Debt-laden Chinesereal-estate developers have been struggling in coming up with effective ways ofgenerating capital. However, now they have got something to rejoice. They wereable to come up with a project of selling asset-backed securities based onrents. This is a form of asset light to the organization.
In a congress whichis held twice in each year, a Communist party argued that apartments are to beused for living and speculation. Within a period of 6 years, the cost of livinghas increased with over 100 percent. This has made it difficult for people torent houses, as they are not in a position of meeting the high amounts of rent.University graduates and migrant workers are the most affected people, withinthe 30 largest cities in China. China has notembarked on developing rental market. Shenzhenmade a promise of converting over 1 million rural units in to rentals. Some bigcities in China such as Shanghai and Beijing have also entered in to agreementwith the rental developers to sell land to them. The land is said to be usedprecisely for apartment projects.
In this year, September, Shanghai Real EstateGroup Co. was able to purchase four plots form the city for constructing rentalhouses. The plots cost 1.7 billion Yuan, which is approximately $256 million.In the event the land was developed for sale, the estimations were that itcould cost 20 billion yuan. In accordance to HSBC Holdings Plc., the rentalrates in the 30 big cities of China is 1.5 percent.
Investing in therental sector is not that cheap and easy. Records indicate that severalinvestors, even although willing have not been in a position of investing inthe rentals due to the high capital requirements in the sector. China Vanke Co.a company operating in the rental sector, has estimated the payback period ofinvesting in such rentals to range from 5 to 8 years. The company isexperienced in the rentals sector and operates over 20,000 units of rentals, in21 cities of china. Most of theinvestors do operate in debt and therefore, they cannot engage in the provisionof national services, as the activities will result to increased debt levels. To attractinvestors in the rental sector, Beijing has been offering incentives such as asset-backedsecurities.
This is based on the fact that the initial capital is quite high,and again, the expected payback period is too long. The two, more specificallythe payback period, are acting as restraining factors to the rentalsdevelopment. Payback period isamongst the common used tools in financial planning or in investments. It isused in the measurement of investment risks. The lower the payback period, theless risk the project is. Long payback period have got the effect of preventinginvestors form investing in such projects. This is based on the fact that,future is uncertain and the longer the period, the more risk the investment is.
Investors prefer shorter payback periods to longer ones. That is the mainreason as to why, the Chinese government is providing land and other incentivessuch as asset-backed securities, to attract investors in the rentals sectors,to help in addressing the issue of rent houses.