New lease of life

Why property majors are rapidly turning themselves into landlords


Better to rent than buy?

When Shenzhen developer Shum Yip first purchased the land Sky Park now sits on, it envisaged a high-end residential development that would be anchored by a five-star hotel and retail space. It had reasons to be optimistic. The project is located near a number of top schools in Shenzhen and local home prices have nearly doubled in the past two years.

What it didn’t foresee, however, is a sudden change in the Chinese government’s housing policy, with Chinese President Xi Jinping reiterating an earlier directive that “houses are for living, not for speculation”. To that end, the Shenzhen government has followed the policy headwind and imposed measures to rein in runaway prices, which includes setting a price ceiling on new homes. As a result, sales of luxury homes have screeched to a halt.

So Shum Yip quickly changed tack. Last week, the developer announced that Sky Park would no longer be available for sale. Instead, interested buyers can consider renting.

The developer is not the only one that has recently expanded into residential leasing. In Shenzhen alone, there are over 100 property firms – including some of the biggest developers like Vanke – that have launched their own rental projects, says Securities Times.

Country Garden, another property heavyweight has just unveiled its BIG+ project. About 400 apartments, which average 35 square metres in size, are now available for monthly rents between Rmb2,800 ($430) to Rmb4,000. Country Garden says its goal is to develop over a million apartments for long-term renting nationwide by the end of 2020.

Upstarts with cool names like You+ have also been set up to provide some of the rental housing. With their stylish set-up (the communal area is an open kitchen where residents can cook together and hang out) and trendy designs (lofts are not just for college kids), some of these new developments have attracted twenty-something renters. Lei Jun, the tech tycoon behind smartphone maker Xiaomi, is an investor in You+.

Nevertheless, for developers, expanding into the rental market is born, in part, out of necessity. Instead of relying on public housing to plug residential shortages, many local governments have now made the rental market its primary focus. Some have even limited the supply of land for sale and designated them strictly for rental properties.

The central government has also introduced a pilot programme in major cities where tenants of rental properties will enjoy the same access to public services and welfare as local home owners. The move removed what was one of the biggest incentives for migrants to buy rather than rent (see WiC378).

But China is still a long way to go from a fully developed rental market. At the moment, the majority of landlords in the country are private individuals. A recent statistic from Leju, a real estate news portal, reveals that just 3% of the market was owned by institutions, compared with 30% in the US.

The biggest problem for commercial landlords is the huge upfront investment and the slow cash inflow. In response, state-owned banks have been instructed to give out favourable financing on rental property projects. Citic Bank, for instance, has offered Country Garden a total of Rmb30 billion of funding to fuel the growth of its rental business, says China Economic Times.

The government has also released new rules that allow developers to issue asset-backed securities backed by rental incomes.

More recently, China Young Professional Apartments (CYPA), a Beijing-based condominium operator, has issued Rmb270 million worth of securities backed by its rental income, says Caixin Weekly. Perhaps it won’t be long before we see the emergence of a much bigger real estate investment trusts (REIT) market.

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