Citigroup has released a research note indicating that China's real estate sector is entering a third wave of transformation, moving away from the pre-sale model that has been in place for over 28 years and toward a completion-based sales framework. This shift, coupled with the introduction of project company systems and lead bank arrangements, signifies a comprehensive restructuring of property development and financing methods, marking the second round of supply-side reform for the industry.

The firm holds a favorable view of leading players in the sector, with its top picks including China Overseas Development (00688), China Resources Land (01109), KE Holdings-W (02423), and China Jinmao (00817). All four have been assigned 'Buy' ratings, with target prices set at HKD 18.3, HKD 43.1, HKD 75.4, and HKD 2.3, respectively.

According to Citigroup, under the new financing framework from the People's Bank of China and the National Financial Regulatory Administration, mortgage funds can only be disbursed after a project has completed filing for completion. This means cash recovery will be postponed until project finalization, extending the cash conversion cycle. On the physical market front, new home supply in core cities will face constraints as the presale-to-delivery timeline stretches from the previous 6-10 months to 1.5-2.5 years. This should help accelerate the rebalancing of supply and demand and support a stabilization of property prices next year. Purchasing power is expected to flow toward the secondary market, with new homes competing primarily on product quality.

The bank also projects that national land sales revenue will reach approximately RMB 1.8 trillion this year. For developers, Citigroup believes the policy changes could reduce profits by 8-17%, with net profit margins for development properties declining from 6% to 4% and project internal rates of return falling from roughly 20-25% to 3-7%. To offset the earnings impact, property prices would need to rise by about 7%, while offsetting the impact on return on equity would require a price surge of more than 40%. Additionally, developers aiming to maintain similar sales volumes may need to inject 70-120% more of their own capital, or alternatively, increase operational leverage by relying more heavily on suppliers' balance sheets.