Foreign investors are entering China’s rental housing market following recent government policies that support the alternative property sector.
The latest case is the Canada Pension Plan Investment Board, which recently announced the expansion of its existing retail-focused joint venture with Beijing-based developer Longfor Group by launching a new focus on rental housing programs in China, with an initial targeted investment of approximately $817 million.
“This rental housing strategy is scalable, we see very attractive fundamentals, and the sector also has the support of the government. In China, that is very important; you want to do investments that are in line with government policy, not going against it,” said Jimmy Phua, managing director and head of real estate investments in Asia at CPPIB.
He views the rental sector in China as underserved and fragmented.
“Rental housing as an asset class is very localized; it really depends on what segment you are targeting because you can target fresh graduates or established families. In every of these big Tier 1 and 2 cities we will look at income levels in sublocations together with Longfor to tailor the product,” Phua said.
The new CPPIB joint venture follows Singaporean state fund GIC’s partnership with NOVA, a Shanghai-headquartered operator and investment manager co-founded by New York-headquartered investment firm Warburg Pincus, to establish a 4.3 billion yuan ($670 million; €570 million) rental apartment platform in China. As part of the deal, announced in May, GIC also agreed to acquire a minority stake in NOVA.
Although 2017 saw a year-on-year drop in transaction volume for the rental housing sector, the overall trend has been a surge since 2014, according to data Real Capital Analytics. The transaction volume in reached $2.8 billion in 2017 compared to $395 million in 2014.
Over the past decade, soaring home prices and the shadow leasing market have necessitated a call for more institutionalized and regulated leasing alternatives. That follows President Xi Jinping’s promoting the slogan “houses are for living in, not for speculation” coined in 2016.
“The authority aims to build a long-term mechanism to curb home prices and to ensure the healthy development of the real estate market. China’s move to boost rental housing sector will be a long-term strategy rather than a temporary policy,” said Daniel Yao, head of research in East China at real estate advisory firm JLL.
Since 2016, the government has allowed insurance companies to invest in the sector and asset-backed security platforms to be listed to provide liquidity. Yao stated it would be difficult for international investors to acquire rental housing land or form partnerships with state-owned enterprises, who so far have been favored as buyers of land plots designated for rental housing. That promotes collaborations with local operators like CPPIB has done with Longfor.
Meanwhile, Demand for rental housing in China is on the rise. According to property services firm CBRE, the overall migrating population is expected to approach 300 million around 2020.
JLL’s Yao noted millennials represent 42 percent of this migrating population and are the main source of housing leasing demand.
“Renting rather than purchasing will be more economically viable for young people before getting married,” said Henry Chin, head of research in Asia-Pacific, at CBRE.
For foreign investors entering China’s rental housing sector, however, the right partner is paramount.
“Investors need to choose operators carefully as the profit margin for this asset class is highly affected by the operational quality. A strong proven track record, clear strategy, and market selection are important factors to consider when choosing operators,” Yao said.
However, he points out that investors ought to stick to Tier 1 and 2 cities to avoid oversupply in Tier 3 and 4 cities. That is in line with the government identifying 12 large cities with continued population inflow as pilot markets for accelerating growth in the sector.