China’s drive to develop a well-functioning rental housing market as an antidote to sky-high property prices is foundering, as rental agencies resort to debt-fuelled expansion amid weak profitability.
President Xi Jinping’s frequent refrain that “houses are for living in, not for speculation” has been seen as a call to increase the supply of rental housing and discourage investors from holding flats empty. Beijing, Shanghai and Shenzhen are among the world’s most expensive places as measured by the ratio of house price to median income.
At the country’s yearly economic planning meeting in December, leaders pledged to promote rental housing and “support the development of professional and institutional housing rental enterprises”. But that effort is off to a bumpy start.
Since the beginning of 2017, at least eight operators of long-term rental housing have failed, according to the China Real Estate Information Corporation, a research group, and analysts say a sustainable business model for rental housing remains elusive. “I don’t advise you to do long-term rental apartments,” Pan Shiyi, chairman of Soho China, a major property developer, told a forum in August. “It’s a lossmaking business.” Mr Pan estimated that buying flats would require bank loans with an interest rate of at least 5-6 per cent, while rental yields were only 1 per cent.
This month, Dwell You, an operator based in the prosperous east coastal city of Hangzhou, announced on August 20 that it was ceasing operations, leaving 1,700 tenants and their landlords scrambling. Dwell You and other rental operators obtained “rental loans” in tenants’ names from banks or online lenders, sometimes without their knowledge. The tenant’s monthly “rent” payments were, in fact, loan repayments. “If I knew it was a rental loan, I would never have signed the contract.
After all, it will affect my credit score,” said Lei Wenqi, a 24-year-old product manager at an internet company in Beijing who rented a flat from Danke, an operator with rental properties in nine cities. “Since the loan is applied in my name, why is the money not given to me but given to Danke directly?” asked Mr Lei. Operators received a year of rent from the loan, while paying landlords only monthly.
This maturity mismatch allowed the operators to use the excess cash to seek new rental flats and expand their business. And because tenants, not landlords, were paying loan interest, this growth capital was essentially free for the operators. Danke raised $100m in February from a consortium of Chinese and foreign VC groups including the Asia private equity arm of German media group Bertelsmann.
Danke did not answer a request for comment. “This shows yet again that as soon as rental apartments groups verge into finance, it creates all kinds of new problems,” said Yan Yuejin, research director of E-House China R&D Institute in Shanghai. Despite doubts over profitability, venture capital has flooded into the sector on expectations of policy support and growth. China’s rental market housed 190m people last year and generated Rmb1.3tn ($190bn) in revenue.
Those figures will rise to 270m people and Rmb4.2tn by 2030, according to Oriental Securities. Financial regulators are also working on policies to encourage the creation of real estate investment trusts — portfolios of rental property that trade like a stock. Tax breaks for such structures would increase their profitability. “Right now everyone is rushing to scale up by gobbling up housing resources.
The logic of the industry is ‘whoever rules housing inventories rules heaven and earth’,” said Hu Jinghui, chairman of the China Alliance of Real Estate Agencies, an industry association. “A lot of companies have very high costs, but they’re more focused on impressing VCs than serving customers.”