Xi Jinping seeks to tame China's wild property market with rental push

City governments from Beijing to Shanghai have earmarked public land to auction to property companies that would develop rental projects only. PHOTO: REUTERS

SHANGHAI (BLOOMBERG) - Chinese President Xi Jinping has unleashed the world's biggest experiment aimed at taming runaway property prices.

After Mr Xi used a milestone Communist Party Congress in October last year (2017) to push a housing model that emphasises renting, a flurry of activity is underway by developers, banks, local governments and even the biggest stock exchange.

The push is the first of a package of programmes, including a long-awaited property tax, poised to unfold over several years to rein in one of the world's wildest real estate markets.

"China's property market is on the brink of tremendous change," said Mr Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong. "The push for rental properties shows a new model is starting to emerge."

Mr Xi is leveraging his immense power to try to solve a problem that has dogged policy makers around the globe: spiralling property prices in major metropolitan areas that have fuelled rising inequality.

The aim seems to be a new market model, somewhere between the capitalist frenzy that sent home prices in Shanghai and Beijing rocketing ever higher and the Communist system where dwellings were allocated by work units.

Establishing a vibrant rental market will help to defuse the risks from "irrational" home prices, said Mr Deng Yongheng, of the University of Wisconsin, who helped carry out a study that showed a 1,538 per cent gain in land prices in Beijing from 2004 to 2016.

Around China, large rental complexes are being completed, under construction or in planning, and funding for such projects is being made available. The changes may alter developers' businesses, shake up government revenue and help make more Chinese citizens, like Germans, renters for life.

In theory, a thriving rental market would add housing supply and help stabilise prices after a 13-year property rally. The old model that prioritised home ownership encouraged "a lot of speculation and crazy price gains - and that model is coming to an end", said analyst Rosealea Yao at Gavekal Dragonomics in Beijing.

City governments from Beijing to Shanghai have earmarked public land to auction to property companies that would develop rental projects only.

Country Garden Holdings, China's largest developer by sales, has announced plans to make 1 million units available over three years.

Banks are offering credit lines to developers for financing rental projects, and the Shanghai Stock Exchange is encouraging the creation of investment products backed by rental income.

Mr Xi is trying to alter the popular belief that property is a one-way bet, since any short-lived declines in prices have inevitably been followed by booms.

Home-ownership rates in China are among the highest in the world, at almost 90 per cent, according to Cushman and Wakefield. People also buy young. Parents often help their sons buy a place as a prerequisite for marriage.

Rentals, meanwhile, have been a hard sell, in part because of limited tenant rights and the low quality of much of the stock, with some units even lacking their own bathrooms and kitchens.

Even if the new policies can help change that mindset, challenges abound.

First, China's leaders have to ensure they are able to tame the market without tanking home prices. They will also have to balance other underlying drivers pointing to slowing demand. And officials would need to drop an old habit of letting prices boom whenever the economy needs a boost.

Still, the government's backing means that the size of China's rental market could drive annual rental payments to 4.2 trillion yuan (S$866 billion) by 2030, almost half of total home sales in 2017, according to estimates from Orient Securities.


To support the rental push, Shanghai has allocated 42.5 million sq m of land for rental homes through 2020 - more than for housing earmarked for sale. That will add about 700,000 units by 2020, or 41 per cent of total supply.

In Beijing, about 30 per cent of new supply by 2021 is designated for rental dwellings.

Under a trial programme in 13 cities including Guangzhou and Nanjing, rural collectively owned land can be converted into rental housing. Some cities are also encouraging the conversion of office buildings, malls and factories into rental units.

Some property firms are securitising rental income into products that resemble real estate investment trusts. The Shanghai Stock Exchange approved such an offering from Poly Real Estate Group and called for developers to roll out more of the products.

China Construction Bank plans to offer credit lines for rental projects. To lure tenants, the state lender devised a rare "rent loan" in Shenzhen to assist with their rent payments. Without collateral, apartment tenants can borrow as much as 1 million yuan for as long as a decade, with interest rates cheaper than mortgages, according to Caixin magazine.

China Vanke is targeting millennials with one-room apartments in former offices turned into dormitory-style accommodation in Shanghai, with rooms ranging from 161 sq ft to 215 sq ft. The facility offers common areas, an indoor gym and vending machines for food and drinks.

Some 95 per cent of 395 units offered in the initial phases have been rented mostly to individuals aged under 32, said Vanke's Shanghai head for rental business Yan Yong, with rents ranging from 2,600 to 3,400 yuan a month. Not bad for a city where home costs have soared to levels rivalling the world's priciest market, Hong Kong.

While analysts say it could take years for the changes to take hold, some caution against underestimating the resolve of Mr Xi, perhaps China's most powerful leader since Mao Zedong.

"When Xi started his anti-graft campaign years ago, people didn't expect it to be so powerful, but it proved to be beyond imagination," said Mizuho's Mr Shen. "Now, most people still hold the belief that home prices will never fall, and speculation is rampant. That's one place where Xi hasn't succeeded. And that means policy execution will be heavier until his goal is achieved."

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