The rise of China’s rental housing market
JLL releases its latest research on rental housing. The report analyses market-based rental apartment projects with single ownership (hereinafter called Rental Housing) and finds that China’s rental housing sector has expanded rapidly in recent years.
Today sees the release of JLL’s (NYSE:JLL) latest research report on China’s rental housing market. The study, Opportunity knocks: The rise of China’s rental housing market, analyses market-based rental apartment projects with single ownership (hereinafter called Rental Housing) and finds that China’s rental housing sector has expanded rapidly in recent years, benefiting from a double shot of market growth and policy support. There remains a gap between China and the world’s mature markets, and the China market’s maturity will depend on improvement across a range of factors. China’s rental housing investment market is still developing, but is expected to get a boost from strong market fundamentals, targeted government policy and investments by key market players.
Four key drivers of rental housing in China
China is home to more than 200 million people who rent their homes, adding up to a rental market with a value estimated to exceed one trillion yuan. In particular, Tier 1 and Tier 2 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. Daniel Yao, Head of Research at JLL China, notes “This group traditionally has relied on China’s shadow leasing market, which suffers from unstable rental periods and low level of transparency. 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.”
JLL has conducted a study of rental housing markets in six major cities of Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou and Chengdu. As of the first half of 2018, the total stock of rental housing in these six cities stood at approximately 135,000 units. Local governments have announced plans to significantly increase the proportion of rental housing land released over the next five years. By the end of 2022, it is estimated that 750,000 units of newly-completed rental apartments will enter the market in these six cities. In terms of property ownership, the six cities’ rental housing markets can be divided into two broad categories: Shanghai, Beijing and Shenzhen highlight the role of state-owned enterprises (SOEs); by contract, Hangzhou, Guangzhou and Chengdu are on track for most rental housing projects to be owned by developers by 2022.
Five elements affecting the maturity of China’s rental housing
After considering both the experience of mature markets as well as the Chinese market’s own characteristics, JLL has divided the development trajectory of China’s rental housing market into four distinct phases. Over the past three years, rental housing in China’s major cities has quickly transitioned from the initial “introductory phase” and is now nearing the end of the second “growth phase”. How long it will take for the market to pass through the third “lift-off phase” of rapid growth and eventually pass on to a final “mature phase” will depend on a number of factors.
After tracking the previous evolution of mature markets in the United States and Japan, JLL has identified five factors that can catalyse the development of China’s rental housing market: macro fundamentals, tenant rights to public services, asset acquisition and costs, financing and tax, and transparency.
China’s rental housing investment market expected to get a boost
Rental housing in mature markets like the United States and Japan is an investment-grade asset that offers clear advantages, including stable rental returns and low cyclicality, high investment returns, ample liquidity, and cap rates similar to those in the office sector.
In China, rental housing remains an emerging alternative asset type and its investment market is just beginning to take shape. From August to October 2018, JLL conducted a survey of 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. Key findings include:
· Strong emphasis on medium and long-term investments
· Strong demand for rental housing is stoking investor interest
· High property prices top list of challenges for investors
· Concerns about rental growth and liquidity risks
· Most investors expect rental housing cap rates to be stable or compress slightly
“China has an ever-growing population of renters, and the rental housing market is short of effective supply,” added Yao. “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.”
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JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. Our vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so, we will build a better tomorrow for our clients, our people and our communities. JLL is a Fortune 500 company with operations in over 80 countries and a global workforce of 88,000 as of September 30, 2018. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com