HONG KONG -- Vanke, among China's largest residential property developers, has welcomed tenants to the country's first village-turned-rental-housing-estate as authorities look to help more workers find places to live in increasingly unaffordable large cities.
The development on the edge of Beijing occupies about 47,500 sq. meters of former village land still owned by residents who moved elsewhere during the capital's rapid urbanization.
While the government has in principle banned farmers from directly trading land with developers, a pilot scheme introduced in 2017 allows farmers to make gains by transferring land management rights to developers if they build apartments for leasing.
Many view the project as a breakthrough in ongoing efforts to reform China's rigid land allocation system, which in the interest of ensuring food security prohibits most rural lands from being used for commercial purposes.
The Vanke development is the first rental housing project to begin operating under the pilot program, which covers 13 cities, including Shanghai, Guangzhou, Nanjing and Chengdu.
"Vanke only needs to bear the construction costs, which has lowered the burden for us to participate in the house rental business," the company said in a press release.
Under the arrangement, villagers who collectively own the land will receive an undisclosed "minimum payment" every year and a bonus if profits are better than expected. In return, Vanke has rights to generate earnings from the land for the next 45 years.
Previously, authorities required any rural land slated for development to be sold to the state first -- usually at a low price -- before being resold to developers at a much higher price. Real estate acquisition accounts for most of the cost of residential developments. By collaborating with the villagers directly, subject to state approval, developers can save a substantial amount on land acquisition costs.
The new housing estate will provide 901 studio units aimed at young urban workers. The average monthly rent is 3,600 yuan, 20% to 30% cheaper than similar units nearby, Vanke said, adding that the first batch of 235 units have all been taken.
The project comes with the overall leasing market under pressure. In the first six months of this year, 16 apartment leasing operators collapsed due to financial drain, according to statistics compiled by Beike, a Beijing-based online property site. Leading companies have significantly slowed their expansion due to weaker demand.
Nevertheless, housing prices in large cities remain stable, putting an apartment out of reach for many.
Developing the rental market remains a priority for the government, which is encouraging property developers into the market with cheaper loans and other policy benefits.
Residential leasing is less lucrative for developers than home sales. Under the "build fast and sell fast" model, developers are able to reinvest funds from house sales in new projects within 20 months on average. The leasing business requires more upfront investment, and the payback in rents takes much longer.
In Vanke's case, a spokesperson said the Beijing project is "sustainable at a thin margin" with net income margin of about 6%. By contrast, Vanke's profit margin for property development related business, referring to its usual model of building and selling homes, was 26.89% last year.
"It's certainly a breakthrough in policies but there are challenges for implementation," Tao Ran, an economics professor at Renmin University said.
Tao said the scale of the scheme is likely to remain small, as projects will succeed only in good locations, though units might still be unaffordable for low-skilled workers.
About 130 million migrant workers lived in China's cities last year, according to official statistics. With limited social welfare benefits, many sleep in basements, rundown buildings and hazardous unauthorized housing.
While building accommodations for low-income workers makes little business sense for profit-driven developers, many entered the market to show loyalty to the government. The thinking is they will be compensated with policy benefits in other more lucrative commercial developments, said David Hong, head of research at consultancy China Real Estate Information.
"To make [rental housing ] work, the government needs to come up with some more market-oriented approaches," Hong said, "instead of asking property developers to take the responsibilities."