Banks Take Up Xi’s Call to Boost Rental Housing
As China’s property developers rush to support President Xi Jinping’s campaign to expand the rental housing market, banks are also jumping into the fray, seeking to earn brownie points from the government and lay the groundwork for what they hope will eventually be a lucrative new income stream.
The crackdown on property speculation and administrative controls on new-home purchases in many big cities is set to dent the booming business of mortgage lending — outstanding home loans surged by 57% in the two years to the end of September to 21.1 trillion yuan ($3.16 trillion), growing at double the pace of overall loans, central bank data show.
In their search for ways to benefit from the government’s rental housing drive, some banks have turned to acting as intermediaries between tenants looking for long-term housing at a guaranteed price and the big property-developer landlords who want money upfront rather than a steady monthly income.
A typical arrangement involves landlord and tenant signing a long-term contract — usually one year to three years, or in some cases as long as five — that specifies the monthly rent for the entire period. The landlord receives the rent upfront from the bank, while the tenant borrows the whole amount from the bank and repays the loan monthly at the prevailing benchmark one-year lending rate, currently 4.35%. The tenant benefits from security of tenure, a stable rent and a reasonable rate of interest on the loan.
China Construction Bank, one of the country’s “Big Four” state-owned commercial banks, is leading the charge. Although the venture still in its very early stages, and so far confined to Shenzhen, the Beijing-based lender is optimistic about the long-term prospects for this new line of business.
“The rental housing market is still very much in its infancy, but the potential to provide financial services to the market could be colossal,” Huang Yi, vice president of China Construction Bank, said at the Caixin Summit in November.
Huang acknowledged that the rental loan business is unlikely to be profitable for banks in short term due to a lack of customers and economies of scale. But “when the market expands, we will make money,” he said.
Surging home prices, growing unaffordability and the financial risk to banks from the rapid increase in mortgage loans have forced the government to come up with strategies to developing the housing rental market. Premier Li Keqiang vowed to “put in place a housing system which encourages both renting and purchasing” as early as March 2016 in his annual report to the National People’s Congress.
Since then, a series of policies to encourage developers to build rental housing have been rolled out, including designating land in local government auctions for rental housing and offering preferential land prices to property companies who promise to build homes for rent. Banks were also encouraged to give financial support to rental housing projects by providing long-term loans, and companies participating in the drive were allowed to raise funds by issuing bonds and asset-backed securities.
At the annual Central Economic Work Conference in December, chaired by President Xi Jinping, calls were made for the government to speed up the development of the market as part of a long-term mechanism to stabilize soaring home prices, especially in major cities such as Beijing, Shanghai, Guangzhou and Shenzhen.
In July 2017, 12 cities experiencing net population inflows, including Hangzhou and Wuhan, were chosen to take part in a pilot program aimed at boosting rental housing development.
“The impetus for the growth of the rental loans business is undoubtedly government policy,” said Joe Zhou, regional director and head of research for China at real estate consultancy Jones Lang Lasalle. He said he expects more players, including real estate developers, banks and property management companies to jump into the market given that the government has made the direction of policy clear.
“The main reason for going into this business is not profit” but to help implement government policy to foster a “rational” rental housing market, a CCB employee with knowledge of the bank’s strategy told Caixin in November.
For the banks, rental loans also offer a potential alternative over the longer term to their mortgage business where growth is likely to slow in view of restrictions imposed on home purchases in many big cities, increasing unaffordability and a maturing market.
“Banks need to re-think their real estate business,” a senior executive with CCB told Caixin. “Focusing only on mortgage loans carries risks. If the mortgage business gets into trouble and we have mortgage defaults on a large scale, we have nothing to cushion us, so we need to find new avenues” for making money, the executive said.
Rental loans are also attractive to the banks because of the potential to offer credit to hundreds of thousands of individual customers, both existing and new, especially young professionals and graduates who have good incomes but cannot afford to buy a home.
“We need to shift to a retail customer-focused business model — university graduates who live in rental homes are among our target market,” the executive said.
The business has some appeal for landlords, especially the large property developers who are now building thousands of blocks of apartments for rent under the government’s campaign. Although many are now diversifying into property management, both residential and commercial, they are still predominantly builders and need cash.
Traditionally developers have relied heavily on deposits and the sale of new homes to replenish their cash and fund new developments. But government policy incentives to expand the rental market are driving local governments to make more land available for rental-housing developments at the expense of homes for sale, especially in big cities such as Guangzhou, Shenzhen, Shanghai and Beijing. This shift threatens to squeeze developers’ cash flow.
Monthly or quarterly rental income doesn’t provide cash on the scale needed to pay for new developments and the government is still discouraging banks from providing loans for real estate development, so receiving up-front rental income for the entire contract period is an improvement.
The model also has benefits for tenants. China’s rental market is currently dominated by individual investors who often raise rents by unreasonable amounts when contracts are renewed and tenants have little security. In rental loan contracts such as those being proposed by CCB, the rent and any annual increase is stipulated and cannot be changed.
But a three-year upfront payment can be a painful financial burden for many people, especially those in their 20s entering the job market. So tenants may well be prepared to borrow the money at a reasonable interest rate in exchange for the security and stability provided by the rental loan contract.
With the market still in its infancy, it’s been difficult to find suitable rental properties, a project manager in CCB’s financial leasing department, who declined to be identified, told Caixin.
“We are not only teaming up with real estate developers but also looking for other rental housing-related projects such as government-subsidized rented housing for low-income families, but it’s not easy,” he said.
CCB is only offering rental loans in Shenzhen for now, but will eventually expand into other cities, although there is no timeframe. To try and drum up business, the bank has launched a smartphone app, CCB Jianrong Home Resources, which allows users to check out available properties listed by real estate developers, make viewing appointments and apply for a rental loan.
CCB’s Shenzhen branch said it rental properties from individual landlords are not being considered at the moment. A tenant can apply for a loan of up to 300,000 yuan and the maximum allowed length of a lease is three years, according to a statement from the branch.
To minimize the risks, CCB is only making loans available to existing customers — those who already have a specified amount of deposits or assets with the bank or who have a record of their salary or public housing funds paid into their CCB bank account by their employer.
State-owned Industrial and Commercial Bank of China, the country’s biggest commercial bank, launched a similar rental loan product targeting Guangzhou customers in November.
But other smaller banks are taking a more cautious approach and, wary of the potential risks involved, are still weighing their options. Rental loans are not as secure as traditional mortgage loans because of the absence of collateral, an employee at a joint-stock bank who did not want to be identified told Caixin. A tenant could abscond early on in the lease contract and it’s not clear what recourse the bank would have to reclaim the upfront payment from the landlord.
“I don’t think the future for this business is bright,” said Joe Zhou from JLL. “I can’t see demand for this type of loan being very high given that only a few cities in China, like the four first-tier cities and several provincial capitals, have the potential to really develop rental housing.”
Tenants may also balk at signing contracts of up to three years. “How you can be sure that you don’t move to another city in three to five years or want to rent a new place because you’ve grown tired of the one you’re living in,” Zhou said.
Contact reporter Pan Che (firstname.lastname@example.org)
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