of financial institutions, destocking dead inventory is of great importance. Therefore, while the focus remains on reducing existing inventory, it is important to maintain a balanced allocation by choosing low-leverage leading companies on one hand and monitoring progress in restructuring on the other hand. Risk warning: Market demand accelerating downward.