New lease of life

For sale or for rent?

Where do you see yourself in 10 years? That may seem like an ambitious question for younger people but in China it is a query that prospective renters might have to consider when they look for a place to live.

In April one of China’s largest property developers released a new rental project, called Emerald College, on the outskirts of Beijing. Even though the Vanke development is still under construction and the homes won’t be ready until 2020, the developer has released a first batch of about 70 units available for rent. To entice renters, instead of the more typical year-long contract, the shortest duration is a three-year lease. And those with a view to the longer term can prepay for a much longer 10-year term, which fixes the rental during the period (avoiding three-yearly increases).

So how much is it going to cost? The majority of the units in the project are around 90 square metres (1,000 square feet), and are priced between Rmb15,000 and Rmb18,000 a month in rent. That means those wanting a 10-year lease will have to fork out at least Rmb1.8 million ($281,185) upfront.

“I used to think I couldn’t afford to buy, what I didn’t know is that I can’t even afford to rent,” one netizen grumbled.

While the prepayment may seem daunting, the market reception for the multi-family development has been strong, with 80% of the units already leased out, says Beijing Business Today.

Most of the renters are college educated with children and they value neighbourhood amenities like good schools and parks, Vanke says.

Higher-end rental developments are in demand in China. In the past, one of the biggest complaints about renting was that the housing on offer was often shabby because it is aimed at lower-income households. Gavekal Dragonomics, a research firm, estimates that only about half of rental units in Beijing and Shanghai have their own kitchens and bathrooms.

Firms like Vanke reckon that the rental market needs higher-end projects like Emerald College that come with long-term leasing terms.

“The government’s logic of vigorously supporting the leasing market to ease housing pressure is heading in the right direction. In the future, the government could even partner with developers to launch similar multi-family rental products so we can remove the speculative nature regarding property investments. The result is everyone will have a truly comfortable home to live in,” Qian Kun, managing director at Matrix Capital Partners, told the Beijing Morning Post.

Developers’ margins for leasing apartments are still lower than for selling them, however. Analysts surmise that Emerald College will end up costing Rmb16 billion to build but that it is generating a yield of no more than 3%. Vanke also told China Economic Weekly that “profits were meagre” for the project and Beijing Business Today believes that it will take decades for the developer to recoup its full costs.

But Vanke had little choice in the matter as the government had made clear when it sold the land that the coveted plot was designated “only for rent not for sale,” explains National Business Daily.

Similar rules may point to why other major developers including Country Garden, Longfor and China Overseas Land & Investment have been expanding their leasing portfolios.

Still, the spread of the rental market hasn’t dampened demand to buy homes.

Late last month, hundreds of eager homebuyers in Shenzhen put down deposits of Rmb5 million to enter a lottery to become homeowners at Shuangxi Garden Phase Three, a development from Shenzhen China Merchants Real Estate.

The money, which is fully refundable, is needed for registration in a lucky draw to purchase a price-controlled unit at the luxury residential project. By the end of the day, 881 applications had been submitted for 167 units.

“Whoever can get a flat would feel lucky and grateful and burn joss sticks,” Xu Xingchun, a property agent in Shenzhen, told the South China Morning Post. “The moment you get the house, one already makes money.”

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