HONG KONG -- In big Chinese cities like Beijing, owning a home has never been easy. But many young workers now fear even renting will be out of reach after a summer of unprecedented rent hikes.
Ironically, the government's initiatives to promote the rental market may have exacerbated the problem. In recent months the sector has seen a big inflow of investment from new entrants, such as venture-capital-backed rental platforms, which rent already scarce housing from individual landlords and sublease them out.
As Beijing sweltered in the July heat, tenants took to Weibo -- China's Twitter -- to vent about rent increases of 20% to 30% when their contracts were renewed. Some said the soaring rents had forced them to move to smaller flats or far-flung neighborhoods to make ends meet.
The prospect of "owning a house is nowhere in sight, and soon we will not be able to afford to rent," one Weibo user complained. Another pointed to a yawning gap between income and rent costs. "Seems people will have to earn at least 20,000 yuan [$2,900] per month to qualify for renting flats in Beijing, but how many can?" the Weibo user said.
Not many, according to the latest figures from the National Bureau of Statistics, which puts the average monthly income in China's capital at 8,467 yuan.
The uproar over rent hikes has sparked concern at the highest levels of government. Premier Li Keqiang made developing the rental market a priority for 2018. But moves such as offering cheap loans to developers have had little effect. Rents in July rose 21.89% per sq. meter in Beijing, 16.45% in Shanghai and 29.68% in Shenzhen over the same month a year ago, according to data compiled by CityRe Data.
These Chinese cities are now ranked among the world's top 10 most expensive to live in, according to a 2018 survey published by consulting company Mercer.
Over the last two years, international investors have invested $5 billion in this sector, according to real estate consultancy JLL. Among them are well-known players including U.S.-based Tiger Global Management, Singaporean sovereign-wealth-fund-affiliated GIC Private and the Canada Pension Plan Investment Board. Chinese tech giants Alibaba Group Holding, Tencent Holdings and JD.com in recent months have also moved into the rental market, either by acquiring stakes in startups or launching their own services.
They all seek to exploit the gap between housing needs and available stock, as well as the potential for market growth.
Rentals account for only 6% of overall property transactions in China, compared with more than 50% in the mature U.S. market, according to research published by Lianjia, a Beijing-based real estate agency.
But the race to acquire rental properties is pushing valuations up to sky-high levels, according to industry veterans. Hu Jinghui, a former executive at one of Beijing's largest online rental brokerage companies, 5i5j.com, recently revealed that these platform operators are paying 20% to 40% above market value to secure rental properties.
The crisis could be solved by increasing the supply of rental properties, but the industry's low profitability has put property developers off.
"It takes a longer time for rental housing business to yield profits," Li Sze-lim, chairman of Guangzhou R & F Properties, one of the most prominent developers in southern China, said in August.
Under the traditional "build fast and sell fast" model, developers are able to reinvest the funds from house sales in new projects within 20 months on average. The leasing business, however, requires a large amount of upfront investment, and the payback in rents takes much longer.
Pan Shiyi, an outspoken Chinese businessman and chairman of Beijing-based developer SOHO China, has said publicly that even if rents double, the business would still not deliver attractive returns.
"From a business perspective, it's impossible to generate profits from the rental housing business at the moment," said David Hong, head of research at consultancy China Real Estate Information. He estimates that the rental yield for rental housing operators in China is just 1% to 2%. "As far as I know, no such company in China has turned a profit," he said.
However, Chinese developers are under pressure from government to act and local authorities are demanding that a certain portion of homes be reserved for rentals, in return for development permission on housing projects. Since last year, most of China's major property developers have launched, or claimed to launch, residential rental projects.
Many are doing so out of "political correctness," Hong said, and to show loyalty to the central government.
Vanke -- one of the country's top three property companies, along with Country Garden and Evergrande Group -- has been one of the most aggressive in moving into the rentals market, and in August described long-term rentals as a "core business." The developer says it has acquired more than 160,000 flats in 30 cities as of the end of June, with 40,000 already rented out. But the Shenzhen-based company, famous for luxury homes, does not expect the business to generate a profit.
In March, Vanke Chairman Yu Liang said the long-term rental activities "should not be making any profit at all," as he considered it part of the group's social responsibility.
Yu's belief is shared by Yang Guoqiang, chairman at Country Garden, which sold 550.8 billion yuan worth of homes last year and earned the crown for being China's largest developer. Launching Country Garden's rental brand last November, Yang said the company is "making contributions to the country" by building 3 million rental-only flats in next three years.
Despite low profitability, international investors and Chinese tech giants are still betting heavily that the sector is underserved and has room to grow. Only 12% of people rent homes in China, compared with more than 30% in the U.S. and the U.K., 40% in Japan, and 50% in Hong Kong, a report published by CCB International Securities shows.
Joe Zhou, an analyst at JLL, believes that more than 100 million Chinese millennials will need to rent homes in the coming years. He argues that experience in mature markets such as the U.S. shows that the rental business can generate stable cash flow, even in an economic downturn.
"Long-term rental housing is a very good business," he insisted. For Zhou, this summer's uproar over rent increases was down to unscrupulous, "ill-fated operators" who wanted to score quick wins in a bid to inflate their own company valuations. They will not last, he argued. A "handful of operators ... can't cloud the future of rental housing market in China."