China’s Rental Market Offers Investors Opportunities

Recently, the rental housing market in China has been expanding at a great pace, and this, in turn, has led to many opportunities for investors, especially in the country's biggest-growing cities.

Where the Opportunities Are

6 of China's biggest cities have led the explosive growth of the country's rental housing sector. These cities include Beijing, Chengdu, Guangzhou, Hangzhou, Shanghai and Shenzhen. Back in 2015, there were only 15,000 rental housing units in all of these cities, according to a recent research study. This same study found that, by June of 2018, the total number of rental units had increased to 135,000. The study found that both market growth and government policy support helped fuel the rise.

The study further found that investment demand in both the medium- and long-term is continuing to rise. This has happened in spite of a number of concerns relating to both liquidity risk in the market and rental growth.

Analysts believe that the country is suffering from a shortage of rental housing, combined with the increasing growth in the number of renters. These analysts also believe that the country's rental housing investment market will be boosted not only by government policies but also by increasing cooperation among major investors.

The study estimates that, by 2022, 750,000 new rental units will be completed in Beijing, Chengdu, Guangzhou, Hangzhou, Shanghai and Shenzhen alone.

Still, the country as a whole has in excess of 200 million renters, and the big cities have attracted workers from all across the country, especially young workers who are looking for long-term rental accommodations.

In the past, these workers have relied on the country's shadow rental market. But this market suffers from both low transparency and instability. This has helped drive the growth of new rental housing developments, along with other factors, such as increasing barriers to homeownership, government policies, a rise of investment capital and positive demographic trends.

Opportunities for Investment Are Still There

In some Chinese cities, government-run enterprises still control the rental housing market. This includes Beijing, Shanghai and Shenzhen. But in other cities, opportunities for private investment are available. This includes Chengdu, Guangzhou and Hangzhou, where real estate developers are owning the properties they develop.

In many established economies, the rental housing market is considered an investment-grade asset that offers advantages such as stable rents, stable periods of renting, high returns, good liquidity as well as capitalization rates that like those in the office building market. But investors should understand that, in China, rental housing is still considered an alternative asset type even if it is maturing.

Conclusions of the Study

The study concluded that investors in China's rental housing market focus on both medium- and long-term investment. They also concluded that, while the demand of rental housing is driving interest among investors, this is being hampered somewhat by high property prices, liquidity risks and worries about rental growth. Finally, many investors in the sector believe that rental housing capitalization rates will remain steady in the future or perhaps tighten just a bit.

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