China rental housing: trickle to torrent

February 12, 2018 / By  

China’s rental housing sector made national headlines in January when rental service provider Ziroom received RMB 4 billion (US$621 million) during its Series A fundraising. The unicorn, which operates co-living apartments and an online leasing platform, was valued at RMB 20 billion (US$3 billion), indicating soaring investor enthusiasm for the booming market.

Founded in 2011, Ziroom was one of the first movers in the co-living segment, providing micro-apartments for young professionals. Before that, China’s rental sector was driven by an influx of expatriates sent by MNCs after China joined the World Trade Organisation in the early 2000s. For two decades, the sector had been dominated by high-end serviced apartments such as Ascott, Fraser and Shama.

Over the past few years, skyrocketing home prices and the notorious shadow leasing market have necessitated a call for more institutionalised and regulated leasing alternatives. The shift in national housing policy was highlighted in Chairman Xi’s speech, where he stated: “Houses are built for living in, not speculation” during the 19th Party Congress last October. This shift in policy proved to be a major catalyst for the growth of the rental market.

Since then, more than a third of China’s largest 30 private developers marched into the build-to-rent business, and the total number of players spiked to 107 in 2017, according to our estimates. We categorise these market players based on their purpose and positioning: private or state-owned developers, hotel operators, real estate agencies, and start-up operators and platforms.

Note: JLL estimates

Developers with deep pockets have taken an opportunistic approach, acquiring raw land and building from ground up. For these investments, state-owned developers are leading the way. Shanghai Real Estate has already acquired 17 lease-only land plots with plans to provide 20,000 rental units in Shanghai by 2020. Meanwhile, private developers, hotels, and start-up operators have focused on a value-add strategy, repurposing distressed retail, office, and industrial properties. Vanke is the front runner in this game, holding around 20,000 rental units across 21 cities as of end-2017. On the other hand, real estate agencies and start-up platforms lease and manage strata-title units for individual homeowners. Mogoroom, which partnered with Ant Financial, manages over two million strata-title units across the country.

The rental sector is gathering momentum as it continues to receive policy support. The Shanghai municipal government aims to provide 700,000 rental units by 2021 and the other three Tier 1 cities have announced similar plans. Several “pilot cities” have also unlocked land-use rights, allowing commercial land to be rezoned for rental housing. Demographics are also playing a large role in fueling the sector. Based on our estimates, more than 100 million millennials are driving demand for rental housing nationwide and this figure is expected to grow in coming years.

Amid strong policy incentives and demographic headwinds, savvy investors hunting for outsized long-term gains will continue to keep close watch over the sector, especially as traditional asset yields remain compressed.

Source: Data from the 13th Five-year Plan of each municipal government

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