As China’s rental housing sector has rapidly expanded, investors have been increasingly drawn to the opportunities in some of the country’s fast-expanding cities.
The total stock of rental housing in six of China’s biggest cities – Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou and Chengdu – was 135,000 units as of last June, up from 15,000 units in 2015, according to JLL. A double shot of market growth and policy support has driven the shift.
While investors have concerns about rental growth and liquidity risk in the sector, demand is rising for the medium and long-term opportunities it presents, according to a JLL survey of domestic and foreign investors.
“China has an ever-growing population of renters, and the rental housing market is short of effective supply,” says Daniel Yao, Head of Research at JLL China. “With the government continuously looking into supportive policies, and rising cooperation among key market players, China’s rental housing investment market is expected to get a boost going forward.”
By 2022, 750,000 newly completed rental units should enter the market in Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou and Chengdu alone, JLL says.
China is home to more than 200 million renters. Cities have attracted large numbers of workers from across the country, most of whom are young people with strong demand to rent living space on a long-term basis.
“This group has traditionally relied on China’s shadow leasing market, which suffers from unstable rental periods and low level of transparency,” says Sherril Sheng, lead Residential analyst at JLL China. “As a result, recent years have seen rapid growth in newer rental housing, supported by favourable demographics, rising barriers to home ownership, supportive policies, and an influx of capital.”
Investors are just getting started
In Shanghai, Beijing and Shenzhen, state-owned enterprises dominate. In other cities like Hangzhou, Guangzhou and Chengdu, developers are increasingly the owners of rental housing projects.
Yet, rental housing in China is still an emerging alternative asset type. In mature markets, rental housing is an investment-grade asset that offers clear advantages, including stable rental returns, low cyclicality, high investment returns, ample liquidity, and cap rates similar to those in the office sector.
From August to October 2018, JLL surveyed 30 major domestic and foreign institutional investors that focus on asset-level investments, and that have invested or intend to invest in the Chinese rental market.
The study found that:
• Investors have a strong emphasis on medium- and long-term investment
• High demand for rental housing is stoking investor interest
• High property prices top the list of challenges for investors
• Investors are concerned about rental growth and liquidity risks
• Most investors expect rental housing cap rates to be stable or to compress slightly.
“China is well on its way to a mature rental housing market,” Yao says.
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