15 trillion urban renewal is here, and funds are entering the market in tiers
Since June, the pace of urban renewal has suddenly accelerated, and urban renewal projects in many provinces across the country will enter the stages of tendering, implementation, and capital investment in a concentrated manner.
According to a review by Economic Observer, from June 3rd to June 9th, in just one week, many cities such as Guangzhou, Shanghai, Wuhan, Suzhou, Hangzhou, Jinan, and Qingdao have intensively promoted urban renewal actions.
For example, Guangzhou has designated six major areas, and local urban investment companies have successively presented project lists and fund plans.
These are a series of capital operation measures implemented by leading urban investment companies in various regions after the State Council publicly released the "15th Five-Year Plan for Urban Renewal" on May 28th. Corresponding public documents can be retrieved on the government's official website for verification.
"The biggest change from the '14th Five-Year Plan' to the '15th Five-Year Plan' is the shift from 'rapid implementation and addressing shortcomings' to'scalable overall planning and market-oriented closed-loop'," Xia Kun, the business leader of an urban investment enterprise in Shanghai, told Economic Observer. "In the past, local governments evaluated the construction start volume and investment amount of urban investment platforms. Now, the evaluation focuses on cash flow and sustainability. Projects that only spend money without generating self-sustaining income will have little room for implementation in the future."
A stock renovation market worth 15 trillion yuan is opening up.
But where does the money come from? Who will do the work? How large is the profit margin? Where are the risks? Economic Observer contacted the heads of urban investment companies in large cities such as Shanghai and Guangzhou, relevant personnel from the finance and housing construction systems, private enterprise service providers, and officials from the Development and Reform Commission, trying to dissect the initial implementation appearance of the "15th Five-Year Plan for Urban Renewal".
01
Capital is Entering in Layers
On June 8th, the State Council Information Office held a regular press conference on the policies of the "15th Five-Year Plan for Urban Renewal". The Ministry of Housing and Urban-Rural Development, the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Natural Resources jointly interpreted the policy orientation of accelerating project reserves, establishing special funds, and publicly disclosing project lists in various regions, guiding localities to seize the window period for plan implementation and accelerate the implementation of project reserves.
Economic Observer learned from relevant persons in charge of urban investment platforms in Shanghai and Guangzhou that relying on the supporting policies of the 15th Five-Year Urban Renewal Plan, the supporting urban renewal sub - funds of the two cities' urban investment companies have now entered the stage of project establishment planning or submission of plans to the competent authorities. The supporting project lists for area renovation have been internally sorted out, and the lists of some areas have been publicly announced to the industry.
These are also the urban investment capital actions that have been implemented in a concentrated manner and can be publicly verified after the issuance of the "15th Five-Year Plan for Urban Renewal".
Where does the money come from?
A section head of the Development and Reform Commission of an eastern province, based on the practical samples of the capital allocation for urban renewal in the areas that have been investigated and implemented in the province and referring to the differentiated measurement models of leading rating agencies such as Zhongchengxin and Zhongzheng Pengyuan for the eastern, central, and western regions, gave a stratified measurement range of the total investment in urban renewal during the "15th Five-Year Plan" period across the country after regional weighting. Divided by the nature of the funds, the weighted average capital structure across the country shows the following stratified characteristics:
Financial funds (including central government investment within the budget, ultra - long - term special treasury bonds, local supporting funds, etc.) account for about 25% to 30%; medium - and long - term special policy loans for urban renewal provided by the China Development Bank and the Agricultural Development Bank of China, which are the core funds for project support, account for 30% to 38%; self - raised funds of local state - owned asset platforms and provincial urban renewal industry guidance funds together account for 20% to 25%; social capital such as private enterprise investment, REITs (Real Estate Investment Trusts), ABS (Asset - Backed Securities), and self - raised funds of residents account for 12% to 18%.
"Central and local state - owned assets bear the foundation, private enterprises focus on segmented fields, and residents make appropriate self - contributions," summarized the section head of the Development and Reform Commission. "State - owned assets 'bear' the public attributes, long - term large - scale investment, and social conflict coordination, while market - oriented capital earns profits from refined operations and technical services. The policies have clearly defined the rights, responsibilities, risks, and benefits from the top - level design."
Where does the money go?
The 10 - billion - level fund recently implemented by the platform where Xia Kun, the business leader of the above - mentioned urban investment enterprise, works has a clear investment scope.
He introduced that the fund mainly focuses on three types of projects: pure livelihood - guaranteeing projects such as the renovation of dilapidated houses in urban areas and the overall renewal of old residential areas; basic public welfare facilities projects such as urban roads, pipe networks, public greening, and convenient supporting facilities; projects with market - oriented self - sustaining potential such as the revitalization of existing areas, the upgrading of industrial carriers, and the renovation of idle urban assets.
The three types of funds are strictly classified and isolated. For pure livelihood - guaranteeing projects, the funds are mainly used for early - stage demolition, infrastructure construction, and livelihood - related supporting construction, and the returns rely on long - term financial overall planning and the counter - feeding of urban value - added benefits; for public welfare supporting projects, short - term profits are not pursued, and they also rely on financial overall planning and urban value - added benefits; for market - oriented operation projects, the fund focuses on investing in formats such as smart community renovation, commercial street activation, industrial park supporting facilities, and the revitalization of parking space resources, and clearly requires self - balanced cash flow and stable operating income.
The local finance department is also carrying out similar classification operations.
The fund management method jointly issued by the finance department and the housing construction department of a province in East China shows that the province has a clear investment list for three types of funds: special bonds, long - term policy loans, and urban renewal industry funds, with separate accounts management and classified accounting. According to the strict review requirements for special bond management, the multiple of the project's overall operating income covering the principal and interest of the financing should not be less than 1.2 times, and the funds are only used for project construction. The medium - and long - term policy loans for urban renewal provided by the China Development Bank and the Agricultural Development Bank of China generally have a term of 15 to 20 years, suitable for large - scale comprehensive renovation projects and systematic updates of municipal pipe networks. The special policy capital loans can be used as a supplement to project capital. The provincial - level overall urban renewal fund focuses on the market - oriented revitalization of idle existing factories and old blocks, and the renovation of science and technology innovation parks. The financial guiding funds support the public welfare shortcomings, and the socially raised funds are invested in market - oriented profitable formats.
"The capital allocation plan is locked at the project warehousing stage, and the capital allocation corresponds to the progress of each project item. The finance, housing construction, and audit departments conduct joint quarterly inspections," said the above - mentioned person in the finance system. The accounts of public welfare and market - oriented projects are separately calculated to avoid cross - category misappropriation of funds or long - term idling of funds in special accounts from the source.
02
People are Taking Their Positions
The money has come in. Who will do the work?
Since June, as urban investment companies in Wuhan, Suzhou, Hangzhou, Jinan, Qingdao and other cities have successively disclosed project lists and fund plans, the overall planning entities for large - scale renovation, resettlement of dilapidated houses, and construction of public supporting facilities have become clear. Among them, the bids for local urban investment, project subcontracting, smart renovation, and community operation are being tendered to the market simultaneously.
Xia Kun clearly responded to some concerns in the market. He believes that this model is not a monopoly of the market by state - owned assets, squeezing the living space of private enterprises. He gave a boundary division: In the links coordinated by state - owned assets, the core is the overall planning of the area, the overall planning of land acquisition and demolition, the overall capital scheduling, the integration of public resources, the implementation of major livelihood projects, and the overall risk control. These links involve public interests, regional overall planning, and large - scale capital scheduling, and it is difficult for market - oriented enterprises to undertake them independently.
However, the links that are completely open to the market are very extensive. Project subcontracting, building construction, smart system renovation, refined property operation and maintenance, community commercial operation, implementation of convenient service formats, digital municipal services, etc. are open to professional private enterprise service providers.
Xia Kun introduced that currently, the cooperation models between leading urban investment companies and private enterprises are mainly divided into three categories: the project cooperation model through public bidding; the annual strategic cooperation model through framework agreement warehousing; the project operation model of joint construction, that is, the urban investment company is responsible for asset construction and rights confirmation, and the private enterprise is responsible for market - oriented revitalization, investment promotion, and operation and maintenance, and the two parties share the profits according to the proportion.
How do private enterprises view this division of labor? Jiang Guoqing, the person in charge of the government - enterprise coordination department of a city renewal service enterprise in Xi'an, Shaanxi, whose business covers the whole chain of old residential area project renovation, digital upgrade of smart municipal facilities, community commercial operation and maintenance, and property services, gave a more positive judgment than expected.
"We never touch heavy - asset links such as first - level development of areas, overall planning of demolition, and overall investment and financing. This is not the advantageous track for private enterprises," he said. Their core positioning is to be the "supporting professional service provider" of state - owned urban investment companies, focusing on the market - oriented detailed implementation links under the overall framework of state - owned asset coordination, and making up for deficiencies, implementing projects, and carrying out refined operations throughout the process.
In his view, the "15th Five - Year Plan for Urban Renewal" clearly states that "the government coordinates and coordinates various existing resources to support state - owned enterprises and private enterprises to participate in urban renewal", thus forming a hierarchical and collaborative implementation division of labor model, which is a long - term benefit to the entire industry. He said: "During the '14th Five - Year Plan' period, the urban renewal industry was quite chaotic. In the previous '14th Five - Year Plan' stage, some private enterprises crossed the border into first - level development of areas and heavy - asset overall planning business. Constrained by the capital volume and government coordination resources, problems such as project stagnation and delayed payment occurred. Now, the policies have stratified the tracks and clarified the rights and responsibilities, which actually helps private enterprises avoid high - risk areas they are not good at."
Jiang Guoqing's view is representative among private enterprises. Many private enterprise service providers in the field of urban renewal contacted by Economic Observer hold relatively consistent views. They believe that as long as the division of labor is clear, the income is stable, and the payment is guaranteed, they do not resist the overall planning and leadership of state - owned assets.
Jiang Guoqing said bluntly that for enterprises like his, the boundaries of the track are clearer, which is a sign of the healthy development of the industry. What really puts pressure on private enterprises is not the "crowding out of space" by state - owned assets, but market - oriented problems such as unstable project implementation rhythm, extended payment cycle, and compressed profit margin.
The local finance department is also using systems to guarantee this division of labor. The above - mentioned person in the finance system revealed that the province has fully implemented the hierarchical layout of "state - owned assets coordinating heavy - asset livelihood projects and market - oriented entities focusing on professional operations". When the project is warehoused, the list is divided in advance. After an area renewal project is packaged, the heavy - asset infrastructure construction is coordinated and built by state - owned assets, and the commercial supporting facilities and later operation are open to the market for investment promotion.
The local Development and Reform Commission is responsible for coordinating the sticking points in the implementation.
The section head of the Development and Reform Commission of an eastern province introduced that their department has regularly visited urban investment companies, private engineering enterprises, and community operation service providers, collected front - line sticking points, and optimized the local implementation details in reverse. He said: "Enterprises often reflect that the project implementation rhythm is restricted by the fiscal budget and the issuance rhythm of special bonds, and personnel and equipment are often idle. We are optimizing the approval process to minimize the idle period."
03
Risks are Surfacing
The money has been invested, and the work has started, but the pressure is also emerging.
The balance sheets of some urban investment companies in weak regions are not optimistic. Relying on the public financial report data of Flush iFinD, Modern Consulting, and major rating agencies, only the book asset - liability ratios of some urban investment companies in the tail - end third - and fourth - tier cities and county - level special urban investment companies with weak industries and continuously declining land sales have exceeded 85%, while the average liability ratio of urban investment companies at the district and county level across the country is less than 60%.
The section head of the Development and Reform Commission of an eastern province gave a relatively clear risk ranking. For urban investment companies with high liabilities in weak regions, the current primary obvious risks are concentrated on the pressure on phased cash flow and the break of local entity cash flow. The sub - optimal project returns will further magnify the cash flow pressure, which belongs to the secondary chain risks. The slowdown of financial allocation leads to the delay of project payment, the tightening of the urban investment company's cash flow, and the increase of the difficulty of refinancing, which in turn intensifies the losses due to sub - optimal project returns.
He said that most county - level cities in the central and western regions with population outflow and urban investment companies in third - and fourth - tier cities with weak financial resources are facing three real dilemmas: the concentrated repayment of due existing debts, with a fixed annual rigid interest payment pressure; there is only large - scale capital investment in urban renewal projects in the first five years, without any payment inflow; in weak regions with population outflow and insufficient consumption power in the area, even if the market - oriented sub - projects are implemented later, the returns are difficult to cover the pre - investment costs.
The private enterprise side is also under pressure. Jiang Guoqing gave the data that compared with traditional real estate and infrastructure projects, the payment cycle of current urban renewal projects is generally extended by 2 to 3 years. The payment for regular projects is no longer settled upon completion, but is allocated in multiple stages including completion, acceptance, performance evaluation, and annual review. The profit margin is also continuously compressed. The gross profit margin of pure public welfare supporting projects is generally 7% to 12%, far lower than that of traditional projects.
"Our profit - making pressure is not the so - called 'crowding out of space' by state - owned assets," Jiang Guoqing said. The real pain points are three inherent market - oriented problems: the normalized deduction of project performance - linked fees, and the fees will be deducted if the service does not meet the standards; the phased implementation of area projects, with scattered annual engineering volumes, making it difficult to achieve large - scale returns; a large amount of supporting operation and maintenance work is continuous service, with the labor cost rising year by year, but the service pricing is basically fixed, and the long - term profit is continuously diluted.
Another pain point is the unstable project rhythm. Jiang Guoqing reported that large - scale area projects coordinated by state - owned asset platforms are greatly affected by the fiscal budget, special bond quota, and approval process, and the implementation rhythm is sometimes fast and sometimes slow. "It is difficult for us to stably arrange our equipment, personnel, and teams, and there are often phased shutdowns and idling, resulting in a waste of idle costs," he said.
The local level has already responded to the risks.
The above - mentioned person in the finance system introduced that the province has divided the list of districts and counties into three categories of high, medium, and low - risk according to the local debt ratio and fiscal self - sufficiency rate. For districts and counties included in the high - debt control list, the approval of large - scale public welfare renewal projects without operating income is strictly controlled. In principle, the launch of such large - scale projects is postponed, and only small - scale livelihood projects such as dilapidated house renovation and old gas and water pipe renovation are allowed to be declared, and the increase of large - scale fixed investment is strictly controlled. In medium - debt regions, the "combination of profitable and unprofitable projects" is implemented. For each public welfare supporting project declared, a project with operable assets that can be revitalized must be matched. In regions with strong financial resources, the declaration quota for large - scale renovation is relaxed.
In terms of the investment rhythm, the projects in high - debt districts and counties are implemented in batches over the years, and the investment amount implemented in the current year should not exceed the upper limit approved by the local available financial resources, and large - scale debt - financed projects should be avoided at one time. The funds are operated in a closed - loop special account. The operating income of the project should be preferentially used for debt repayment, and the funds should not be withdrawn to supplement other existing debts of the platform.
The leading urban investment company where Xia Kun works has also established a full - process risk control mechanism. In