For Chinese homeowners, rent dreams are fading into a red flag for a fragile economy
She is among millions of Chinese landlords who have bought apartments to rent on a highway to the country’s growing middle class, many of whom are now facing an initial drop in rental income.
Analysts say there is little prospect of widespread defaults for now and house prices continue to grow, albeit more slowly. But the rental troubles underscore China’s economic fragility, with legions of landlords already cutting back on spending amid their gloom.
Li, who declined to give her full name, said she had to cut the rent on one of her apartments nearly in half between February and May to hang on to a tenant, while her own salary went down. been reduced by 25% as his employer reduced coronavirus.
“I have to pay my room rent in Beijing and the monthly mortgages for the two apartments,” she said.
Rents in 20 major cities fell 2.33% in July from the same month a year earlier, according to real estate data provider Zhuge House Hunter – the fourth straight month of declines in a buoyant market in years.
The sector remains opaque, with no national database of who owns which buildings and limited historical tracking data.
Amid the strain on China’s service and manufacturing sectors from the spread of COVID-19 earlier this year, the first to be laid off were migrant workers, the main takers of small rental apartments.
White-collar workers followed, while new university graduates from the provinces who would normally flock to the cities struggled to find jobs. All of this weighed on the consumption of both tenants and the wealthiest owners.
Even demand for short-term housing has declined, depriving landlords of an alternative. In June, the number of Chinese properties that had at least one night booked fell 29% from a year earlier, according to data from analytics firm AirDNA, which tracks bookings on Airbnb and Vrbo.
“Two groups (…) suffer the most,” said Yuan Chengjian, vice president of Zhuge House Hunter. “One is made up of long-term rental companies…the other is made up of investors who buy properties with highly leveraged finance, as they pay off part of their mortgages with rent.”
Luo Shuzhen, 50, with 80 rooms to sublet in two buildings in the southern industrial city of Dongguan, said the number of tenants had fallen by 30% this year. She is now postponing her plan to furnish an apartment she bought last year.
“It’s hard to say how long the outbreak will last, so I’m not sure I can sustain rental business in the second half,” said Luo, who runs a convenience store.
INCREASE IN DEFECTS
Like Luo, other owners Reuters spoke to were considering cutting spending. Retail sales in China fell for the seventh month of July, official data showed on Friday.
But mortgage defaults remain rare for now: China’s overall non-performing loan ratio stood at just 2.1% on average at the end of June.
Regulators don’t give a breakdown on which mortgages are deteriorating, but China’s residential mortgage-backed securities (RMBS) market offers a clue to the trends.
Around 3% of mortgages are securitized by banks, and defaults on some securitized mortgages increased slightly at the start of the year, although defaults remained below 0.10% of mortgages in Classes.
“Half of transactions in the securitization market use 90 days as their definition of default, while the other half use 180 days,” said Tracy Wan, senior director of Asia-Pacific structured finance at Fitch Ratings. “For those using 180 days, you would have more time to recognize the defaults, and that number continues to grow.”
For Li, an office worker in Beijing, the time to ask for help to keep her property dreams in one piece has already come.
“I even asked my dad for help – and I’m almost 30!” she says.