Property investment

Rental properties are the new gold in China for overseas investment funds

Increasing residential prices, decreasing housing affordability and a highly mobile workforce are driving China’s rental market boom, according to a recent Savills report

PUBLISHED : Tuesday, 12 June, 2018, 9:27am
UPDATED : Tuesday, 12 June, 2018, 6:28pm

Overseas private equity funds have been piling into China’s rental flat sector in the past few months, on the back of strong government support and shifting consumption patterns among the younger generation.

Tiger Global Management, a US-based global investment firm, led a US$70 million financing round on Beijing-based rental flat operator Danke Gongyu on Wednesday. That followed a batch of local and global funds that closed a US$100 million financing on Danke in February, all of whom participated in the latest June round.

GIC Private, a Singapore sovereign wealth fund, in May co-launched a platform with Nova Property Investment to acquire long-term home projects with an initial US$676 million fund. GIC will also take a minority stake in the Shanghai-based flat brand.

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Nova itself was co-founded by global private equity firm Warburg Pincus and Chinese entrepreneur Wang Qian in 2015. Warburg Pincus also invested in Mofang, an institutional rental flat company, and Ziroom, a spin-off of HomeLink, China’s largest property agency.

GIC was “attracted by the promising outlook of China’s fast-growing rental flat sector,” said Lee Kok Sun, chief investment officer at the fund’s real estate division. “There is a large and growing population of renters within our target income group, with a limited supply of quality institutionally-owned and professionally-managed projects.”

Other global private equity firms have made similar comments when announcing their deals.

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China’s market of 190 million renters will grow to 250 million by 2025, reflecting a value of 2.9 trillion yuan (US$452.88 million), according to a report by Homelink.

Savills in a recent report noted increasing residential prices, decreasing housing affordability, a highly mobile workforce as well as “a younger, more spendthrift demographic that prefer to invest in stocks than bricks and mortar” as factors driving the rental market.

In a nod to millennial-generation renters, many flat operators in China feature small rooms, standardised management services, amenities such as gyms and cafes, and comfortable public spaces for socialising. Many said they target urban professionals with disposable income. Rental rates are generally 15 to 30 per cent higher than comparable spaces nearby.

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“The logic is simple. So many urban professionals can’t afford a home, but want a quality life,” said Huang Haibin, Harbour’s founder and CEO.

The logic is simple. So many urban professionals can’t afford a home, but want a quality life
Huang Haibin, Harbour

Most start-ups operate on an “asset-light” model, under which they don’t own the properties but sign long-term lease contracts with landlords, renovate and sub-lease them, and then profit on the rental spread.

But Huang said he expects non-rental income, such as the fees paid by e-commerce companies, will account for up to 40 per cent of revenue if the room numbers reach large scale, or around 500,000. Currently Harbour runs about 15,000 rooms in top cities and rent is the main revenue generator.

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Huang said it was possible to extract additional value from renters, much in the same way that other e-commerce companies provide additional services under the platform model.

“We can sell them a variety of things. The logic is the same with private equity firms investing in bike renting start-ups, or Alibaba investing in physical retail stores,” Huang said.

Some start-ups are also moving into “asset-heavy” territory, hoping to reap asset appreciation. The GIC-Nova platform is the latest example. Harbour has also co-launched funds with Gaw and other Chinese institutions to acquire assets.

Some private equity firms have also co-founded rental flat brands with hotel management groups. For example, IDG Capital co-launched Cjia in 2015 with Huazhu Hotel Group, a Shanghai-based firm.

“For a hotel group it is very natural to extend its business to the rental flat market,” said Jiang Weidong, general manager of Cjia. “Design, building and operation is similar.”

For a hotel group it is very natural to extend its business to the rental flat market
Jiang Weidong, Cjia

Cjia even provides a one-night option for tenants, but Jiang said most people choose six-month as it’s the shortest lease that offers a big discount.

Jiang said CJIA gets support from Huazhu from many aspects, including project acquirement, design, marketing, IT and membership management. Cjia’s strength, as a hotel-backed startup, is its operation.

“We emphasise a lot on hygiene and safety. It sounds dull but in practise not easy,” he said.