Industry Insights | Centralized Long-term Rental Apartments Drive 'Dual Optimization' of Living Quality and Cost in the New Economic Environment

The Chinese rental apartment market includes non-institutional long-term rental apartments (mostly provided by individual landlords) and institutional long-term rental apartments (usually provided by professional rental apartment operators). The institutional long-term rental apartment market consists of decentralized and centralized long-term rental apartments, with the main difference between them lying in their operating models and properties they manage. Decentralized long-term rental apartment operators lease houses located in various places from individual landlords and then sublease them out, while centralized long-term rental apartment operators typically sign long-term whole-property leases with institutional landlords such as real estate companies, and can build apartments on a whole building basis and rent them out.

The upstream of the institutionalized rental industry includes real estate providers, home appliance providers, furniture providers, renovation design and construction service providers, insurance companies, banks, etc., supplying the required assets to the midstream institutionalized rental apartment operators.

Midstream institutionalized rental apartment operators hold a dominant position in the value chain, integrating upstream and downstream resources. These operators purchase or lease properties from property owners, renovate them, then rent out the apartments to corporate or individual customers, and are responsible for the daily operation of the apartments, providing related services to tenants.

Currently, the consumer base for institutional long-term rental apartments is gradually expanding downstream. It has grown from initial college graduates and white-collar workers to more diverse tenant groups such as freelancers, middle and senior corporate managers, and blue-collar workers. In addition, as tenants demand higher quality housing and comprehensive services, institutional long-term rental apartments with complete facilities, convenient locations, and high safety are favored more than traditional housing rentals. Centralized long-term rental apartments are often more popular among consumers due to their advantages over decentralized ones in these aspects.

With the continuous improvement of China's urbanization rate, the rental concept of China's main consumer group has become more open. Compared to purchasing expensive and costly-to-replace residences, more and more people tend to rent in order to alleviate economic pressure and adapt to job changes. The continuous development of the macroeconomy has also led tenants to have higher and higher requirements for living standards and convenience. This has brought broad market space to institutional long-term rental apartments, especially centralized long-term rental apartments with unified management standards. In terms of market scale, in 2018, the market scale of institutional long-term rental apartments in China exceeded 100 billion yuan and still maintained a relatively fast growth rate by 2022, with a compound annual growth rate of about 10%. The market has grown significantly and is expected to grow at about 15% in the future. The market scale is expected to increase to about 250 billion yuan by 2027.

The centralized long-term rental apartment market has enormous potential, far exceeding the industry average. Compared to decentralized long-term rental apartments, centralized long-term rental apartments have significant competitive advantages in terms of stability, safety, service, community feel, addressing market mismatch issues, effective cost control, and operational efficiency. By 2022, the number of operating centralized long-term rental apartments was nearly 3 million units, with a compound annual growth rate of nearly 20% compared to 2018, and it is expected that this will double by 2027.

Currently, the geographical coverage of centralized long-term rental apartments is mainly concentrated in first-tier cities, which is also the market segment with the largest scale and fastest growth rate from 2018 to 2022. It is estimated that by 2027, the market scale of centralized long-term rental apartments in first-tier cities will reach approximately 80 billion yuan, accounting for about 60% of the overall centralized long-term rental apartment market.

From a business model perspective, centralized long-term rental apartments can be divided into chain and non-chain apartments. Chain apartments are located in multiple cities and managed by a single operator, while non-chain apartments are managed by limited local operators. In terms of market trends, the market share of chain apartments in China is expected to increase from around 30% in 2022 to over 50% by 2027, gradually surpassing the penetration rate of non-chain apartments.

• stability

Unlike decentralized long-term rental apartment operators who acquire property assets from individual owners, centralized long-term rental apartment operators typically sign long-term whole-property leases with large institutional landlords to ensure operational stability.

• security

Centralized long-term rental apartments usually have on-site security personnel, and the resident managers of each apartment regularly inspect the condition of the apartments to ensure that potential safety hazards are detected and addressed in a timely manner.

• All-round service

Centralized long-term rental apartment operators usually provide a variety of value-added services for residents to meet their changing needs, while decentralized long-term rental apartments offer relatively limited services.

• community environment

A large number of residents in centralized long-term rental apartments live in the same community, and residents can establish meaningful and healthy relationships through different types of social activities.

• Solve the problem of mismatch between supply and demand of one-bedroom apartments

The supply of two-bedroom or three-bedroom apartments in the current market is sufficient, but one-bedroom apartments are relatively scarce. The younger generation either has to pay extra rent for unnecessary large apartments or share apartments with others. Centralized long-term rental apartments, with their core characteristics such as centralized operation models, overall planning, product design, and execution capabilities, can better solve the above mismatch problem by providing a large number of one-bedroom apartments.

• Low cost and high operational efficiency

An important feature of centralized long-term rental apartments is that operators sign long-term whole-property leases with large institutional landlords, significantly reducing the cost per unit rental. In addition, centralized long-term rental apartment operators often maintain a high level of operational efficiency through centralized procurement systems, standardized products and services, excellent management capabilities, and specialized staff. This will also help centralized long-term rental apartment operators further effectively expand their apartment network and benefit from economies of scale.

(1) The urbanization process in China is accelerating.With the rapid development of China's economy, the urbanization process has progressed faster than planned, driving a large number of people from rural areas into urban areas. In 2022, China's urban population exceeded 900 million, with an urbanization rate of 65.2%. It is expected that in the next few decades, China's sustained urbanization will generate a huge housing demand for cities (especially core cities), which will further drive the growth of the centralized long-term rental apartment market.

(2) The threshold for property investment is high, especially in first-tier cities.Despite the huge housing demand in first-tier cities, the overall housing supply level will still remain low. Therefore, rapidly growing housing demand and a shortage of available housing supply have led to rising housing prices, making home ownership more unattainable for the younger generation. Centralized long-term rental apartments provide an alternative solution for homeownership, which can alleviate the burden of home purchases.

(3) Rental preference has strengthened.The younger generation's late marriage and more frequent job changes make them more inclined to rent rather than buy a home. Additionally, renting offers diversity and flexibility, which aligns with the mentality of young people. It is expected that from 2022 to 2027, the national rental rate will continue to grow.

(4) The awareness of service quality is constantly increasing.With the increase in disposable income, households now pursue better living conditions and community environments and are more willing to pay for a quality residential experience than in the past. In addition to high-quality housing options, centralized long-term rental apartments also provide a wide range of facilities for residents and diversify value-added services, helping to popularize them in the market.

(5) Favorable policies.In June 2016, the State Council issued the 'Several Opinions on Accelerating the Cultivation and Development of the Housing Rental Market', encouraging the development of the housing rental market and standardizing the management of rental housing. In May 2017, the Ministry of Housing and Urban-Rural Development issued the 'Notice on Accelerating the Development of the Housing Rental Market in Large and Medium-sized Cities with Net Inflows of Population', encouraging the development of large-scale, specialized rental housing enterprises. In July 2021, the State Council issued opinions reaffirming its determination to encourage the development of specialized and institutionalized long-term rental apartment operators. Around the same time, the Ministry of Finance and the State Taxation Administration jointly announced a preferential VAT rate applicable to enterprises operating rental apartments. In addition, provincial departments in China have taken measures to encourage industry participants to increase the supply of apartment properties, including converting non-residential properties into affordable rental housing, increasing the utilization rate of vacant or infrequently used properties, and renovating existing urban residential communities. The introduction of favorable policies and the new supply of available apartment properties contribute to the sustainable and healthy development of centralized long-term rental apartments.

(1) The penetration rate of chain apartments has increased.Before 2018, the main participants in China's centralized long-term rental apartment market were small-scale non-chain operators. However, in recent years, larger-scale cross-city chain apartments have gradually emerged. Despite rapid growth, the number of operating chain apartments in China accounted for only about 30% of the centralized long-term rental apartments in 2022. It is expected that the penetration rate of chain apartments will exceed 50% by 2027, indicating a very rapid development.

(2) The demand of the younger generation for high-quality services.As the millennial and Generation Z enter the workforce market, the younger generation has become the main resident group in the long-term rental apartment market. Unlike previous generations, millennials pursue better living conditions and community environments, and are more willing to pay extra for high-quality apartments and convenient services, driving centralized long-term rental apartment operators to improve apartment quality. In recent years, centralized long-term rental apartments have gradually expanded their service scope for residents, from covering basic services to adding diversified value-added services. Many leading centralized long-term rental apartment operators have been actively expanding their service scope, especially launching new businesses such as community retail, job search services, pet care, and car rental services, to meet the ever-changing needs of residents.

(3) The demand for suitable housing among blue-collar workers is constantly growing.In the past decade, the rapid economic growth of China's megacities has led to a shortage of local labor, forcing labor-intensive industries to rely on migrant workers from second- and third-tier cities or rural areas. For a long time, there has been a persistent supply shortage of housing suitable for blue-collar workers, and centralized long-term rental apartments provide clean, safe, and high-quality living conditions that meet their daily needs. Therefore, it is expected that more centralized long-term rental apartments will emerge in the market for blue-collar workers.

(4) More supportive policies.Due to the continuous increase in housing demand, centralized long-term rental apartment operators are actively addressing the shortage of housing, especially by utilizing inefficiently used or idle properties. In recent years, governments have introduced comprehensive regulatory policies to encourage the development of centralized long-term rental apartments. It is expected that national and local governments will introduce more favorable policies to support the long-term development of the centralized long-term rental apartment market.

(5) Digital operations.With the rapid development of technology, digitalization has penetrated into all industries. For example, technologies such as AI, big data, and the Internet of Things have been widely applied to the management and operation of centralized long-term rental apartments. As the overall market scale further expands, it is expected that these technologies will play a greater role in the centralized long-term rental apartment market.

(6) Accelerated industry integration.The centralized long-term rental apartment market in China has always been highly fragmented. However, as leading participants expand their business scale through mergers and acquisitions, the trend of industry integration in the centralized long-term rental apartment market will continue. It is expected that future market leaders will continuously integrate the market by leveraging brand awareness, the ability to provide diverse services, and their excellent operational efficiency. Customers, in pursuit of a reliable, safe, and comfortable living experience, tend to choose well-known brands and leading enterprises with larger operating scales. Therefore, small and medium-sized market participants may actively establish cooperative relationships with well-known centralized long-term rental apartment operators to gain more customer traffic, which can help improve occupancy rates or rents and accelerate industry integration and concentration.