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Housing rental may become silver bullet for housing system reforms in China

www.cfbond.com
2018-02-22 10:24

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For quite a long time, the Chinese government has been depending on a series of heavy-handed policies targeting both real estate developers and speculators as well to cool off its over-heated housing market. The recent cutback in lending by the country's commercial banks has, for example, caused panic among the country's home builders.
 

To some extent, these policies have, so far, yielded desirable outcomes. The latest data from the China Index Academy shows that over 80 percent of Chinese cities saw a month-on-month decline in their overall housing area being traded in January. What's more, most large and medium-sized Chinese cities have seen their house prices rise at a slower pace or even take a slight drop.
 

However, house prices in China, particularly in its first and second-tier cities, are still unaffordable to most of the country's wage earners. Even worse, with the rapid progress of the country's urbanization, more and more rural populations have been pouring into the cities, which further exacerbates the supply shortage in the country's housing market.
 

Under this context, China's central government finally turned its attention to its housing rental market in 2015 and promised to establish a new housing system where the housing rental market will be equally important as its housing purchase counterpart.
 

To echo the central government's strategic shift, local governments have been taking actions to increase their land supply for the construction of rental apartment buildings.
 

Beijing, for example, plans to set aside over 1,000 hectares (100 million square meters) of collectively-owned land to build nearly 400,000 rental apartments over the next five years while Shanghai is expected to add more than 290,000 new rental apartments this year alone.
 

In fact, China has already seen a significant growth potential in its housing rental market. It is estimated that the current size of its housing rental market is about RMB 1.1 trillion and accounts for merely seven percent of the total volume of its housing market, which is far behind such developed countries as America and Japan where over 40 percent of their housing markets are taken up by their housing rental sector.
 

Seeing this huge opportunity, the country's large real estate developers have also started their explorations into this promising market.
 

In mid-January, China's leading long-term housing rental brand Ziroom raised a record high of RMB 4 billion in its A-round of financing as it planned to expand its business to more Chinese cities this year.
 

A few days later, the state-owned Shanghai Land Group also announced that it will make a total investment of over RMB 18 billion in its housing rental business this year which is expected to offer roughly 20,000 rental apartments to young talents in Shanghai.
 

However, unlike the housing purchase market where real estate developers can get a quick return on their investments, the prolonged investment return period is the biggest shortcoming of the housing rental market, making it less attractive to developers.
 

To overcome this obstacle, the Chinese government has developed a variety of financial instruments including, among others, the real estate investment trusts (REITs) which allow real estate developers to raise funds with the guarantee of the future proceeds from their housing rental projects.
 

Apart from giving incentives to real estate developers, the Chinese government has also been making efforts to raise the status of the country's tenants. According to China's housing ministry, tenants are expected to receive equal treatment as the country's home owners regarding public welfare, which means they may expect their children to go to the same nearby schools as their home-owning neighbors do in the future.
 

It is no doubt that China's housing rental market will continue to play a crucial role in the country's housing system reforms in 2018.

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