Interpretation of three red lines of real estate

The three red lines of real estate are divided according to three different indicators, and each red line has its corresponding calculation formula.

1. The asset-liability ratio excluding advance payment shall not be higher than 70%.

Calculation formula: Asset-liability ratio excluding advance receipts = (total liabilities-advance receipts)/(total assets-advance receipts)

2. The net debt ratio shall not be greater than 100%.

Calculation formula: net debt ratio = (interest-bearing liabilities-monetary funds)/consolidated equity.

Note: Consolidated equity refers to the total equity in consolidated statements, including perpetual bonds and minority shareholders' equity.

3. The short-term cash debt ratio shall not be less than 1 times.

Calculation formula: cash short-term debt ratio = monetary fund/short-term interest-bearing debt.

The background and reasons of the introduction of three red lines of real estate

On August 20th, 2020, the Ministry of Housing and Urban-Rural Development and the People's Bank of China held a symposium on key real estate enterprises. The main purpose of this symposium is to further implement the long-term mechanism of real estate, implement the prudent management system of real estate finance, and enhance the marketization, standardization and transparency of real estate enterprise financing.

It is reported that the Ministry of Housing and Urban-Rural Development and the People's Bank of China have drawn three red lines for key real estate enterprises. The details are as follows:

1) The asset-liability ratio after deducting the advance payment shall not exceed 70%; 2) The net debt ratio shall not exceed100%;

3) The short-term cash debt ratio shall not be less than 1 times.

What is the asset-liability ratio after deducting the accounts received in advance? Here, we must consider the existence of advance payment from housing enterprises. For example, some housing enterprises require buyers to pay a deposit before buying a house, otherwise they are not qualified to buy a house. The down payment belongs to the advance payment, and housing enterprises like to include this part in the column of liabilities, which eventually leads to a bit of distortion in the asset-liability ratio.

Therefore, the industry likes to check the asset-liability ratio after excluding advance payment, which is relatively more referential. The formula is as follows: Asset-liability ratio after excluding advance receipts = (total liabilities-advance receipts)/(total assets-advance receipts).

The term net debt ratio is common, and its formula is: net debt ratio = total liabilities, total net assets (owner's equity) 100_.

Real estate companies are extremely dependent on cash flow. Therefore, the short-term debt-to-cash ratio is a very important indicator, which refers to the ratio of cash to short-term debt.

When the short-term cash debt ratio is less than 1, the company may encounter greater financial difficulties in the short term. If the debt is allowed to develop, it may endanger the survival of enterprises.

Therefore, the industry calls the three requirements jointly issued by the Ministry of Housing and Urban-Rural Development and the People's Bank of China three red lines. Obviously, this is deliberately reducing the leverage ratio of key housing enterprises and reducing the pace of forward flight of housing enterprises.

It is reported that the rules of the three red lines will be fully implemented from 202 1 1 1.

What are the goals of the three red lines of the new asset management regulations?

1, to prevent financial risks caused by real estate financing.

In recent years, there have been frequent defaults by domestic housing enterprises, including many top domestic housing enterprises or listed housing enterprises. With the increasing financial attributes of real estate, the financing risk of real estate industry is gradually put on the agenda by the regulatory authorities. Therefore, it must be effective to control the financial risk of the real estate market from the perspective of financing and liabilities.

2. Promote the transformation of the real estate industry and strengthen the service attributes.

The new rules of real estate financing put forward higher requirements for traditional real estate enterprises. The contribution of traditional land acquisition and Gai Lou sales model to real estate enterprises will continue to decrease in the future, and the contribution of these models which can provide long-term cash flow will have more room for development. If real estate enterprises have more long-term and stable cash flow guarantee, they will reduce their dependence on high leverage, thus ensuring the controllability of the real estate industry and reducing the risks brought by real estate finance.