VIP Class Notes (Jesse) [W]

tier 3 / 3rd tier

At the opening of the 19th national congress of the communist party of China, president Xi jingping emphasized, “China will maintain the principle that houses are for people to live in, not for speculation”. The principle was first introduced by China’s top leaders at an economic conference last December, as the country sought to crack down on rampant speculative buying in its property market through a flurry of government curbs.
Since last year, China has adopted a series of cooling measures, the effect of which are obvious. After the regulation of housing prices was applied in first tier cities, the market so far appears to be relatively stable, with the demand for speculative investment effectively being curbed. According to the report issued by the National Bureau of Statistics, China’s new home prices in August rose at the slowest pace in 7 months but fell or leveled off in the majority of cities. Home prices in China’s four tier-one cities Beijing, Shanghai, Guangdong, Shenzhen declined for the first time this year by 0.3 per cent month-on-month in August after staying flat in June and July, which is in contrast with the 2 to 4 per cent average monthly growth recorded. The price of newly built commercial housing in 15 first and second tier cities is decreasing or flat, and the year-on-year growth rate has been declining for several months. At the end of September, the national commercial housing sale area fell by 12.2%, mainly in the tier-three and four cities, which is a positive result. Price growth in first and second tier cities is likely to remain muted in the next 6 to 12 months due to the current tight regulations.

At present, according to current estimates, China’s housing rental population is expected to be 190 million people, composed mainly of floating population and college graduates, with the rental market size exceeding 1 trillion yuan. Second tier cities would be the main battlefield of China‘s rental market in the future. To measure the current rental market of China, the 4 first tier cities and 23 second tier cities have been selected to do the detailed resolution calculation. The current rental market reached 1.3 trillion yuan, of which the second tier city share accounted for 31%, 20%. Compared to the mature markets of developed countries, both the population and the scale of the rental market have considerable room for development.

Overall, there are four reasons that the Chinese rental market has a high potential for future development. Firstly, on the demand side, the main reason for the rental housing demand increasing year by year is that there is a larger floating population entering the rental market due to the urbanization process; secondly, high prices, and loan & purchase-limit policies cause demand from the buying market to overflow into the rental market; thirdly, buying homes at the late marriage age prolongs an individual‘s rental period, which indirectly increases the rental demand. However, on the supply side, the supply of the rental housing market is not being met. The standard rental market and long-term rental apartments urgently need development; finally, compared with developed countries, the population and rental market size of first-tier cities in China are far less than cities like New York, Los Angeles, and Tokyo. The main reason is that rental prices and the proportion of the population leasing properties are relatively low. China‘s first-tier cities will occupy the largest market share continuously in the future and the market size is expected to double.

According to the East Securities Research Report, by 2030, China’s leasing population will reach 270 million people, with the overall market size reaching 4.2 trillion yuan. Rental population growth comes from the continued growth of the floating population, and the urbanization of cities entering the second stage which means there will be more people relocating from small cities to big cities, causing second tier cities to have an increased rental population. First-tier cities have a future land supply plan to increase the supply of land available to lease, and it has begun gradual implementation, with Shanghai having sold 6 pieces of dedicated leasing land and are planning for another 10 to be included in the future. The share of the second tier cities will rise from 20% to 27%, which will be the largest incremental increase. Brand apartment companies have been aware of this, and have begun actively seizing the layout of such cities. The current rental market is undergoing a transformation from the “old lease” to “new lease” stage, for example the past rental agreement emphasized the relationship between the tenant and the landlord, focusing on the rights and obligations of each party, and in fact the current lease is similar but with some new elements, including long apartment rental innovation, which is a new feature of this round of the rental market development. The increase of leasehold land, also conforms to the new direction of the development of such a rental market.