President Xi Jinping has been trying for years to change citizens’ attitudes toward leasing. Most owners still prefer leaving units empty to renting them out. Equity returns from property investments can reach triple digits over time, but renting can hurt resale values given many Chinese people’s distaste for lived-in homes. And because most renters are poor or very young, rental yields in China are some of the lowest in Asia.
As a result the country has enough empty units for roughly 90 million people, estimates Logan Wright of the Rhodium Group. That does not include the 500 million to 600 million square metres of unfinished residential projects by indebted developers who have run out of money. Many of those frustrated investors who have pre-purchased apartments are threatening to stop paying mortgages.
In normal times, converting unused spaces into affordable flats this way would not impact buyer confidence much. But the risk is that prospective Chinese buyers become convinced that home ownership is going to peak sooner than expected, and steer clear. After all, family formation is slowing, and Beijing’s push to make renting a respectable alternative to buying might work.
Dumping state-owned flats onto the leasing market will further depress yields, deterring private corporate investors like China Vanke and more recently, Singapore’s sovereign wealth fund GIC, which are interested in developing residential leasing property. Turning empty flats into affordable spaces is a laudable goal, but there’s no reason to hurry.
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