China needs progress in property rental market

By Xia Dan Source:Global Times Published: 2017/5/31 23:08:39

Illustration: Peter C. Espina/GT


The Ministry of Housing and Urban-Rural Development issued draft rules earlier in mid-May for property rental and sales, an indication that the government has fired the first salvo against the poorly regulated rental market since the State Council announced guidelines in June 2016 aimed at fostering property leasing in the world's second-largest economy. This also marks significant reform of China's housing market on the supply side. The creation of a housing regime catering for both buying and rental requires building a well-regulated market environment to overcome deficiencies in property rental.

For that scenario to be achieved, a few points should advisably be addressed and the draft rules should come across as moving in the right direction.

First, supply needs to be increased to meet the shortage of rental property. China's migrant population is now around 245 million, and the number is still rising. Home prices in a handful of core cities that are home to much of the migrant population have seen rapid growth, inevitably resulting in transitional or long-term rental demand. But why has rental yet to become more mainstream? It's certainly attributed to the traditional mindset that makes the case for "super-inelastic demand" - having a home is normally considered a prerequisite for a man to win approval from his mother-in-law. But an even more important reason is the shortage of rental supply.

The availability of rental homes is nowhere near that of homes for sale. In Shanghai, the city's rental market is comparatively well developed, but the homes for rent cover one 36th of the total area of houses for sale, local official data showed at the end of last year. There are not many companies offering rental property and individuals are the main source of rental supply, but this can only partially meet the demand.

The new draft rules address the issue on the supply side, encouraging the development of large-scale professional home rental firms that will be entitled to preferential policies in areas including land supply, tax relief and financial support.

Second, the blank spaces in the regulatory regime need to be filled to achieve rental market stability. One problem that has long weighed on the rental market is that landlords are always in a strong position, as a result of which renters are often forced to move out and have no tranquility in sight. This is only aggravated by other problems such as unlawful real estate agents, fake landlords and leases that are unfairly one-sided.

The new rules clearly define the rights and obligations of landlords and tenants, especially strengthening protection of the latter whose rights and benefits specify the details of the lease term, rent and residency certificate, among others.

Landowners are also encouraged to sign long-term rental agreements with tenants, which will boost the long-term rental options.

Third, improved oversight is needed to ensure rental home security. The absence of standards and regulations for governing the market as well as the difficulty of getting the regulator to respond when a tenancy dispute occurs are partly to blame for the market chaos. The draft rules address this by requiring different government departments to play their part in ensuring oversight so as to foster the rental market.

If the key concerns can be addressed, renting could soon become a more mainstream choice. This certainly depends on policy implementation and I would argue that two questions still need to be suitably answered.

The first is how to increase the financial attractiveness of the property rental market. The operation of professional rental apartment projects necessitates a large amount of investment, particularly in the initial stages - covering property acquisition, decoration and brand promotion. Long-stay apartment projects are also challenged by long payback periods. This means that comparatively high returns on investment are required to make the case for the projects. However, it's long been the case in China that home sales are more profitable than rental, thus reducing the appeal of the rental market for investors.

Germany has dealt with this by putting in place various tax relief policies for corporate and individual investment in rented homes. The average investment return from rental property has been stable, at between 7 percent and 8.5 percent, for nearly a decade, rendering investment in rented homes appealing.

The second is how to regulate landlords' behavior in a direct and efficient manner. The draft rules specify legal obligations for landlords, but there's still room for providing further details. In the case of rental-heavy Germany, rent increases are strictly controlled: An increase of more than 20 percent within three years is against the law, and landlords are subject to penalties if their rental prices are 20 percent higher than a level considered reasonable. On top of that, unlawful activities by landlords tarnish their credit record and accordingly affect their employment and credit card applications.

China should draw on Germany's experience to devise a regime that is more in favor of the tenant.

The author is a senior analyst with Bank of Communications Co in Shanghai.


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