Continued urbanization and increasing wealth are driving demand for housing in China, but affordability is a problem, especially in first-tier cities. China’s government wants to see a rental housing market develop to provide more choice for citizens and to support labor market flexibility. This combination of demand and state support means China will be a major market for Greystar Asia-Pac, a platform created by Greystar Real Estate Partners, the largest multifamily residential operator in the US and and Macquarie Capital, the corporate advisory, capital markets and principal investing arm of Macquarie Group. Wes Fuller, executive managing director, investment management, and Charles Ma, managing director, Greater China at Greystar, talk with PERE about the best strategies for investing in multifamily residential in China.
PERE: Why invest in China multifamily residential? What is the attraction of the sector for institutional investors?
Wes Fuller: China’s larger cities have similar characteristics to many of the world’s great cities. With urbanization and upward mobility have come housing shortages and a lack of affordability, which drives people towards renting. There is an opportunity to build a large portfolio of housing in urban centers and that’s no different in China. What is different is the scale and potential growth of the opportunity. Few cities in the world are 20 million-plus in population like Shanghai and Beijing where rents and income have grown in high single digits over the past 10 years. Investors that traditionally invest in income-producing residential are also looking at a long-term investment horizon. China will be very similar to other major cities where institutional investors tend to hold these residential assets for the long term, which will allow them to capture the value from growth and institutionalization of the sector. There is a long history of international institutional capital investing in China commercial real estate and we believe these investors will move into residential.
Charles Ma: There are three major factors that make the China rental sector very attractive to investors – continuing urbanization, a structural housing shortage with affordability constraints, and strong governmental support. China is in the midst of a second stage of urbanization. The first stage was people moving from rural to urban areas, but now people are moving from smaller to larger cities because of the resources and opportunities there for work and lifestyle. This trend in urban growth is what is generating and will continue to generate very strong demand for rental housing in major urban areas.
On the supply side, major cities in China have become less and less affordable with most of the local residential supply being developed for high-net-worth individuals and housing speculators, not resolving the cities need for housing. Shanghai is one of the least affordable cities globally with a 42.8x housing price to disposable income ratio, compared with 22.2x in London and 12.3x in New York. As a professional relocating to Shanghai for work, there are very limited choices in terms of rental options catered to his or her need. Finally, the fact that both central and local governments are implementing policies to help institutionalize the sector is a really important factor for investors. There is a saying in China which suggests that to invest successfully, one should first be aligned with the direction of government policies.
PERE: China is a huge nation; what strategy should be adopted with regard to city and asset selection? Who are the tenants for multifamily residential?
CM: It is important to build effective scale. Having 50 projects in 50 cities across China does not give any advantage of scale from an operational perspective. We believe in the Tier One cities: Shanghai, Beijing and Shenzhen, with an initial focus on Shanghai. Building scale in a single sub-market, which allows for efficiencies gained from sharing of marketing, procurement and talent between projects.
Scale is also important within a single building or community. It takes as much effort to operate a 50-unit building as a 300-unit one. The larger the community, the more you can create a fun, safe and vibrant community to drive rental value, because you’ll be able to leverage more common areas and resources as well as the ability to hire better people.
WF: What is interesting about rental housing is it has a lot of diverse demand drivers. You typically have a high percentage of a younger demographic that will rent for a variety of reasons: they can’t afford to buy a home or they need more flexibility due to work, but you also have young families who want an urban lifestyle but plan to move once they have children. You might have expats or corporations that need to house employees temporarily, and even retirees who don’t want the hassles of home ownership.
PERE: What are the best ways for investors in Chinese multifamily residential to secure and manage the best assets, and what characterizes those assets?
CM: Acquiring and repositioning existing assets can be challenging as older stock in China suffers from quality issues as well as other complications such as poor fire and environmental standards affecting long-term operational effectiveness. Ideally, we prefer to take the Greystar expertise and use it to program a new building from the inside out and really optimize it around tenant experience and operations. However, we don’t rule out opportunities to find great existing assets located in central locations for repurposing.
In terms of asset characteristics, our experience tells us that each building needs to fit in with its micro market. Long-term rental housing product is not like a hotel, where people are in and out thus expecting the same consistency and experience as they travel from place to place. When it comes to rental housing, the tenant is making a longer-term commitment and selects a property because they are attracted to the lifestyle that an area and a building offer. Therefore, each of our buildings should take on a personality and have a slightly different character fitting in with the culture of its surrounding.
PERE: How important is the community aspect to the ongoing success of a China multifamily residential strategy?
WF: I think what is driving the co-working and co-living space is the desire for people to be part of something, to be part of an experience, that experiential interaction with others. That is what’s really driving co-working; certainly people want more flexibility, but what’s driving the stickiness of customers is their desire to have the community aspect. That’s effectively what our asset class does. We’re building amenities to provide opportunities for our residents to interact with each other and really create a community. When people are part of that community, they’re more likely to stay for the long-term.
PERE: Multifamily residential is a long-term play, but how liquid will the market in China be for investors that need to exit or to manage their portfolios?
CM: While multifamily housing is a relatively new concept in China, there is already strong interest for quality rental assets in the sector from both overseas and local institutions. Unfortunately, the lack of good stock in the market means investors can’t find the right products to invest in. This makes us believe that when we deliver a quality product with Greystar’s global standards, there should be plenty of demand from capital. Options for investors to participate will also increase especially as the sector institutionalizes just as it did for China’s retail, office and logistics sectors.
This article was sponsored by Greystar and appeared in PERE’s Investing in Residential supplement, which accompanied the June 2018 issue of PERE magazine.