How is the quality of the second growth curve as the financial sector rushes into long-term rentals?

The successful pilot of the first long-term rental apartment project has given Financial Street a taste of success.

In September 2023, Financial Street's first urban renewal long-term rental apartment project—Jinshu Ruyuan Talent Apartment—officially opened, achieving an occupancy rate of over 70% in its first month. This has given Financial Street, which was struggling with performance, hope and confidence.

At the 2023 Annual Shareholders' Meeting held on May 15, the management disclosed the company's development plans in the long-term rental sector to investors: establishing a dedicated management body for the long-term rental apartment segment and ensuring the success of each project.

The Grand Plan for Long-Term Rentals

Financial Street entered the long-term rental market by first becoming a "sub-landlord."

It is understood that Jinshu Ruyuan Talent Apartment, also known as the Yuetan Talent Apartment project, is Financial Street's first urban renewal long-term rental apartment project. Financial Street began leasing the property at the end of 2022 for a 20-year term.

Subsequently, Financial Street initiated renovations, which took about a year. The project was completed and officially launched in September 2023. After marketing efforts, the occupancy rate exceeded 70% in the first month.

"The current leasing situation is better than both the investment projections and our expectations," the management stated during the briefing. Based on this, Financial Street is planning further expansion in the long-term rental business. There are two directions:

First, renovating internal projects that are underperforming but still have market value and meet the needs of long-term rental apartments. Second, actively seeking external project opportunities, focusing on core areas with convenient transportation in first-tier cities.

"We will also make relevant adjustments to the operational mechanisms to support its growth and development," it was said.

Currently, Financial Street owns a large number of operational property projects, including office buildings, commercial properties, and hotels, concentrated in cities like Beijing, Shanghai, Tianjin, and Chongqing.

From the current perspective, Financial Street's operational performance is acceptable. According to its 2023 annual report, property leasing revenue was RMB 1.826 billion, up 12.32% year-on-year; property operation revenue was RMB 438 million, up 79.74% year-on-year; and other income was RMB 233 million, up 47.98% year-on-year. The gross profit margins for these three segments were 86.21%, 20.22%, and 44.74%, respectively, up 2.39%, 73.69%, and 1.69% from the previous year.

However, due to economic conditions and intensified market competition, Financial Street also faces operational challenges.

In 2023 alone, several of Financial Street's projects recorded significant declines in occupancy rates. Among office projects, the occupancy rate at Beijing Financial Street (Yuetan) Center (excluding Financial Collection) dropped from 84% in 2022 to 66%, while Beijing Financial Building's occupancy rate fell from 100% to 84%. For commercial projects, the steepest decline was at Beijing Mentougou Rongyue Center, where occupancy dropped from 80% in 2022 to 56% in 2023.

The vacancy pressure is expected to persist for some time. According to JLL's research report, in Q1 of this year, landlords in Financial Street and Wangjing submarkets faced significant vacancy pressures, with some major tenants vacating and weak new leasing demand making it difficult to fill the vacancies quickly.

If operational performance does not improve, this will inevitably deepen Financial Street's financial pressure. As of the end of 2023, Financial Street's cash and cash equivalents balance was RMB 13.54 billion, down from RMB 16.743 billion at the end of 2022.

To lighten its load, Financial Street has sought business transformation in urban renewal, old city renovation, industrial collaboration, and long-term rental apartments over the past two years. Currently, long-term rental apartments are one of the most viable paths for Financial Street to revitalize its assets.

How to Stand Out in a Crowded Market?

Currently, although the rental market still shows robust prospects, the influx of capital and institutions has increased market concentration, making the long-term rental apartment sector somewhat crowded. How will Financial Street carve out its share?

According to institutional statistics, in April alone, the scale of long-term rental apartment openings increased, with cumulative openings rising to 1.131 million units. However, demand saw a slight decline during the same period, with average rents dipping slightly.

In Beijing, according to 5i5j Research Institute, long-term rental transaction volumes in April saw a noticeable month-on-month decline but were up over 10% year-on-year.

In terms of rents, the average rent per square meter and per unit for long-term rentals in Beijing remained flat month-on-month in April but declined year-on-year.

Analysts note that these changes are related to broader economic trends and seasonal factors. However, fierce competition will undoubtedly impact the sustainable development of Financial Street's long-term rental business.

Moreover, while Financial Street's entry into the long-term rental market aligns with favorable policies and has long-term potential, it may face short-to-medium-term pressure.

Recently, Beijing has also sought to guide social investment in affordable rental housing, increasing supply through new construction, renovation, and conversion. This year, Beijing plans to build and supply 70,000 affordable rental units and complete 80,000 units of various affordable housing. With weak demand, the pressure on transactions remains.

Additionally, this year, the PBOC, CBIRC, CSRC, and other departments have introduced financial policies to support the development of the rental housing market. Earlier, the PBOC and the National Financial Regulatory Administration launched the "17 Financial Measures" to support the rental housing market. The PBOC also established a RMB 100 billion "Rental Housing Loan Support Program" to guide seven major banks in providing funding for the acquisition of existing housing by rental operators in pilot cities.

For new entrants, strong financial support can effectively reduce costs. The promotion of REITs for affordable rental housing also provides stable cash flow and favorable exit mechanisms, addressing the biggest concerns for heavy asset investments. But how can market capacity expand to gain more consumer recognition?

The Beijing Municipal Commission of Housing and Urban-Rural Development's "2024 Beijing Housing Development Annual Plan" offers an answer, explicitly supporting the standardized development of the long-term rental apartment industry and increasing the supply of "a bed, a room" market-oriented rental housing. It also guides affordable rental housing and long-term rental operators to improve management and build branded communities. Clearly, gaining consumer recognition is the key to success.

With the wind at its back, Financial Street must now focus on how to precisely develop its long-term rental business into a second growth driver, testing the wisdom of its management.