China’s rental housing sector continues to attract investors

Strong fundamentals combined with government’s supportive policies have attracted broad attention from domestic and international investors.

October 15, 2021

Following a period of reshuffling and segmentation in 2019, companies that maintained steady operations in China’s rental housing sector have successfully developed business models suitable for long-term development. Supply and demand have accelerated in major cities, indicating that leasing demand has stayed resilient even under the impact of the COVID-19.

Take Shanghai, for example; according to JLL’s data, as of 2Q21, there were approximately 290 rental housing projects in Shanghai with a total of 71,000 units, up 103% since 2018. Rental housing projects are mainly concentrated along metro lines and close to areas with high densities of office buildings and business parks. Most projects choose locations that can meet the daily commuting needs of potential tenant groups. In addition, 50% of the total stock is located outside Shanghai’s outer ring road, while only 10% is within the inner ring road (see figures below).

Figure 1:Shanghai Rental Housing Stock, 2Q21

Source: JLL

As of the first half of 2021, leasing demand in the rental housing market was strong, with an average occupancy rate of 90.9% in Shanghai. In terms of rents, after an early phase in which most players offered similar products, the market has gradually moved into the refinement phase, with differentiation in products and rents. The average rent of mid-to-high-end rental housing is RMB 185/sqm/month. While this is higher than the RMB148 /sqm/month of standard rental housing, it still has room to grow, as evidenced by rents in the traditional serviced apartment market, which are approximately RMB 231/sqm/month.

On the supply side, Shanghai’s rental housing market will have three main sources of future supply: land newly zoned for rental use (R4 land), residential-use land set aside for exclusive rental use, and projects converted from other types. R4 land is the main source of future supply in Shanghai. By the first half-year of 2021, a total of 137 R4 land plots were sold in Shanghai, which are expected to supply about 176,000 units in the coming five years (based on JLL’s calculation).

Figure 2:Shanghai Future Rental Housing Supply, District Breakdown

Source: CREIS, JLL
Note: Forecasts based on 2Q21 data

Strong fundamentals combined with government’s supportive policies have attracted broad attention from domestic and international investors. JLL invited more than thirty investors from various backgrounds to participate in our "2021 Rental Housing Investment Sentiments Survey". The results show that rental housing investors primarily focus on Tier 1 cities such as Shanghai, Beijing, Shenzhen, and emerging Tier 1.5 cities such as Hangzhou. Our survey results indicate that investors prefer asset-heavy strategies in the current rental housing investment market, with a large majority (90%) open to acquiring existing investment properties. Land development comes in second, with 55% of respondents expressing support, and only about 32% of respondents chose asset-light business models, including third-party management and leasing. Overall, investors are optimistic about asset performance, with most investors currently expect a stable return (yield on cost) of between 4.5% - 5.5% for rental housing projects in China. As China’s rental housing market matures with lower vacancy risk and stable asset performance, cap rates are expected to continue to converge towards those of traditional commercial assets (such as offices).

Figure 5:Investors’ Stabilized Return Expectations for Rental Housing Investments, 2018 vs 2021

Source: JLL

With strong market fundamentals, robust policy support, and a maturing investment environment, the rental housing sector’s development trajectory still has far to run. Investors who can navigate the market’s challenges will realize significant gains as the market continues to grow.

Note: Rental housing in this blog refers to market-based rental apartments with single ownership.