CITIC SEC: The tax burden on real estate transactions in the current Chinese market has reached the lowest level in history.

CITIC SEC released a research report stating that the transaction tax burden in the current Chinese real estate market has reached historically low levels, especially for the transaction tax burden of improvement demand in first-tier cities, which will decrease significantly. This fully reflects a policy that liberates thinking and actively promotes stability to prevent further declines. At a key moment when there is once again a divergence in expectations for the real estate market, CITIC SEC believes that the new policies can prevent the market from cooling down again. This is also the first time in over a decade that a tax relief policy specifically targeting development enterprises has been introduced. This policy not only matches the fact of declining gross profit margins in development activities, which is beneficial for developers to focus on high-quality construction, but also helps low-profit-margin development enterprises to recover profit elasticity. CITIC SEC reiterates its view and predicts that by the end of 2024, the Chinese real estate market can achieve stability after a decline. On November 13, the Ministry of Finance, the State Administration of Taxation, and the Ministry of Housing and Urban-Rural Development issued an announcement on tax policies related to promoting a stable and healthy development of the real estate market. The State Administration of Taxation also released an announcement on reducing the lower limit of prepayment rate for land value-added tax, enhancing the preferential treatment of deed tax in housing transactions, reducing the lower limit of prepayment rate for land value-added tax, and clarifying value-added tax and land value-added tax preferential policies in alignment with the cancellation of standards for ordinary and non-ordinary residential properties. The announcements will take effect on December 1, 2024. Reduce the deed tax for new and existing homes, with the most significant reduction in first-tier cities and large units. Before this round of reforms, in areas outside of Beijing, Shanghai, Guangzhou, and Shenzhen, the deed tax for properties under 90 square meters was 1%, while properties over 90 square meters were taxed at 1.5% for the first set and 2% for the second set. In first-tier cities, the deed tax for second homes was 3%. This reform mainly consists of two points: first, the range of application for the 1% preferential tax rate has been expanded from 90 square meters to 140 square meters, and second, the deed tax for second homes in Beijing, Shanghai, Guangzhou, and Shenzhen has been unified to 2%. Overall, after the policy is implemented, deed tax exemptions will be higher for medium to large units and lower for small units (those under 90 square meters will not be affected); deed tax exemptions will be higher in first-tier cities and lower in other areas. According to statistics on transaction data in various cities, it is observed that the average size of second-hand homes in first-tier cities is around 100 square meters, with 90-140 square meters being the main types of units transacted. Therefore, it is expected that the policy will have a significant impact on reducing the burden on demand. Reduce the property transaction value-added tax in first-tier cities. Before the reform, for residential properties in first-tier cities (Beijing, Shanghai, Guangzhou, Shenzhen) that have been sold for over two years, a 5% value-added tax was levied on non-ordinary residential properties based on the difference. This policy has reduced the property transaction value-added tax in first-tier cities. That is, residential properties in Beijing, Shanghai, Guangzhou, and Shenzhen that have been traded for 2 years will no longer be subject to the value-added tax, regardless of size. This reduction will have a significant effect on reducing transaction costs for larger residential units over 144 square meters in first-tier cities. This policy does not involve a reduction in property transaction value-added tax for non-first-tier cities. Reduce the burden of corporate land value-added tax, optimize the cash flow of real estate development enterprises, and objectively impact the profit and loss statement. This round of reform will also lower the prepayment rate for land value-added tax by 0.5 percentage points nationwide. At the same time, large-scale projects with low plot ratios are expected to enjoy the exemption from land value-added tax if the sales value of ordinary standard housing does not exceed 20% of the project cost. Land value-added tax is the highest tax paid by real estate companies, with land value-added tax equivalent to 25% of net profit attributable to shareholders of Poly Developments and Holdings Group and 50% for China Merchants Shekou Industrial Zone Holdings in the first half of 2024. After the full implementation of the new regulations, CITIC SEC calculates that the policy is expected to bring varying degrees of profit enhancement to real estate companies, averaging 8% to 15%, with companies with lower profit margins experiencing greater growth. However, since the specific implementation standards for land value-added tax have not been issued, the increase in profit performance theoretically may only apply to new projects in the future. Nevertheless, compared to the profit and loss statement, the cash flow statement is more important for real estate enterprises, and it is expected that the reduction in the prepayment rate will have a quicker impact on development enterprises. At a critical moment, with policies once again taking action, it is expected to push the market sentiment upward. According to data from Beike and 5i5j Holding Group, in October 2024, the year-on-year increase in second-hand housing transactions in 74 cities reached 60%, and prices in some cities began to stabilize in October. However, the recovery of the existing housing market is very fragile, with listings still at high levels, and the number of cities where homeowner prices are falling exceeds those where prices are rising; the inventory of developers is still difficult to sell before 2022. In a situation where there is a significant difference in expectations for the future market, policy intervention can help further consolidate expectations for stability after a decline, starting from first-tier cities and improvement demand, to boost real market transactions. CITIC SEC reiterates its view and predicts that by the end of 2024, the Chinese real estate market can achieve stability after a decline. Risk factors: The risk of declining resident income and wealth expectations affecting demand for housing; the slow transmission speed of the price stabilization effect in first-tier cities and the risk of continuing price declines in second- and third-tier cities.