Renters wanted: Experiment to cool spiralling property prices
China seeks to tame wild real estate market with rental push, write Emma Dong and Paul Panckhurst
Chinese President Xi Jinping has unleashed the world’s biggest experiment aimed at taming runaway property prices. After Xi used a milestone Communist Party Congress in October to push a housing model that emphasises renting, a flurry of activity is underway by developers, banks, local governments and even the biggest stock exchange.
The push is the first of a package of programmes, including a long-awaited property tax, poised to unfold over several years to rein in one of the world’s wildest real estate markets.
“China’s property market is on the brink of tremendous change,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd in Hong Kong. “The push for rental properties shows a new model is starting to emerge.”
Xi is leveraging his immense power to try to solve a problem that’s dogged policy makers around the globe: spiralling property prices in major metropolitan areas that have fueled rising inequality.
The aim seems to be a new market model, somewhere between the capitalist frenzy that sent home prices in Shanghai and Beijing rocketing ever higher and the communist system where dwellings were allocated by work units.
“Establishing a vibrant rental market will help to defuse the risks from ‘irrational’ home prices,’’ said Deng Yongheng, of the University of Wisconsin, who helped carry out a study that showed a 1,538% gain in land prices in Beijing from 2004 to 2016.
“The long-term effects could range from driving consolidation among developers to fueling consumer spending as people pay less for housing,’’ Wang Tao, an economist for UBS Group AG, wrote.
Around China, large rental complexes are being completed, under construction or in planning, and funding for such projects is being made available. The changes may alter developers’ businesses, shake up government revenue and help make more Chinese citizens, like Germans, renters for life.
In theory, a thriving rental market would add housing supply and help stabilise prices after a 13-year property rally. The old model that prioritised home ownership encouraged “a lot of speculation and crazy price gains — and that model is coming to an end,” said Rosealea Yao, an analyst at Gavekal Dragonomics in Beijing.
City governments from Beijing to Shanghai have earmarked public land to auction to property companies that would develop rental projects only. Country Garden Holdings Co Ltd, China’s largest developer by sales, has announced plans to make one million units available over three years.
Banks are offering credit lines to developers for financing rental projects, and the Shanghai Stock Exchange is encouraging the creation of investment products backed by rental income.
Xi is trying to alter the popular belief that property is a one-way bet, since any shortlived declines in prices have inevitably been followed by booms.
Homeownership rates in China are among the highest in the world, at almost 90%, according to Cushman and Wakefield Inc. People also buy young. Parents often
help their sons buy a place as a prerequisite for marriage.
Rentals, meanwhile, have been a hard sell, in part because of limited tenant rights and the low quality of much of the stock, with some units even lacking their own bathrooms and kitchens.
Even if the new policies can help change that mindset, challenges abound. First, China’s leaders have to ensure they’re able to tame the market without tanking home prices. They’ll also have to balance other underlying drivers pointing to slowing demand. And officials would need to drop an old habit of letting prices boom whenever the economy needs a boost.
Still, the government’s backing means that the size of China’s rental market could drive annual rental payments to 4.2 trillion yuan ($658 billion) by 2030, almost half of total home sales in 2017, according to estimates from Orient Securities Co.
Here are some of the steps taken by cities, developers and others to support the push:
Shanghai has allocated 42.5 million square metres of land for rental homes through 2020 — more than for housing earmarked for sale. That will add about 700,000 units by 2020, 41% of total supply.
In Beijing, about 30% of new supply by 2021 is designated for rental dwellings.
Under a trial programme in 13 cities including Guangzhou and Nanjing, rural collectively owned land can be converted into rental housing. Some cities are also encouraging the conversion of office buildings, malls and factories into rental units.
Some property firms are securitising rental income into products that resemble real estate investment trusts. The Shanghai Stock Exchange approved such an offering from Poly Real Estate Group Co Ltd and called for developers to roll out more of the products.
China Construction Bank Corp plans to offer credit lines for rental projects. To lure tenants, the state lender devised a rare “rent loan” in Shenzhen to assist with their rent payments.
Without collateral, apartment tenants can borrow as much as one million yuan for as long as a decade, with interest rates cheaper than mortgages, according to Caixin magazine.
China Vanke Co Ltd is targeting millennials with one-room apartments in former offices turned into dormitory-style accommodation in Shanghai, with rooms ranging from 161 square feet (15 square metres) to 215 square feet (20 square metres). The facility offers common areas, an indoor gym and vending machines for food and drinks.
“Some 95% of 395 units offered in the initial phases have been rented mostly to individuals under 32,’’ said Vanke’s Shanghai head for rental business Yan Yong, with rents ranging from 2,600 to 3,400 yuan a month ($407 to $532). Not bad for a city where home costs have soared to levels rivaling the world’s priciest market, Hong Kong.
While analysts say it could take years for the changes to take hold, some caution against underestimating the resolve of Xi, perhaps China’s most powerful leader since Mao Zedong.
“When Xi started his anti-graft campaign years ago, people didn’t expect it to be so powerful, but it proved to be beyond imagination,” said Mizuho’s Shen. “Now, most people still hold the belief that home prices will never fall, and speculation is rampant. That’s one place where Xi hasn’t succeeded. And that means policy execution will be heavier until his goal is achieved.”
China’s property market is on the brink of tremendous change. The push for rental properties shows a new model is starting to emerge. SHEN JIANGUANG Chief Asia economist at Mizuho Securities Asia Ltd