CICC: The timely implementation of tax optimization policies may boost property transaction volume.

CICC releases a research report stating that the tax optimization policy has been implemented as scheduled. The adjustment to the land appreciation tax may improve the short-term cash flow pressure of real estate enterprises moderately, and may boost the volume of real estate transactions. The adjustment to the deed tax and value-added tax may stimulate the improvement of the group, boost the total demand, and may also change seller expectations and increase the volume of properties for sale. While the overall transaction volume may increase, the price trend still needs to be observed further depending on changes in supply and demand dynamics. With the continuous implementation of expected policy measures, the market is gradually shifting towards observing industry fundamentals, and short-term market fluctuations may be expected. Buying on dips remains a suitable strategy. On November 13, 2024, the Ministry of Finance, the State Administration of Taxation, and the Ministry of Housing and Urban-Rural Development issued a notice on tax policies to promote stable and healthy development of the real estate market, adjusting the deed tax, value-added tax, and land appreciation tax in response to the announcement made during the Ministry of Finance press conference on October 12 regarding the adjustment of value-added tax and land appreciation tax policies related to ordinary residential and non-ordinary residential standards. Key points of CICC's analysis: The adjustment of the deed tax and value-added tax mainly benefits the volume of real estate transactions in first-tier cities. Prior to this tax policy adjustment, deed taxes in various regions were levied at 1%/1.5% for first homes below/above 90 square meters, and 1%/2% for second homes (with second homes in first-tier cities uniformly taxed at 3%); value-added taxes in various regions were based on a holding period of two years, with full tax/ exemption levied depending on the holding period (with first-tier cities further distinguishing between ordinary residential and non-ordinary residential, with exemption/differential tax levied policies). After the new policy, the deed tax threshold for all cities was adjusted to 140 square meters, and first-tier cities no longer implemented separate policies for second-home deed taxes and non-ordinary value-added taxes. According to the bank's monitoring, the proportion of housing transaction areas between 90-140 square meters in different cities varies from 30% to 60%, and the bank estimates that the total transaction volume of first and second-hand houses in 2024 is about 15 trillion yuan, with the adjusted deed tax saving about 50 billion yuan; considering that the total transaction area in first-tier cities in 2024 is about 60 to 70 million square meters, with the proportion of transactions above 140 square meters at about 15%, and assuming a value-added rate of about 5%, the adjusted value-added tax saving is about 8 billion yuan. The bank believes that the above-mentioned tax exemptions can stimulate improvement in the group to a certain extent, boost the total demand, change seller expectations, increase the volume of properties for sale, and possibly boost the total transaction volume (the boost may be more significant in first-tier cities under dual policy incentives), but the price trend still needs to be further observed depending on changes in supply and demand dynamics. The adjustment to the land appreciation tax may moderately improve the short-term cash flow pressure of real estate enterprises. According to legal requirements, if the value-added amount of a regular residential project does not exceed 20% of the project cost, the land appreciation tax is exempt, while non-regular projects must pay the land appreciation tax based on the value-added amount; after first-tier cities abolished the standard for regular residential projects, they still need to wait for adjustments in land appreciation tax standards by local governments. In addition, this adjustment also lowered the pre-collection rate of land appreciation tax by 0.5 percentage points (from 2%/1.5%/1% to 1.5%/1%/0.5% in eastern/central and northeastern/western regions, respectively), which helps reduce the advance tax burden on real estate enterprises and contributes to the improvement of short-term cash flow pressure. Focus on investment opportunities in the real estate development and property management sectors. Since the Political Bureau meeting proposed the goal of "stabilizing the decline", the real estate sector has shown a consolidation of high-level trading. With the continuous implementation of expected policy measures, the market is gradually shifting towards observing industry fundamentals, and short-term market fluctuations may be expected. Buying on dips remains a suitable strategy. The bank believes that top-tier companies with potential for development investment recovery, deepening presence in core cities, and long-term potential market share growth should be given priority for allocation. If subsequent policy measures exceed expectations, opportunities to select more high-elastic assets may arise. Risk warning: Policies being implemented or fundamental reforms falling short of expectations.