Investors rush to develop rental housing as Chinese home prices surge
HONG KONG (Reuters) – China’s sky-high apartment prices and its footloose generation of millennials are fueling demand for rental apartments, driving investment by foreign private-equity funds and Chinese real-estate developers.
The country has been very much a home-owner’s market since opening up to the outside world in the 1980s, and its home-ownership ratio is now one of the highest in the world at about 90%.
But that is beginning to change as the rise in housing prices grows faster than income, making the prospects of buying a home an increasingly distant dream for many young Chinese. Newer generations of tech-savvy workers also want to be able to move quickly without being tied down by a property if a better job opportunity opens up in another city.
A typical two-bedroom new home in Beijing costs about 6 million yuan ($870,000), some 69 times the average per capita disposable income in the city, much higher than the ratio of less than 25 times for New York City. It is a similar tale in many of the largest Chinese cities, such as Shanghai and Shenzhen.
US private-equity firm Warburg Pincus is among the foreign investors that have taken note. It has invested $500 million with China’s Avic Trust in so-called “white-collar apartment” manager Mofang, which started its business in 2010 and now operates 30,000 rental units across the country.
Another rental-apartment platform, Mogoroom, has attracted investment from South Korean venture-capital firm KTB Network. Also, Greystar Real Estate Partners LLC, the largest apartment manager in the United States, says it is looking for opportunities in major Chinese cities.
Chinese developers China Vanke and Longfor Properties are betting big on the so-called youth apartment market, which is aimed primarily at 20- to 40 year-olds. Vanke aims to add 150,000 rental units to the market in the coming two years, while Longfor is looking at growing by 15,000 units each year.
Targeting young professionals means landlords cannot charge high rents. Developers such as Vanke and Longfor are mostly leasing or buying underutilized assets such as hotels, offices and warehouses and redeveloping them into rental units, as the returns are much higher than if they bought land and built a new development.
Vanke said in this model, gross profit margin for their rental apartments is in the 20%-30% range, up to 10 percentage points higher than its overall property-development business in 2016.
Still, the industry is in the early ramp-up investment stages in China, and the profits are yet to flow into accounts in a meaningful way.
And there may be plenty more rental development to come. Realtor Lianjia Real Estate forecasts that the sector will almost triple to $420.5 billion in annual rental payments by 2025.
COMMON SPACE
When David Chen, 29, relocated a year ago to an advertising company in the southern city of Shenzhen, one of the country’s most expensive property markets, he decided a “youth apartment” was his best bet for housing.
Many youth apartments feature a “co-living” theme with a common space where tenants can socialize after work. They also have live-in managers who organize weekly events such as movie nights, cooking parties and field trips.
“I was new to the city and didn’t have many friends, so I thought living with other young people would be more fun. I like to party,” said Chen, who pays 2,800 yuan a month, or about 20% of his salary, for an apartment operated by China Vanke, the country’s No. 2 developer by sales.
His en-suite room is about 25 square meters. It fits a double-sized bed and small wardrobe but has no kitchen.
“To buy a two-bedroom unit you’d need at least 1 million yuan for a down payment, and I can’t afford it now,” Chen said, adding that a short-term lease was preferable because he may have to relocate to Shanghai after a few years.
The investors are being helped by a government-backed drive to support rental supply in a bid to rein in property prices and satisfy housing demand. The authorities have allowed commercial properties to be redeveloped into rental apartments and encouraged banks to provide financing to rental-apartment companies.
“The biggest challenge is to turn rental apartments into a sustainable and scalable business in China – from development to exit,” said Charles Ma, China managing director of Greystar, which manages more than $17b. in assets globally.
He cited high land and financing costs and taxes as issues for developers getting into the rental market.
SUPPLY GLUT
‘The biggest challenge is to turn rental apartments into a sustainable and scalable business in China – from development to exit’
For major foreign investors, it is also difficult to find developments of a size – worth $50m. or more – that would make sense.
And in some places, there are already signs of a glut of rental apartments.
“In China, if something is good, then everyone jumps in,” Ma said. “For example, over the past year there are many ‘youth apartments’ built across cities, and the occupancy rate is often not too high. The sudden boost in supply may create a glut in the short term. But that creates trading opportunities, and consolidation will eliminate the non-serious or small players.”
One very positive sign is that renters are starting to stay longer because of the home-price crunch.
“In the past, youth apartments could only retain young tenants for two to three years, then they would purchase a property when they got married,” said Joe Zhou, JLL’s head of research for East China. “But this period is getting longer, and people are also getting married at a later age in big cities, so demand for these apartments is only getting greater.”
Most developers have yet to address the market for newlywed couples and those with young families, though Mogoroom has some buildings with larger apartments. There is traditional resistance in Chinese culture to renting rather than buying after getting married, and many couples still see owning a property as a prerequisite for marriage.
The youth and white-collar apartments do not appeal to newly married people such as 26-year-old Fiona Zhang.
“These apartments are usually quite small, which is not suitable for wedded couples who plan to have kids,” said Zhang, who owns a marketing start-up in Shenzhen and got married late last year.