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Friday, May 5, 2017, 17:11

Investors rush to develop rental housing

By Reuters
Investors rush to develop rental housing
A couple in Hangzhou, Zhejiang province, revamp and decorate their home for renting it out to tenants via home-sharing platforms. (Provided to China Daily)

HONG KONG - China's sky-high apartment prices and its footloose generation of millennials are fuelling demand for rental apartments, driving investment by foreign private equity funds and Chinese real estate developers.

The country has been very much a home-owner’s market since opening up to the outside world in the 1980s and its homeownership ratio is now one of the highest in the world at about 90 percent.

But that is beginning to change as home price gains far outpace income growth, making the prospects of buying a home an increasingly distant dream for many young Chinese. Newer generations of tech-savvy workers also want to be able to move quickly without being tied down by a property if a better job opportunity opens up in another city.

READ MORE: Home renting expands, but problems arise

A typical two-bedroom new home in Beijing costs around 6 million yuan (US$870,000), about 69 times the average per capita disposable income in the city, much higher than the ratio of less than 25 times for New York City. It is a similar tale in many of the largest Chinese cities, such as Shanghai and Shenzhen.

US private equity firm Warburg Pincus is among the foreign investors who have taken note. It has invested US$500 million with China's Avic Trust in so-called "white-collar apartment" manager Mofang, which started its business in 2010 and now operates 30,000 rental units across the country.

A typical two-bedroom new home in Beijing costs around 6 million yuan, about 69 times the average per capita disposable income in the city

Another rental apartment platform, Mogoroom, has attracted investment from South Korean venture capital firm KTB Network.

Also Greystar Real Estate Partners LLC, the largest apartment manager in the United States, says it is looking for opportunities in major Chinese cities.

Chinese developers China Vanke and Longfor Properties are betting big on the so-called youth apartment market, which is aimed primarily at 20-40 year-olds.

Vanke aims to add 150,000 rental units to the market in the coming two years, while Longfor is looking at growing by 15,000 units each year.

Targeting young professionals means landlords can't charge high rents. Developers, such as Vanke and Longfor, are mostly leasing or buying under-utilized assets such as hotels, offices and warehouses and redeveloping them into rental units as the returns are much higher than if they bought land and built a new development.

Vanke said in this model, gross profit margin for their rental apartments is in the 20-30 percent range, up to 10 percentage points higher than its overall property development business in 2016.

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Still, the industry is in the early ramp-up investment stages in China and the profits are yet to flow into accounts in a meaningful way.

And there may be plenty more rental development to come.

Realtor Lianjia Real Estate forecasts that the sector will almost triple to US$420.5 billion in annual rental payments by 2025.

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