Caixin
Sep 14, 2020 02:11 PM
OPINION

Editorial: Making Renting a Home Less Arduous Will Help Fix China’s Housing Market

China’s home rental market is moving toward greater regulation and development. In recent days, the country’s Ministry of Housing and Urban-Rural Development published a new set of legal proposals for public comment.

The document, which experts have long called for, emphasizes two main things: the protection of renters’ legal rights and interests, and the need to strengthen standards and regulation for long-term rental apartments. We look forward to seeing it stabilize the home rental market, spur the market’s healthy long-term growth, and allow tenants to enjoy a more settled home life.

In recent years, frequent problems in China’s local long-term rental markets have spurred large numbers of renters to move to protect their rights. The coronavirus pandemic has revealed and exacerbated the clear shortcomings and hidden risks in the way that long-term rental properties are run. Despite a host of other issues, China has huge demand for rental housing, especially in megacities with rising numbers of young people and high property prices.

Surveys have shown that people under 35 years old are most likely to rent a home in China. This group is still at the beginning of their careers and tends to lack independent wealth, but holds the key to the future of their adopted cities. We must move decisively to tame this chaotic market while also creating a relaxed policy environment that allows further development while encouraging businesses to explore new models.

Although these two concepts seem mutually exclusive, they are not. The standard for judging them is to determine whether they help eradicate economic and financial risks, develop the rental market in a healthy way over the long term, and fairly protect people’s rights and interests.

Many different models of long-term home rental market have emerged in China over the years, from the concentrated, to the decentralized, to the developer-led.

Recently, decentralized industries have expanded rapidly thanks to policy and capital support. However, there are shortcomings and hidden dangers in their business models, as demonstrated in the abuse of so-called “rent loans,” when long-term tenants simultaneously sign contracts with both the rental company and an associated loan provider.

As a financial instrument, rent loans are nothing sinister. But if the rental company suffers financial issues and can’t pay landlords on time, then landlords can take back control of their properties, leaving tenants servicing their debts to the loan provider despite not occupying their homes. China is home to a number of similar schemes that can rapidly leave tenants on the hook for rent they cannot or should not pay.

It was extremely necessary for the housing ministry to include regulation on these kinds of risks, which can trigger conflict and financial distress. The document proposes that governments in directly administered municipalities and communities can set up capital management systems for home rentals, incorporating regulation on rents and deposits. This will form an important part of controlling the market in the future.

A document issued last year by six government ministries, including the housing ministry and the National Development and Reform Commission, stated that the government would instruct rental companies to set up accounts with banks for regulating capital received from tenants, and forbid them from earning more than 30% of their rental income from rent loans. The new rules are slated to fully take effect before the end of 2022. While the intention behind them was right, there are worries some local areas imposed a complete halt to rent loans, a one-size-fits-all approach that would fail to account for complex individual arrangements.

Another strong move is that while strengthening regulation of the home rentals sector, the proposals also mention several support measures, such as permitting rental companies to enjoy preferential financial, tax and land policies according to the relevant national regulations.

The rate of return in the property rental market is comparatively low. Long-term rented apartments are a highly concentrated industry, but the profit margins are slim. Such businesses rely on a constant influx of capital to ensure their survival, but much of the capital flows have not yet been adequately opened.

In theory, China has fundraising pathways like financial institutions, special bonds for home rentals, stock ownership and asset securitization, but businesses still struggle to solve their funding issues, either because financing costs or the standards for underlying assets are too high.

In other parts of the world, real estate investment trusts (REITs) are an important funding tool in this respect. The yield on assets like long-term rental apartments is higher than normal rentals and even approximates the standards for publicly placed REITs, but years of dithering have left them unable to be rolled out in China. Governmental departments must urgently research fundamental legal frameworks and tax collection policies for publicly placed REITs and aim to launch them as soon as possible.

The rights and interests of all parties must be fairly upheld if the rental market is going to enjoy healthy long-term development. The market is home to diverse entities, with different contractual relationships existing between lessors, rental firms, tenants and financial institutions. The most vulnerable group is the tenants, for whom guaranteeing legal rights is the key to establishing healthy rental relationships.

For a long time, the rights of people who rent apartments have been ignored or violated in China. Many tenants bear the inconvenience of frequently moving house or living in poor conditions. Often, they suffer from rent hikes, deposit deductions, and penalties from falling behind on rent. In some cases, they argue frequently with the property owners or real estate agents.

All of this prompts many tenants to try and buy their own homes as quickly as possible. This is evidently a disadvantage for the healthy development of the rental market, let alone grander plans like raising domestic demand.

The development of the rental market also depends on broader systemic reforms. In recent years, the Chinese government has advocated a housing system that balances the needs of renters and buyers. Some areas have piloted granting the same rights to both groups, but up to now progress has been limited.

Ensuring the rental market’s healthy long-term development requires us to make simultaneous reforms to the household registration, social insurance and education systems. The proposals state that tenants with rental contracts will be allowed to apply for local residency permits in accordance with the relevant regulations and enjoy basic public services and conveniences in accordance with the law. This is an important development, but is still far from enough. We’re also still waiting for local governments to strictly implement the rules.

As China’s domestic property market becomes progressively more saturated, the rental sector will inevitably develop further, especially in large cities. Rentals naturally embody the principle that “homes are for living in.” Ensuring people have settled home lives should be our first priority.

Long-term rentals are an important starting point for resolving the current structural contradictions in our rental market. At the moment, some real estate developers are exploring the long-term sector. We are optimistic about this and have deep confidence in the capacity of entrepreneurs to innovate. Implementing effective regulation to root out risks and creating a relaxed environment for development should become our “two-pronged approach” to drawing up the relevant home rentals policies.

Contact translator Matthew Walsh (matthewwalsh@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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