Special Loans Issued to Urban Villages Renewal Projects in 17 Chinese Cities

BEIJING, February 2 (TMTPOST)—The first batch of special loans for the urban villages renewal projects has been handed out in multiple megacities in China, with loans from policy banks being the main source of funding.

As of Wednesday, the special loans for the urban villages renewal projects have been disbursed across 17 cities, including Guangzhou, Chengdu, Jinan, Shijiazhuang, Hefei, Xi'an, Chongqing, Nanjing, Guiyang, Suzhou, Ningbo, Hangzhou, and Xiamen. The special loans are mainly used for preliminary work, land acquisition compensation, housing, and related infrastructure construction for urban villages renewal.

China Development Bank has disbursed the first batch of special loans amounting to 90.8 billion yuan (US$12.8 billion) for urban villages renewal projects, covering nearly a hundred projects in cities such as Guangzhou, Zhengzhou, Jinan, Nanjing and Shijiazhuang, benefiting over 100,000 households and constructing 238,400 settlement apartments.

These special loans play a crucial role in accelerating urban villages renewal. They enable phased funding releases based on investment progress, facilitating the swift implementation of urban villages renewal, and ensuring that goals are achieved, said Li Yujia, Chief Researcher at the Guangdong Housing Policy Research Center.

Additionally, these loans aim to address the large upfront capital investment and long fund recovery cycle, which leads to input-output cash flow imbalance, Li added.

Since 2023, urban villages renewal has become a major market concern, and the national authorities have unveiled a slew of policies to address the urban villages renewal issues.

Industry insiders believe that the currently available amount of loans for urban villages renewal are quite considerable. Looking ahead, the benefits of urban villages renewal are highly anticipated.

According to initial estimates of Essence Securities, the total investment in urban villages renewal stands at 4.75 trillion yuan (US$ 0.67 trillion). Calculated based on a construction period of five to ten years, the average annual investment in urban villages renewal is expected to be around 450-950 billion yuan.

In the next five years, urban villages renewal will drive an investment scale of about a billion square meters, propping up the sagging real estate market. On an annual average, a new residential demand of about 44 million square meters will be generated, accounting for 18% of the sales area of new residential properties in 22 cities in 2022, according to Huang Yu, the Executive Vice President of the China Index Academy.

Apart from policy banks, commercial banks and financial institutions are also encouraged to provide loans for urban villages renewal projects in a market-oriented and rule-of-law-based manner.

In addition to special bonds and special loans, pledged supplementary lending (PSL) also provides funding for urban villages renewal. By the end of December 2023, the net addition of PSL by China Development Bank, the Export-Import Bank of China, and the Agricultural Development Bank of China amounted to 350 billion yuan, with the year-end PSL balance reaching 3,252.2 billion yuan, according to a report released by the People's Bank of China, China’s central bank.

The PSL is expected to be used primarily for the three major projects of affordable housing construction, urban villages renewal, and "dual-use" public infrastructure construction, as part of efforts to reverse the downward in real estate investment in the first quarter and maintain high growth in infrastructure investment.

As part of the national new urbanization strategy, many commercial banks have launched relevant credit products for urban villages renewal. These can be used for both the primary and secondary markets. The loans issued by commercial banks will be repaid based on the income from the secondary development of the project. Therefore, these loans will not form implicit government debt.

However, “net land transfer” is required in this round of urban villages renewal. “Net land” refers to a plot ready for construction, without issues in housing demolition and resettlement compensations. Loans issued by commercial banks for urban villages renewal must not be used for pre-land requisition, demolition, and resettlement compensation. This will to some extent hinder the credit support from banks for urban villages renewal.

Industry insiders point out that one possible solution is to combine loans from policy banks for urban villages renewal and special loans from commercial banks. Special bonds and special loans can meet the funding needs during the land requisition and compensation stages, while loans from commercial bank can satisfy the funding needs for construction after net land is created.

(1 yuan equals US$0.14)