The curtain is about to rise on China and India as rental-housing powerhouses. At present, the world’s largest securitized housing sector is in the United States, where REITs encompassing multifamily, manufactured homes and single-family dwellings sport a market cap of more than $145 billion. Japan’s housing REITs are next, with $24 billion.
Of course, there’s plenty of rental housing in Europe. While much of it still sits on the balance sheets of governments and institutions, it is also being unlocked. Vonovia, which owns and manages roughly 355,000 homes in Germany, is pioneering a modern capital-markets platform.
In the United Kingdom and Australia, “build-to-rent’’ housing is heralded as the next big thing.
Four factors drive the success of rental housing as an asset class in the United States. The first is scale. More than 3.3 million apartments are managed by professional residential operators, of which about 15 percent are REIT managers. The second is a mobile labor force that seeks out rental accommodation to match footloose job opportunities. The third is attractive investment returns. According to Nareit, U.S. multifamily and manufactured housing score five-year total returns of about 11 percent and 19 percent, respectively. The fourth is government support — the United States hosts the world’s most extensive ecosystem of housing incentives, from tax credits to planning bonuses.
Both the Chinese and Indian governments have declared their desire for a build-to-rent housing asset class to boost affordability and manage price bubbles. Scale is not an issue. The Asian middle class is growing by more than 300,000 people daily, mostly in China and India.
Labor-market mobility is also rising as these countries urbanize at more than 120,000 people each day, thereby generating a hunger for housing choice at affordable rates.
In India, Prime Minister Narendra Modi has promised all Indians will have access to affordable housing by 2022. To meet this goal, India must supply the entire average annual supply of U.S. homes every six weeks consistently for the next five years.
Clearly, both housing-for-sale and housing-for-rent are required at massive volumes.
The Indian government has launched a menu of incentives, including a suite of affordable-housing public-private partnership models and planning bonuses. The Modi government’s most innovative strategy is to classify affordable housing as infrastructure and thus eligible for special incentives under the country’s new infrastructure investment trust platform.
This past October, Chinese President Xi Jinping said, “Houses are built for living, not for speculation.’’ As a result, the entire state apparatus swung into action.
Within months of President Xi’s announcement, authorities had released China’s first formal housing-REIT guidelines, 15 cities launched rental-housing development campaigns, and China’s leading developers announced multi-billion-U.S.-dollar quasi-REIT and asset-backed securities (ABS) schemes.
In their local plans, many city governments staked-out development zones earmarked exclusively for rental housing. In Shanghai, more than 42.5 million square meters of land is now reserved for rental housing through 2020. In Beijing, 30 percent of new supply is designated for rental housing.
China’s private developers responded immediately, with multiple announcements of quasi-REITs — that is, securitized income streams distributed to investors without tax concessions. An increasing number of China’s 42 quasi-REITs now focus on rental housing.
To date, the most prominent IPO announcement has been by China’s biggest property developer and home seller, Country Garden Holdings Co., which won regulatory approval for a $1.6 billion housing quasi-REIT that is expected to deliver 1 million apartments over the next three years. This past July, China’s second-biggest developer, China Evergrande Group, announced a similar-size deal via an ABS.
A common question for China and India is, how does a country foster a rental-housing asset class when average yields are less than 3 percent? Japan supports a well-performing housing asset class with yields of just over 4 percent. In the United States, housing yields for directly-owned homes average about 5 percent. Germany’s increasingly vibrant housing investment market operates on yields of 4 percent to 5 percent.
The lesson is, the housing asset class relies on total returns, quality assets and performance driven by active management, not yields.
The GPR/APREA AsiaPac Performance Snapshot tracks the dynamics of listed real estate companies and REITs across 12 Asia Pacific countries/regions and eight sectors. Over the past 10 years, residential REIT total returns (in U.S.-dollar terms) in Asia Pacific were outpaced only by the healthcare sector — 11.54 percent compared with 11.72 percent, respectively. Turning to listed property companies, residential specialists were the top Asia Pacific performer in 2017, with a total return of 22 percent.
These numbers indicate a promising potential for a rental-housing asset class in Asia’s fastest-growing marketplaces.
The GPR/APREA Snapshot doesn’t yet track China’s quasi-REITs, let alone the budding residential-funds marketplace. GPR and APREA have, however, built an experimental REIT index for China that measures investment returns from Chinese assets in seven Hong Kong and Singapore REIT funds, comprising a market cap of roughly $4.5 billion.
To be clear, every square meter and foot of space, and every yuan of income, tracked by this experimental index is generated on the Chinese mainland and is an indicator of the potential for a diversified Chinese REIT market.
From January to May 2018, the China-focused funds scored a 16 percent total return and outperformed all other Asia Pacific markets, including Hong Kong, the region’s best medium- and long-term performer, and Singapore, the top-ranking country REIT market in 2017.
Of course, a single year of strong performance offers no guide to the future, and the experimental series only includes a small element of residential property at this stage.
The snapshot does, however, show the emerging behemoths are worth close strategic exploration.
Peter Verwer is CEO of Asia Pacific Real Estate Association Ltd., also known as APREA.