China Galaxy Securities: Real estate industry faces crucial stage of destocking, external demand may be important direction this year.

China Galaxy Securities released a research report stating that the core cities of the real estate market are showing a trend of continued heat in January 2025, with demand in medium and low-tier cities showing some recovery. Core cities performed well in land auctions in February, and the continuous release of demand plays an important role in the industry's development. The overall demand in the real estate market is expected to exceed 875 million square meters by 2050. The industry is currently facing a critical stage of inventory digestion, with both internal and external demand playing important roles in inventory digestion: maintaining the steady release of internal demand is crucial for maintaining the overall tone of the real estate market; in the current real estate environment, external demand may be an important focus in 2025 and is expected to support the overall valuation of the industry. Key points from China Galaxy Securities include: Continued release of residential housing demand From a sales perspective, the second-hand housing market in first-tier cities performed relatively well overall, showing resilience in core city real estate despite the impact of the Chinese New Year holiday. According to data from China Index Institute, the bank found that the overall sales area in 28 key cities in January 2025 decreased slightly by 0.89% year-on-year, with a gradual stabilization of the cities by the end of January due to the Chinese New Year holiday. In terms of land acquisition, in January 2025, first-tier cities accounted for 28.07% of the total land transaction area in 100 cities, and land acquisition by real estate companies was focused on core areas; the average premium rate for land transactions in 100 cities in January 2025 was 8.73%, the highest level since August 2021; the average premium rate for land auctions in Shanghai in February 2025 was 33.56%, the highest level since 2019. Internal and external forces jointly support housing demand According to the sources of residential housing demand, the bank divided the demand into two categories. 1)Internal demand: population growth and urbanization process mainly lead to the growth of urban population, creating rigid demand from the new urban population; the increase in per capita housing area and the decrease in average household size mainly stem from residents' desire to improve their quality of life, thus generating improvement demand. 2)External demand: the demand for renovation brought about by the demolition of old houses or the transformation of some old communities due to urban development is considered external demand. According to the bank's estimation, China's housing demand could reach 875.2 billion square meters by 2050, with rigid demand and improvement demand accounting for 168.9 million square meters (19.30% of total demand) and 618.5 million square meters (70.67% of total demand) respectively, totaling 787.4 million square meters of internal demand. The annual average renovation demand or external demand from 2041 to 2050 is estimated at 88 million square meters, accounting for 10.03% of total demand. Policy support for stabilization As of February 11, 2025, the provincial-level People's Congresses have concluded. According to the expressions regarding the real estate industry in the government work reports published by various regions, new models in the real estate industry, stabilization measures, and other content have been mentioned multiple times. The pressure on the real estate market inventory is still there, and digesting inventory is the main focus of the industry at present. The consolidation of stock housing and land acquisition, as well as the renovation of urban villages, are expected to release residents' housing demand. The People's Bank of China mentioned in the fourth quarter of 2024 Monetary Policy Execution Report that moderate monetary policy easing will be implemented, which could continue to lower the threshold for home purchases and reduce the cost of housing for residents, thus supporting the release of internal demand. Investment recommendations: Top real estate enterprises demonstrate excellent operational and management capabilities, with financial advantages and potential to further increase market share. The bank is optimistic about: Poly Developments and Holdings Group (600048.SH), China Merchants Shekou Industrial Zone Holdings (001979.SZ), LONGFOR GROUP (00960), Hangzhou Binjiang Real Estate Group (002244.SZ), China Vanke Co., Ltd. (000002.SZ), Seazen Holdings (601155.SH), China Merchants Property Operation & Service (001914.SZ); Suggested focus: 1) High-quality development: GREENTOWN CHINA (03900), CHINA RES LAND (01109), CHINA OVERSEAS (00688); 2) High-quality property management: CHINA RES MIXC (01209); 3) High-quality commercial: Shanghai Zhangjiang Hi-Tech Park Development (600895.SH), HANG LUNG PPT (00101); 4) Built-to-order leader: GREENTOWN MGMT (09979); 5) Intermediary leader: BEKE-W (02423), 5i5j Holding Group (000560.SZ). Risk warning: Risks of policy implementation falling short of expectations, risks of policies not meeting expectations, risks of macroeconomic performance falling short of expectations, risks of funds not being in place as expected, risks of significant fluctuations in house prices, risks of unexpected population changes, risks of urbanization process falling short of expectations.