Recently, the Central Bank of China announced a 25 basis point (BP) cut on October 21, 2024. It has cumulatively reduced interest rates by 60 BPs this year, initiating a new round of interest rate cuts. During this interest rate cut cycle, the investment returns of residential and commercial properties may see significant improvement.

This article will mainly analyze from several dimensions such as industry status, monetary policy, central and local policies, and comparison of investment returns at home and abroad.
Industry Status
In cities such as Guangzhou, Shenzhen, Beijing, and Chengdu, investors can generally buy apartments with high rental yields, with a Return on Investment (ROI) of 5%-6% (including property and other fees). This figure is much higher than the approximately 1.5% rental yield of ordinary residential properties. So, what kind of impact will the industry have in China after a series of interest rate cuts?
The actual yield can be obtained by subtracting the 5-year fixed deposit interest rate of the Bank of China, which is 1.8%, from the rent-to-sale ratio, resulting in a risk premium:
Risk premium = rental yield - Bank of China 5-year interest rate = 5% - 1.8% = 3.2%
monetary policy
The essence of China's interest rate cut and reserve requirement reduction policy is to drop the cost of financing on the funding side. Generally speaking, the Return on Investment of investment products consists of the risk-free Interest Rate and the risk premium. In the case of a drop in the risk-free Interest Rate, the Return on Investment (rental yield) theoretically should also decrease. However, it is difficult for the Return on Investment composed of rental income to change significantly,
It can be foreseen that:
Assuming that the financing cost of the future drops to 0, if China enters an era of zero or even negative interest rates, and the risk premium remains at 3.2%, this means that the Return on Investment for residential commercial real estate would only be 3.2%. At this time, rents would need to decrease by 36% compared to the current level, which is almost impossible. This indicates that although financing costs have greatly decreased, it is difficult to have a significant impact on the rent-to-sales ratio of residential commercial real estate. On the contrary, a market environment lacking other high-cost-effective investment products may lead to an increase in the asset prices of residential commercial real estate.
Central and Local Policies
Currently, the central and local governments advocate a dual-track housing system. With the basic completion of China's urbanization rate, the role of local governments is gradually shifting from incremental infrastructure construction to the revitalization of existing infrastructure assets. In major first-tier cities, the proportion of affordable housing in the 2025 plan for the dual-track housing system has increased to around 50% of the overall new housing.
These public rental housing units are not derived from new infrastructure construction, but are renovated and leased from government-acquired existing properties. For example, the establishment of 'Guangzhou Anju Group' in Guangzhou. The operating costs of these enterprises directly affect whether the rental income from individuals who purchase apartments for leasing will be affected.
According to the operational situation of many long-term rental apartments in the market, the 'cost of acquiring properties' is the balance point for the continued profitability of long-term rental apartments at 50%. This means that even if the government implements affordable housing, the rental prices will only be slightly higher or remain the same as the existing market prices.
House Aging Problem
There is actually some irrationality in measuring the future based on the current rent-to-sales ratio, especially the issue of aging houses. Under reasonable circumstances, how much should the renovation cost account for the rent? Referring to Japan, renovation and management fees generally do not exceed 5%-10% of the rent.
In summary, in the upcoming low-interest era, combined with the widespread lack of high-yield products domestically, the long-term rental business of commercial real estate may become a good business.
‍ #中国央行 # #降息 #