Recently there are more and more discussions in the Chinese market concerning the increase of rental. To expand the scale, some representative long-term rental apartment operators are competing for housing resources with 20% to 40% higher capital than the normal market price, which artificially raises the price of housing transaction, disrupting the attitude of the property owners. The owners' appetite has increased, and they are increasing the price as well. Insiders warned that if margin calls occur in the long-term rental apartments, the industry may face greater risks, and such risks might even be more dangerous than that of P2P.
According to News China, rental in the top ten cities of China, namely Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin, Wuhan, Chongqing, Nanjing, Hangzhou and Chengdu all rose in July. Among them, rental in Beijing, Shanghai and Shenzhen sees the most increase. Beijing's rental in July increased by 3.1% compares with last year. The rental in Dongcheng and Shunyi Districts increased by 10.5% and 10.7% respectively, and some areas even rose more than 30%. Although the price has risen, the total transaction volume of 5i5j Group, one of the largest real estate brokerages in China and its apartments has increased by 11.3% from June and up 15.5% compares with previous year; the total transaction volume from January to July 2018 increased by 14.4% compared with last year. Anbound pointed out that in the past month, the rental of first-tier cities in China have increased by nearly 20% year-on-year, and Chengdu and Xi'an have also increased by 30.98% and 25.08% respectively.
Why is the rise in rent prices causing so much concern? Does the rise in rent reflect market supply and demand?
The government's focus is first on market and social stability. Since the development of the housing renting market, this has become an important direction for the metropolitan government to ease high housing prices, and now the rental price has risen sharply, the government has naturally begun to pay attention in this area. On the escalation of rental, on August 17th the Beijing Municipal Construction Committee and other departments had discussions with the main housing renting companies such as Ziroom, 1zu and Danke Gongyu, asking them not to use bank loans and other financing channels to obtain funds for vicious competition to seize the property resources; and that they may not occupy the rental at a price higher than the market level; as well as not allowing them to induce the housing owners to preempt the lease contract in advance to increase the rent.
However, in the Anbound research team believes that there behind the surge in rental is the impact of excess capital. Specifically, excess capital is flooding into the housing rental market from other sectors, appropriating the policy shifts of the central and local governments while utilizing capital leverage to rapidly push up the price of the rental market.
To alleviate the problem of high real estate prices in large cities in China, in 2016, the State Council issued the Several Opinions on Accelerating the Cultivation and Development of the Housing Leasing Market and proposed to develop the domestic housing leasing market, among which, (1) developing housing leasing enterprises, at the same time, housing leasing enterprises enjoy relevant support policies for life service industry; (2) encouraging real estate development enterprises to carry out housing leasing business; (3) regulating housing leasing agencies and provide standardized intermediation services; (4) supporting individual entrusted housing leasing enterprises and rental housing with intermediaries; (5) improving housing leasing support policies.
Under the guidance of the policy, capital began to flow into the rental market. It should be particularly pointed out that although the liquidity of the local market is currently tightening, it is still in a state of excess capital. In the Chinese market, funds often follow the policy. As urban housing rental is almost in need of the market, it is not surprising that the influx of various types of capital has entered. But as Anbound have analyzed in the past, the flow of excess capital has a destructive effect on market stability and will cause bubbles in the market while overvaluing the prices.
Once excess capital enters the housing rental market, it will be more than merely simple supply and demand problem, and it will not be solely about renting intermediary service. To a considerable extent, it has evolved into a capital game. First, excess capital drives rental companies to compete for high prices. Why are such companies having the strong position to compete for high prices? The reason is that there is capital involvement that stimulates the rental companies to quickly seize the housing resources to gain the advantage. Second, rental companies are based on scale to obtain asset returns. After capital intervention, the revenue and profit of the rental company not only come from rental services, but also from asset transactions. For example, a rental company can package a leasing project, make an asset securitization, and guarantee the property based on the rental income right to be placed on the financial market. Third, the size of the rental company determines whether there is pricing right; large amount of capital is waiting for investing in the rental market, therefore when the rental companies have obtain the pricing right, the profit margin will be considerable. Excess capital will use various means to promote asset trading of the rental companies; the greater the market share, the stronger the pricing right will be, and there will be more substantial the asset price.
However, the large amount of surplus capital entering the rental market is likely to cause the outcome that the policy department does not wish to see it. Simply put, there are the following points: (1) The pressure of high land prices and high housing prices is transferred from the buying market to the rental market. The rapidly increased rental has become an unbearable burden for many urban blue-collar and grassroots white-collar workers, which is not good for stabilizing urban labor force. (2) The price of the service industry has been increased. The rapid rise in rental will significantly increase the price level of service industry in a considerable number of cities in China and become an important force driving up inflation. In the context of trade war and rising oil prices, China's rising inflation levels are entirely possible. (3) The spending power of renters has been limited. The U.S. Department of Housing and Urban Development defines cost burden when a household or an individual's rental expenses exceeds the 30% of disposable income; the rental in China's first-tier cities has exceeded that standard, reaching more than 45%. If young generations are going to spend half of their income in rental, their spending power will be greatly reduced.
Final Analysis Conclusion:
An important reason for the chaos in some urban rental markets is the result of a large amount of excess capital, which will quickly transfer the high housing price factor caused by the rapid urbanization to the rental market and push up the price of urban service industry, as well as increase the inflation level.
