CHINA'S PLAN TO DE­VELOP RENTAL HOUS­ING BACK­FIRED

The Gulf Today - Business - - SPECIAL REPORT -

BEI­JING: When Pres­i­dent Xi Jin­ping of China vowed to in­crease the sup­ply of rental hous­ing last year, mil­lions of young Chi­nese ex­pected to find homes they would fi­nally be able to af­ford.

But the govern­ment’s ini­tia­tive has had an un­in­tended ef­fect: a surge of prop­erty in­vestors into the rental mar­ket that has dra­mat­i­cally pushed up prices.

This sum­mer, rents in China’s ma­jor cities soared in the dou­bledig­its, forc­ing the peo­ple that Xi vowed to help - many of them white-col­lar work­ers or re­cent col­lege grad­u­ates - to down­grade to smaller flats and re­lo­cate to less de­sir­able neigh­bour­hoods.

Com­pa­nies flush with in­vestor fund­ing - like Zi­room and 5I5J — have been ag­gres­sively de­vel­op­ing hun­dreds of thou­sands of rental homes in the past year.

But the homes do not come cheap, de­spite the in­creased sup­ply. The av­er­age rent in Bei­jing jumped 21.16 per cent year-onyear in Au­gust, com­pared with 3.12 per cent a year ear­lier, data from the China Real Es­tate As­so­ci­a­tion (CREA) shows. Sim­i­lar trends were seen in other ma­jor Chi­nese cities.

In 2017, Wang Zhilu, 23, rented a room in a mid-tier Bei­jing neigh­bour­hood for 3,000 yuan ($438.17) a month. Now, he pays 4,500 yuan for a room in a sim­i­lar area.

Soar­ing rents have fu­elled widespread pub­lic frus­tra­tion as the cost of liv­ing surges in cities, out­pac­ing salary growth for many peo­ple.

“Rent now makes up about 30 per cent of my salary while my hous­ing con­di­tion is worse,” said Tian Enyu, a 35-year-old di­vorced of­fice man­ager in Bei­jing.

At least 19 pro­vin­cial cap­i­tals have seen rents soar this sum­mer, with Chengdu in Sichuan prov­ince post­ing the big­gest year-on-year rise of 32.95 per cent in Au­gust, ac­cord­ing to CREA.

AG­GRES­SIVE EX­PAN­SION

In­vestors have been pil­ing into the rental hous­ing sec­tor.

Zi­room, which is owned by Zuo Hui, chair­man of the Chi­nese real es­tate bro­ker Lian­jia, raised 4 bil­lion yuan in Jan­uary from in­vestors in­clud­ing Ten­cent Hold­ings, War­burg Pin­cus and Se­quoia Cap­i­tal.

The Sin­ga­pore sov­er­eign wealth fund GIC launched a 4.3 bil­lion yuan ven­ture with Nova Prop­erty In­vest­ment in May to ac­quire rental apart­ments in cities like Bei­jing and Shang­hai.

Tiger Global Man­age­ment, a Us-based global in­vest­ment firm, led a $70 mil­lion fi­nanc­ing round in June for Danke, a Bei­jing-based rental flat op­er­a­tor.

Zi­room had about half a mil­lion rooms in China and com­manded a mar­ket share of 30 per cent at the end of 2017, ac­cord­ing to Reuters cal­cu­la­tions based on an April re­port by Meadin.com.

Xiangyu, a rental unit owned by 5I5J, was a close sec­ond with a 27 per cent share.

About 1.66 mil­lion rooms were owned or man­aged by rental com­pa­nies and de­vel­op­ers at the end of last year, ac­cord­ing to Meadin.

Zi­room and Xiangyu typ­i­cally source units from prop­erty own­ers. They then ren­o­vate the prop­er­ties and rent them out at a pre­mium, which some ex­perts call a “forced up­grade” for ten­ants.

“These com­pa­nies are very ag­gres­sive in se­cur­ing flats this year,” said Yu Runze, who leased his two-bed­room Bei­jing apart­ment to Zi­room for 7,800 yuan a month in May af­ter re­ject­ing an of­fer from Xiangyu.

The rent that Xiangyu charges is of­ten dou­ble the price that it pays to flat own­ers for their prop­er­ties, said Zhang Yongjing, a for­mer prop­erty agent with 5I5J in north­ern Shanxi prov­ince’s cap­i­tal, Taiyuan.

Reuters could not reach Zi­room for com­ment. 5I5J did not re­spond to a re­quest for com­ment.

While the rental gi­ants have been ac­cused of driv­ing up prices, a lack of reg­u­la­tions means that reg­u­la­tors have lim­ited power to act or en­force ex­ist­ing rules, ac­cord­ing to prop­erty an­a­lysts and a govern­ment source.

In Au­gust, Bei­jing’s hous­ing au­thor­ity or­dered rental firms to stop ac­quir­ing rental list­ings at above mar­ket prices us­ing funds pro­cured from banks and other fi­nan­cial chan­nels.

How­ever, it did not take ac­tion against com­pa­nies be­lieved to be us­ing such prac­tices.

A hous­ing min­istry source also said the body does not have an of­fi­cial rent track­ing sys­tem, though it is “closely mon­i­tor­ing the sit­u­a­tion”.

Some an­a­lysts also blamed the per­sis­tent short­age of rental sup­ply for the high rents.

Govern­ment-funded pub­lic rental homes are lim­ited, with the over­all land sup­ply shrink­ing in China’s big­gest cities amid stricter pop­u­la­tion con­trol.

There are 900,000 homes that are tech­ni­cally avail­able for rent in Bei­jing, ac­cord­ing to Hu Jinghui, a for­mer vice pres­i­dent at 5I5J, but Chi­nese home own­ers pre­fer to let them sit empty and wait for the value of their in­vest­ments to rise over time.

The govern­ment does not pub­lish an of­fi­cial home va­cancy rate.

The hous­ing min­istry and the statis­tics bureau did not re­spond to re­quests for com­ment.

RARE BANK­RUPTCY

Rapid growth in the sec­tor with lit­tle reg­u­la­tory con­trol has cre­ated un­ex­pected fi­nan­cial risks.

Dingjia, a Hangzhou-based rental com­pany, went belly-up in Au­gust due to what its chief ex­ec­u­tive called an ag­gres­sive mar­ket ex­pan­sion, mark­ing the first high-pro­file bank­ruptcy in the sec­tor.

To en­sure a pipe­line of prop­er­ties, Dingjia of­ten paid home own­ers more than the even­tual rental price. A ten­ant sur­named Lu told Reuters she rented from Dingjia this year for 4,700 yuan per month, but Dingjia paid the apart­ment owner 5,600 yuan.

Re­peated phone calls to Dingjia went unan­swered.

Lu was asked by Dingjia to sign a year-long con­sumer loan con­tract with a Chi­nese loan plat­form, Ais­hangjie, to pay her rent.

Af­ter Dingjia went un­der, Lu was stuck with the re­main­ing debt pay­ments of 23,500 yuan as her land­lord stopped re­ceiv­ing rental pay­ments.

It is un­clear whether the govern­ment will act on the rental mar­ket given Xi’s vows to de­velop the sec­tor.

A source at one of China’s big­four banks, who re­quested anonymity, said the bank had not re­ceived any guid­ance to tighten fi­nanc­ing to the sec­tor.

Sources close to the govern­ment, who also re­quested anonymity, told Reuters that they were unaware of any ma­jor change in pol­icy de­spite the ris­ing risks.

“The mar­ket is nei­ther bal­anced nor trans­par­ent,” said a source at the Min­istry of Land and Re­sources. But “if Xi doesn’t say some­thing needs to be done, these min­istries won’t do any­thing.”

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