At the same time that China’s home sales market faces an era-defining crisis, the country’s rental housing sector is becoming increasingly attractive to foreign and domestic institutional investors, according to a panel of experts from LaSalle Investment Management, Greystar and Savills. Watch the full recording>>
A combination of shifting demographics, social acceptance of renting as a long-term alternative to home ownership and the introduction of rental housing REITs as a potential path to liquidity, make investment in Chinese multi-family properties a priority target, Selena Shi, managing director of acquisitions and RMB fund at LaSalle Investment Management; Jialin Li, managing director at Greystar; and James Macdonald, head of China research at Savills told Mingtiandi’s 2024 APAC Residential Forum on Thursday.
“China multi-family has great potential. The penetration rate right now is as low as 2 percent to 5 percent, whereas the US is about 20 percent and Europe is probably even higher. So we do believe there’s great growth potential, and we are seeing more interest from institutional capital, domestic and foreign, in this sector. I’m very positive on the (sector’s) future growth,” Shi said in the panel discussion, which was sponsored by Yardi.
Multi-family deal volume in Asia’s largest economy surged 30 percent last year to $1.9 billion, according to MSCI Real Assets, with investors showing a preference for Shanghai, as the city’s estimated annual influx of 150,000 to 200,000 professionals helps boost rental demand in mainland China’s commercial centre.
Home Ownership Loses Appeal
Multi-family investors in China have primarily targeted younger renters, with that cohort seen as increasingly shifting away from traditional and cultural preferences for home ownership on the back of delayed family formation, low housing affordability, and slumping property values.
“People are getting married and having kids later on in life, if they’re having kids at all, so pressure for buying property is perhaps not there, and owning a property is not as much financial security as before,” said Macdonald. “Five years ago, owning a property was a sign that you’ve made it, you’re going to see growth in your net worth. Now, if you’re not financially well off, it’s seen as a potential risk for their future financial security. And you’re not necessarily likely to see that 10 percent growth (in housing prices) that you’ve seen before.”
Echoing Macdonald’s view, Shi sees rising demand from young professionals as a “long term” trend, which LaSalle IM aims to tap as part of its strategy to invest RMB 10 billion ($1.4 billion) in China’s rental housing sector within the next three years.
The Chicago-based fund manager has launched two rental housing projects in Shanghai under its newly established COZI brand, with another on the way next month. Both of those projects target white-collar workers in the city’s finance and technology industries.
Shanghai’s concentration of talent has also drawn Greystar, with the South Carolina-based developer and fund manager planning to launch its second China project in the third quarter of this year. That development in Shanghai will be the city’s first institutional purpose-built rental housing development, with the 580-unit complex in Jing An district aimed at the same resilient mid-premium consumer base as the company’s existing LIV’N 833 project in Changning district.
“For the LIV’N 833 project, the average rent is as high as RMB 25,000 per month…we focus more on high-end expats and occupancy rates have increased from 50 percent to 87 percent today, and we think that this trend is still growing,” said Li. “And because Greystar is well known especially in the US and Europe, expats are very familiar with the Greystar brand name. This is also one of the unique advantages that Greystar has.”
The rising rental demand has bolstered the economics of institutionally-operated rental apartment projects in Shanghai, with Macdonald and Shi citing average rental premiums of 20 percent to 30 percent over standard individually-owned properties. That pricing power, along with lower overhead costs and service provisions compared to serviced apartments and hotels, has resulted in margins of around 80 percent for multi-family projects, according to Macdonald.
C-REIT Liquidity
Investors have also been encouraged by policy measures introduced by China’s central government, including the country’s pilot REIT programme, which was expanded in 2021 to allow public listing of trusts holding affordable housing assets. C-REITs have emerged as the third most preferred exit channel for potential investors, according to a survey of 50 regional and global investors by JLL published in December.
“Long-term, REITs will help to bring additional liquidity into the multi-family sector and lower the barrier of entry for many institutional investors,” said Shi. “Right now, the housing REIT market is undergoing a period of volatility so people have had some hesitation on the REITs. But long-term, I think it is definitely going to be very positive for the sector…we are seeing more and more institutional investors showing interest in the sector, and some of them are driven by the potential of a REIT exit.”
Government incentives such as tax benefits, a dedicated supply of land for rental housing projects and increased credit availability have also encouraged rental housing developers.
With these government incentives drawing participation from state-owned developers potentially new to the sector, Greystar also sees opportunities to partner with these government players at the project level or even to launch housing investment vehicles.
“We do see some SOEs forming pre-REIT funds or rental housing funds,” said Li. “They are very market oriented, not SOE oriented. So they are acquiring some value-add assets as well as land plots, while others are looking at core-plus. So different investors focus on different strategies in the rental housing sector, which is very encouraging.”
Japan Opportunities Coming on Tuesday
Mingtiandi’s 2024 APAC Residential Forum continues at 10:00 AM Hong Kong time on Tuesday, 26 March with a panel on multi-family investment in Japan.
That look at Asia Pacific’s largest rental residential market features Akira Kosugi, a managing director who heads Japan investment for Greystar and Laurent Fischler, head of investments for Asia Pacific with Canadian pension fund manager Ivanhoé Cambridge.
Also speaking will be Christopher Handte, managing director for Japan with Tokyo Trust Capital, who joined the eight-year-old company last year after more than seven years at BlackRock and Chedli Boujellabia, managing partner and chief executive officer with Alyssa Partners, which has led some of Japan’s largest rental residential deals in the last two years.
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