Citigroup expects that the relaxation of the "three red lines" policy in mainland China will have limited impact on the fundamentals of the industry, and the possibility of increasing leverage for investment in the short term is not high

Citi published a research report indicating that recent domestic media reports suggest that mainland property companies are no longer required by regulatory authorities to report the "three red lines" indicators on a monthly basis. This policy aims to limit debt and encourage the industry to deleverage. In fact, since the article in Qiushi magazine set a supportive policy tone for the industry, the pace of policy implementation has accelerated to promote transactions, including the People's Bank of China's reduction of the commercial property down payment ratio from 50% to 30% this month.

The report states that since most non-state-owned enterprises have entered the debt deferral or restructuring phase, it will take time even if investment is restored; while state-owned enterprises still need to comply with the State-owned Assets Supervision and Administration Commission's leverage requirements, making a significant increase in leverage unlikely. Citi believes that the cancellation of the "three red lines" may have limited fundamental impact on the industry, but this move could signal that the goals of deleveraging and capacity reduction in the real estate sector have been achieved, which may help boost market sentiment.

Citi believes that due to the decline in domestic property prices, especially in first-tier cities, limited policy impact, and limited improvement in household confidence before price stabilization, the rebound in domestic property stock prices driven by this policy may be temporary. Following weak performance in the third quarter of last year, a new round of earnings forecast downgrades is expected during the performance period from January to March this year.

Citi will continue to monitor industry conditions, with high-end mall retail maintaining positive same-store sales growth in the last quarter, but the growth rate in December slowed under a high base and did not meet expectations. Preferred domestic property stocks include China Jinmao (00817.HK), Greentown China (03900.HK), China Overseas Land & Investment (00688.HK), and China Resources Land (01109.HK). For specific ratings and target prices for domestic property stocks from Citi, please refer to another table