In recent developments, the city of Shanghai has made significant strides in its goal of providing affordable rental housing, having already completed 70% of its annual construction target for the first seven months of 2023. This ambitious effort to enhance the supply of protective rental housing has inevitably led to a notable decline in rental prices across the housing marketConsequently, some publicly traded companies have acknowledged that the influx of affordable rental units has intensified market competitionHowever, amidst the backdrop of falling rents, the issuance of rental housing Real Estate Investment Trusts (REITs) is gaining momentum, signaling that the recovery of funds may be prioritized over fluctuating rental rates.

Shanghai's Achievement Towards Its Rental Housing Goal

According to the latest report from Shanghai’s Housing Security and Management Bureau, the city plans to increase the supply of affordable rental housing with a target of constructing 70,000 new units and supplying an additional 50,000 units for this year

By the end of July, the city had already achieved the construction of 51,000 new units and delivered 38,000 units, successfully completing 73% and 76% of their respective annual targets.

The Bureau has indicated that its future efforts will focus on optimizing the supply structure, aiming to increase the availability of housing for the city’s builders and managers in this new era, with a target of supplying over 30,000 additional beds throughout the yearOf these, 18,000 will be sourced from existing rental housing projectsNotably, in the initial seven months, 12,000 new beds have been successfully allocated through this channel, with aspirations to complete the annual objective by the end of October.

Moreover, the Bureau has launched a special initiative targeting recent graduates from universities in Shanghai for 2024, offering over 3,000 long-term, affordable rental housing units

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The effort to integrate affordable rental housing into university life has resonated with students, as reflected by over 49,000 cumulative visits to its dedicated platform.

Intensifying Market Competition

As the economic nucleus of China, Shanghai experiences significant population mobility, making it a bellwether for the broader housing rental market in the countryThe introduction of high-value, affordable rental units has had observable repercussions on the city’s housing dynamics.

For instance, in June of this year, publicly available data reflected a 6.7% month-over-month decline in average rental prices across Shanghai, compared to a 7.5% year-over-year dip, marking a stark 12% decline when juxtaposed against the average rental prices for the entire year of 2023. Specifically, concentrated apartments reported a 6.5% reduction in rental income per square meter compared to the first quarter of 2024 relative to 2023, and a staggering 19% drop compared to figures from 2021.

This trend is not isolated to Shanghai; other cities are witnessing similar declines

According to Vanke, a leading property management firm, their mid-2024 report cited a cumulative 0.9% drop in average residential rental prices across 50 major cities in China, indicating mounting pressure on rental trendsVanke, which operates 155 projects in 23 cities, holds the title of the country’s largest operator in terms of scale.

In its mid-year report, China Merchants Shekou also acknowledged the intensifying competition arising from the confluence of a sluggish real estate market and increased supply of affordable rental housingNonetheless, the company reported stable growth in its apartment business, with no adverse effects on its operational performance or indicators.

Clearly, the rapid escalation of affordable rental housing developments has ushered in impactful shifts in rental price trendsCurrent data indicates that as of mid-2023, 13 provinces and 81 cities across the nation have set rental housing supply targets, estimating a combined influx of approximately 1.01 million new units, with first and second-tier cities expected to account for roughly 75% of this total.

Acceleration of Affordable Rental Housing REITs

On the flipside, there has been a conspicuous acceleration in the issuance of rental housing REITs

Recently, China Merchants Shekou’s rental housing REIT received formal approval, boasting an estimated project valuation of approximately 1.287 billion yuanNotably, two significant infrastructure projects in Shenzhen—Prince Bay and Linxia—reported impressive occupancy rates of 95% and 98% respectively as of June 2024, evidencing their market competitiveness.

Besides China Merchants, other real estate firms are also gearing up for REIT proposalsIn January, Xin Huangpu announced the initiation of the application process for affordable rental housing REITsBy March, Construction Bank confirmed that its "Jianxin Jianshu Home REIT" had been accepted for processing by the China Securities Regulatory Commission and the Shanghai Stock ExchangeSeveral major corporations, including Vanke, are now actively preparing to launch their own rental housing REITs.

Industry insiders have noted that affordable rental housing REITs serve as a mature asset holding platform, providing effective exit strategies for rental housing enterprises