China's Hard-Pressed Home Buyers Aren't Sold on Renting
(Bloomberg Gadfly) -- China has begun a great rental giveaway, offering cheap land and subsidized loans in an effort to kick-start development of home leasing markets in major cities across the nation.
Anyone expecting a rental housing boom to match the growth of the private purchase market may be disappointed, though: China's real estate industry is likely to remain dominated by the development of apartments for sale.
The increase in property prices to unaffordable levels has put a strain on migrant workers and middle-class residents in many urban centers, highlighting the low number of apartments available for rent. In July, the government identified 12 cities that have seen net population inflows, including the southern metropolis of Shenzhen, as urgently needing more supply. Others including Beijing and Shanghai have joined the push.
Those cities have become great places to be a tenant. Nanjing, for instance, gives rental subsidies, while Guangzhou and Shanghai are among those offering tenants the right to have their children educated in local schools -- a privilege usually reserved for homeowners or those who hold a prized local hukou, as China's household registration system is known.
Shenzhen, a center for technology companies including internet giant Tencent Holdings Ltd., has been even more generous. Tenants can withdraw up to 65 percent of their monthly pension contributions to pay rent or even take out a loan from China Construction Bank Corp. Real estate prices in the city bordering Hong Kong have more than doubled in the past couple of years; even so, taking out a loan for a monthly liability like rent is unusual, to say the least.
On the supply side, the government is using its control over land and financing to persuade developers to become landlords.
That won't be easy. Real estate companies already have a model that works: Load up on debt, buy land and start pre-sales in short order, enabling investments to be recouped in less than a year. That method has helped businessmen such as China Evergrande Group Chairman Hui Ka Yan become some of the country's richest people.
Shanghai has marked out 31 percent of the land it's selling between 2017 and 2021 for rental housing, having previously ignored the sector, according to research firm GavekalDragonomics. Local governments have also made such land cheaper: One plot in the eastern city of Hangzhou, home of Alibaba Group Holding Ltd., went for 5,050 yuan ($763) a square meter, a fraction of the 40,000 yuan per square meter price of market housing nearby.
State-controlled lenders such as Industrial & Commercial Bank of China Ltd. have set aside hundreds of billions of yuan to lend to developers building homes for lease. Meanwhile, closely held Mofang Apartment issued an asset-backed security this year at a rate of 4.8 percent to 5.4 percent, lower than the average funding cost of about 10 percent for rental companies, according to HSBC Holdings Plc.
Real estate investment trusts are also slowly emerging, with state-owned Poly Real Estate Group Co. selling a 5 billion yuan REIT made up of rental units in October.
The potential for growth is probably limited, though, by the deep-seated preference of Chinese households for home ownership. In a country with few investment options and a weak pension system, most people still see owning an apartment as a store of value and source of security. Today's young graduate renters are all likely to aspire to buy at some point.
Another challenge for developing this market is the flip-side of China's endemically high property prices: low returns on investment. Rental yields in tier-1 cities are about 1.5 percent, based on data from Centaline Property Agency cited by HSBC.
Selling developers on an asset-heavy model like rentals, where payback takes at least five years, is a tough proposition. Companies entering the rental market such as China Vanke Co. and Longfor Properties Co. have low leverage and cheap funding costs and can afford to wait, according to Bloomberg Intelligence analyst Kristy Hung.
Highly indebted firms such as Evergrande and Sunac China Holdings Ltd. won't be big rental investors because they can't afford to raise funds that are locked up for a long time, even if they're able to charge high rents in luxury buildings with swimming pools and indoor gyms.
Ultimately, until there's a significant change to the hukou system enabling more migration to cities, or the REIT market develops more rapidly, China will remain a housing market for buyers.
It's not just an Englishman whose home is his castle.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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