Rental housing in China: fad or trend?

September 25, 2017 / By  

Since the housing reform started in the 1990s, Chinese investors have not invested a significant amount in rental housing, which are dominated by individually-owned properties. Yet there has been a resurgence in the rental housing sector in China, propelled by strong market and demographic fundamentals, in addition to government support.

Surging house prices in recent years have made affordability a major concern for local residents in China’s large and medium cities. In Shanghai, for example, the average price for apartments located within the Inner Ring Road rose from RMB 2.4 mil (US$360,000) in 2006 to RMB 14.7 mil (US$2.2 mil) in 2016.

As barriers to homeownership increase, renting is becoming a necessity in cities like Shanghai and Beijing, with demand set to grow at a staggering pace.

Chart 1: Average sales price of apartments within Inner Ring Road of Shanghai
Chart 1_25Sep2017
Source: Shanghai Real Estate Trading Center

Developers seeking opportunities in the rental housing sector

While the policy stance in China’s housing sales market is unlikely to soften anytime soon, nine ministries jointly issued a notice on July 20th to encourage the development of rental housing across the country’s medium and large cities.

The supportive policies have led to an increasing number of developers, such as Vanke and Longfor, to seek opportunities in the housing rental sector. Institutional investors have also acknowledged this sector’s prospects. In September, Gaw Capital announced that it would invest in a co-living space operator – Harbour Apartments, while Warburg Pincus doubled its investment in Nova, a Shanghai-based rental housing owner and operator.

Demographics of Chinese cities in favour of the rental market

The millennial generation constitutes the majority of rental tenants in medium and large cities. Millennials already account for about 27 per cent of China’s urban population and are continuing to enter the workforce with increasing mobility, feeding the demand for renting.

Additionally, urbanisation provides a further tailwind to the rental market. The first homes for newcomers to cities are mostly likely to be rental apartments. China’s urbanisation only recently surpassed 55 per cent and still has room to grow further.

Chart 2: China’s urban population by age (2015)
Chart 2_25Sep2017
Source: EIU

Backed by a longstanding supply shortage, favourable demographics and government support, the housing rental sector appears to be the next big thing in China. However, a few key issues have yet to be addressed:

  • Returns: The biggest challenge for developers and investors entering this sector. In most cities, the rental yields for individual properties are merely 2 per cent, not attractive enough to incentivise developers and investors. Since July, Shanghai has listed six land plots designated for rental housing, all of which were sold to government-backed developers at attractive accommodation values. However, it remains unclear if private developers will be able access to land at similar pricing.
  • Tenants’ access to local education and healthcare: Rental tenants traditionally have had weaker access to local education and healthcare compared to homeowners. Although some cities such as Guangzhou and Wuhan recently have announced policies to grant tenants the same rights as homeowners, their implementation is unclear and may prove challenging, given limited public resources available.
  • Financing and taxation: In the US, investment in the housing rental (multifamily) sector is reaching new heights and accounted for a third of total commercial real estate investment in 2016, with REITs topping largest owners. Various states in the US also provide tax incentives to encourage developers to build multifamily housing. China still lacks effective financing and taxation systems to promote the development of its rental housing sector.

China’s housing rental sector shares many fundamentals with that of the US, indicating strong growth prospects and presents compelling opportunities for developers and investors in China over the long run. However, in the short- to medium-term, there are several challenges that need to be addressed for the sector to flourish.

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