Long-term housing projects emerge as an attractive investment option

Insurance companies will become the most important financial support for the development of long-term rental housing, experts said.

They said insurers usually have a large and stable cash flow, which makes them prime candidates to play that role.

Last month, the China Banking and Insurance Regulatory Commission allowed insurers to participate in the long-term rental market by way of direct investment, investment in the sector's bonds, equity investments and private funds.

China has begun to promote long-term rental housing as part of its policy to ensure sustainable and steady development of the real estate market, and to secure housing supply to meet demand.

However, rental housing investments typically tend to have long gestation before yielding competitive returns. This makes them less attractive for returns-minded investors, said Joe Zhou, head of research at JLL China, a provider of real estate services.

"That's why, insurance companies, which have a long-term and steady cash flow from premiums, can become an ideal source of financing for long-term rental housing projects," he said.

An employee of a major domestic insurer, who sought to be identified only by his surname Li, said the company recently picked up a 49 percent stake in a long-term rental housing project from a property company. It also bought 40 percent of bonds issued by the developer. "In effect, we have an 89 percent stake in the project."

The insurer's foray into housing started in late 2017 when it formed an exclusive team to oversee the long-term rental apartment business. To encourage the team to excel in their new role, extra scores were added to their performance appraisals.

But Li said he opted not to join the team as other projects generate higher profit margins. "The profit rate of other property projects, such as office buildings, logistics parks, industrial parks and other commercial real estate, can reach 10 to 20 percent, but that of long-term rental housing is about 5 to 10 percent."

One of the reasons, Li said, is that since most of the long-term apartments were created by redesigning what were office buildings, hotels or other commercial real estate, their operational cost is comparatively higher than that of regular residential real estate.

Besides, the usage time of commercial land is only 40 years, while that of residential land is 70 years. Electricity and water charges at long-term rental housing projects are also double that of regular residential projects. In addition, there is the cost of renovation, he said.

For the insurer, each long-term rental housing project may take about 10 years to bring in profits, given investments needed for buying land, renovation, marketing, rental revenue, management and other operational expenses.

But JLL's Zhou said long-term rental housing, when on track, will bring a continuous flow of rental income, which makes it a worthwhile, low-risk investment product compared to other asset classes like stocks or bulk commodities.

"In the future, investors will have greater interest in long-term rental apartments than commercial real estate," he said. "This is already the reality in some developed countries."

Rental income from apartments is more stable despite fluctuations in the economy because housing is a rigid demand, especially in populous markets like China, Zhou said.

"Besides, young persons' lifestyles have changed. They prefer the community-like feeling that long-term rental apartments create. Such housing is good for social networking," he said.

Han Shi, vice-president of Longfor Group, a Chinese property firm, told the Securities Times that the company expects revenue from long-term rental apartments across China to reach 3 billion yuan ($459 million) by 2020.