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Final version of paper accepted for publication by Habitat International
https://doi.org/10.1016/j.habitatint.2022.102715
Panacea or Pandora’s Box? An Institutional Analysis of the Contested
Long-term Rental Apartments Development in China
Chenxi Li, Jin Zhu* and Shenjing He
Abstract: The dramatic growth of long-term rental apartments (LRAs) in China’s megacities since 2015,
spurred by a series of state policies encouraging the development of the private rental sector (PRS), has
culminated in many LRA firms encountering capital chain rupture and even going bankrupt within a short
period. As a result, thousands of tenants were rendered homeless and many property owners were left
unpaid. The present study analyses the boom and bust of LRA development in China under housing
financialisation and explores the relationship between the transformative institutions – characterised by
policy deregulation/re-regulation – and market performance stimulated by capital speculation. The findings
of this study reveal the institutional changes in China’s PRS to have been closely linked to the socio-
economic changes emanated from endogenous opportunism and exogenous shocks. Specifically, the policy
drift in the PRS was closely associated with deregulation and capital speculation, while policy layering was
employed to institutionalise, regulate and legalise the PRS, thus mitigating the housing shortage crisis and
ensuring the retention of social stability. Adapting to the volatile politico-economic circumstances as a form
of punctuated equilibrium, policies governing the PRS require constant assessment and reflection to
safeguard people’s basic housing rights.
Keywords: Long-term rental apartments; private rental sector; institutional change; policy drift; policy
layering; housing financialisation
1 Introduction
The retreat of the state from social housing and the dominance of market‐based housing finance models in
the neoliberal era have expanded housing wealth inequality, and have given rise to the emergence of
“generation rent” around the globe (Byrne, 2019; Crook & Kemp, 2019; Stebbing & Spies-Butcher, 2015).
Accordingly, the significant growth witnessed in the private rental sector (PRS) can be considered an
outcome of the financial constraints faced by low-income households (Lima, 2021; Pawson & Milligan,
2013), although in some developed countries, people may choose to rent as a personal preference, giving
them access to more feasible dwellings and higher living standards (Hulse et al., 2018; Pawson et al., 2017).
With the application of policies aimed at enhancing tenure security in the PRS and at warding off housing
affordability crises, recent years have seen a boom of long-term rental apartments (LRAs) around the globe
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facilitated by the deregulation of the PRS and the emergence of new leveraged investment channels (Kemp,
2015; Nethercote, 2019; Ronald & Kadi, 2017; Wijburg et al., 2018) – e.g. “buy to let” mortgages in the
United Kingdom.
In China’s megacities, housing is becoming increasingly unaffordable, while renting lacks insecurity (e.g.
excessive rent increases and landlord-instigated evictions), placing the economically worse-off populations
in highly precarious situations (He and Chang, 2020; Huang et al., 2021). Compounding matters, under the
hukou (citizenship status) system, migrants without local hukou are often institutionally excluded from
house buying until they have paid local tax for several years (e.g., five years in Shanghai), contributing
further to the rise of the PRS in Chinese cities. To facilitate the co-habitation of the rental and sales markets,
the State Council (SC) and the Ministry of Housing and Urban-Rural Development (MHURD) issued a
series of policies, starting in 2015 – and most intensively in 2016 and 2017 – with the intention of cultivating
the development of the PRS and accelerating and encouraging the provision of LRAs by institutional
investors (MHURD, 2015; MHURD et al., 2017; SC, 2016). These policies range from diversified land
supply channels to financial support, i.e., legitimising the development of LRAs on rural collective land,
granting permission to convert non-residential properties into LRAs, providing corporation subsidies on
LRA provision and broadening the financial channels for LRA development.
While the government’s original goal was to expand the supply of rental apartments and increase tenure
security, the unexpected outcome was social unrest as a result of the bankruptcy of more than 170 LRA
firms, including Danke and Qingke, two of the best known LRA firms in China (Xinhua News, 2020).
Unlike the LRAs created through large-scale institutional investments, such as those in countries like the
United Kingdom and Australia (Crook & Kemp, 2019; Pawson & Milligan, 2013), LRA firms in China
take advantage of the widely-used asset-light model (Chen et al., 2021), and are indeed “second-hand”
landlords that do not hold the property rights of the apartments. LRA firms tend to sign long-term contracts
with atomised individual landlords and then renovate existing residential stock into standardised apartments
for letting at high rents under fixed-term contracts. When LRAs file for bankruptcy, the landlords, who
receive no payment from these firms, tend to terminate their rental agreements and evict their tenants, who
subsequently find themselves homeless. In any case, the resulting conflicts bring governance challenges to
local states. For instance, the Shanghai Consumer Protection Commission – equivalent to fair trade
organisations in the West – received more than 3,000 complaints relating to LRAs in 2020, of which 1,368
were related to Danke– one of the largest LRA firms in China (Xinhua News, 2021). Considering its vast
involvement in the PRS (i.e., 419,000 tenants resided in LRAs operated by Danke in 2020), the crisis of
LRAs and its impacts should not be underestimated.
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LRA development is strongly associated with the global trend of housing financialisation. Recent years
have seen a growing number of institutional investors entering the PRS, lured by the attractive financial
incentives, variegated credits and generous policy support (Aveline-Dubach, 2020; Fields & Uffer, 2016;
Pawson & Milligan, 2013), including private equity funds, hedge funds, real estate investment trusts (REITs)
and publicly listed real estate firms (Aalbers et al., 2020; Wijburg et al., 2018). When compared to the
volatile and unstable “ buy to let” market, large-scale institutional investments are often considered stable
and efficient, benefitting from economies of scale (Hulse & Milligan, 2014). Institutional investors are also
expected to support the rapid expansion of private rental housing and to provide long-term tenure security
for tenants (Pawson & Milligan, 2013). The context differs in some continental European countries (e.g.,
in Germany, Austria and Sweden), however, where security and social acceptance in the well-developed
rental sector (both social renting and private renting) are almost on an equal footing with homeownership
(Elsinga & Hoekstra, 2005). In such contexts, private renting is not secondary to social renting in terms of
tenure security thanks to the various forms of rent regulation in the PRS (Elsinga & Lind, 2013; Haffner et
al., 2008). Such strong rent regulations may, however, discourage institutional investors from entering the
PRS due to the relatively low rates of return (Fields & Uffer, 2016). Even in the United Kingdom, where
rents are less regulated, recent net rental returns are in the range of 3.3–3.6%, which is much lower than the
typical 6–7% pursued and anticipated by institutional investors (Pawson & Milligan, 2013). The
financialisation of rental housing is considered a means of overcoming the temporary inadequacy of the
returns from the PRS. For institutional investors, mortgage debt and income from housing rentals benefit
from the advantages of “scale, standardisation, well-established calculative systems, fixed income and a
highly standardised institutional framework to collect future income streams” (Aalbers, 2017, p. 544). The
existing financial players, prevalent financial instruments, and policies and regulations related to the PRS
have different forms in different countries as a result of the variegated social-economic contexts (Aalbers
et al., 2020; Charles, 2019; Fields & Uffer, 2016; Lima, 2020). Institutional investors have been gradually
transforming the initial speculative strategy of “buy low, sell high” into a long-term investment strategy
with a view to establishing stable cash flows and returns for shareholders (Wijburg et al., 2018).
The financialisation of rental housing is seemingly a well-established cure to the housing shortage in
international practice, then why did it open Pandora’s Box in the Chinese case? Drawing upon a detailed
institutional analysis of the boom and bust of LRA development in China, this article explores the
relationship between transformative institutions – characterised by policy deregulation/re-regulation – and
the market adaption and manipulation associated with capital speculation.
The paper develops as follows. The following section presents a review of institutional changes in the global
context from a financialisation perspective, after which an overall picture of the rise of LRAs spurred by
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evolutionary state policies and innovative financial instruments is presented. The following section details
the boom and bust of Danke through the lens of policy drift and market opportunism, while the final section
revisits the research questions and concludes the study.
2 Conceptualising institutional changes in the context of housing
financialisation
Housing tenures are “socially constructed configurations of property rights and obligations” (Kemp, 1987,
p. 14) and a form of institution nested within other institutions (Kemp, 2015). Institutions have generally
been considered sufficiently stable and independent to guide organisational behaviours, while more recently,
more insight has been gained to better understand the institutional changes, focusing on how institutions
evolve (Hacker et al., 2015). In historical institutionalism, the punctuated equilibrium model is often used
to explain institutional changes over time, and wherein political-economic institutions are reproduced or
restructured under certain “critical junctures” associated with exogenous shocks (e.g., revolution and war),
leading to the creation of openings for institutional innovation and reconfiguration (Thelen, 2009).
Punctuated equilibrium may be thought of as a policy adjustment – rather than wholesale replacement –
resulting from incremental socio-economic changes and the adjustments of dynamic interest among
different stakeholders (Thelen, 2009)
In the field of institutional reforms, four types of endogenous processes have been explored: layering, drift,
conversion and displacement (Béland, 2007; Hacker, 2004; Thelen, 2004), all of which differ in terms of
their ability to integrate policy outcomes effectively, achieving coherent goals and consistent means
(Rayner & Howlett, 2017). Policy layering refers to the introduction of new institutions or rules alongside
existing ones, encompassing “the grafting of new elements onto an otherwise stable institutional framework”
(Thelen, 2004, p. 35). Policy layering can alter the trajectory of a previously stable institution, and can
initiate reforms that deviate from the existing path of critical junctures and exogenous shocks (Kemp, 2015;
Pierson, 2004). Policy drift refers to cases of “institutional change that result not from formal revision, but
from policies’ failure to adapt to shifts in their social or economic context” (Béland et al., 2016, p. 202).
Drift indicates the presence of a hidden face among institutional changes, referring to “the transformation
of stable policy due to changing circumstances” (Hacker, 2004, p. 248). Policy conversion refers to the
internal adaptation of an existing policy, and the setting of new goals that alter the core objectives of an
institution (Béland, 2007). In contrast to drift, conversion requires the active reinterpretation of the existing
formal rules to serve new goals (Hacker et al., 2015). Finally, displacement refers to a formal – and often
wholesale – reform in which existing policies are either replaced or eliminated (Hacker, 2004).
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Unlike the commonly-used economic approach in housing studies in which emphasis is on economic
efficiency and in which it is suggested that the government can improve matters through regulation or
subsidies, the institutional approach focuses more on the temporal process, the timing and sequencing of
changes, and institutional development over time (Crook & Kemp, 2019; Elsinga & Hoekstra, 2005;
Haffner et al., 2008; O. Fioretos, 2016). Similarly, in contrast to the social policy approach that emphasises
the narratives of welfare state restructuring and the approaches to housing provision, an institutional
perspective contributes to a better understanding of the dynamics of the institutional changes that result
from exogenous shocks, as well as the endogenous process from the local to the global level (Hoekstra &
Elsinga, 2015; Wolfgang Streeck, 2005).
Given the temporal character of institutions, an institutional analysis is also applied to examine the
transformations and lasting consequences on the PRS over time (Crook & Kemp, 2019; Hulse & Haffner,
2014; Kemp, 2015). For instance, Kemp (2015) found the boom and bust of the UK’s PRS to be greatly
influenced by both the formal rules (policy layering/conversion) and informal practices (policy drift), while
Crook and Kemp (2019) adopted a historical institutional approach to explain the increase in investments
in the PRS by not-for-profit housing associations. The institutional changes in the PRS are broad in scope,
including, for example, policy transformations in the provision of land/housing, [de]regulation of the rental
sector and related financial leverage (Kemp, 2015). Policy layering is an instrument through which the
degree of regulation can be adjusted to mitigate social or economic crises and achieve certain political goals
(Crook & Kemp, 2019), and has arisen out of the recently layered policies targeting the expansion of the
rental market. From the perspective of tenants, the [de]regulation of rental housing policies (e.g.,
deregulation and institutional innovations in the financial market) can directly affect the supply capacity of
the PRS by attracting investment, thus diversifying the choices of housing tenure (Chen et al., 2021; Haffner
et al., 2008; Nethercote, 2019; Ronald & Kadi, 2017). Policy drift here refers to deviations from the
proposed policy goals and actual market performance occurring due to entrepreneurial opportunism and
rapid shifts in the social and economic context. For instance, in the UK, the 1988 Housing Act significantly
expanded the duration of new lets as “assured shorthold tenancies” (Kemp, 2015, p. 5), increasing the
liquidity of rental housing as an investment. The perhaps unintentional result, however, was a weakening
of the tenure security of tenants, and failed to bring about the necessary reform of the tenancy framework
to cater to the increasing number of longer-term tenants after the GFC, representing a form of “policy drift”
(Kemp, 2015).
In the context of global housing financialisation, to maximise the benefit from private finance and achieve
economies of scale, corporate landlords take full advantage of favourable investment policies for excessive
financialisation and expansion, making the housing system even more fragile and unstable in the face of
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exogenous shocks (Lima, 2020). This vulnerability is particularly palpable within the global financial crisis
and, more recently, the COVID-19 pandemic. As is argued by Wijburg (2020, p. 12), “excessive housing
financialisation undermines the social reproduction of national-urban economies and destroys urban
housing systems, and the communities living within them”.
The emergence of corporate landlords and excessive financialisation indicate a drift in PRS institutions.
Under the punctuated equilibrium model, the emergence of exogenous shocks can undermine the present
institutional equilibrium, and subsequently create the necessary conditions for a new one (Krasner, 1984).
With regard to endogenous market opportunism and unexpected exogenous shocks, the goals of previously
layered policies may drift, leading to new policy layering to offset or redress the existing policy drift.
Drawing up the perspective of institutional change in the context of global housing financialisation, this
paper focuses on the evolution of LRA policies to examine the mutually constitutive relationship between
transformative institutions and market performance and adaption.
3 Methodology
Focusing on the institutional changes in China’s PRS that have encouraged the engagement of corporate
landlords in the provision of standardised rental services, this paper draws mainly from a policy
ethnography approach (Dubois, 2009) in its investigation and interpretation of the policies and
implementations related to the PRS and LRA development in China. The empirical data for policy
ethnography includes primarily policies and legislative documents garnered from government websites,
financial reports of major LRA corporations and extensive media reports.
First, government policies and documents are scrutinised to trace the institutional changes, as exemplified
in the constant policy layering. Policy transformation always occurs in response to the shifting socio-
political and geographical conditions (Jones & Ward, 2002), especially in transitional China, which is
characterised by dramatically rapid urbanisation and policy renovation under neoliberalism (He & Wu,
2009). Sometimes the rules in the context of China's progressive reform are left intentionally vague to
facilitate policy tinkering or even reversal. Second, news items from official media sources and the financial
reports of typical LRA firms (e.g., Danke and Qingke) are collected and analysed to track the latest
dynamics in the rental housing market and to identify the shifting market strategies in response to the
consistently promulgated state policies. A thematic analysis is employed to identify and analyse the patterns
of meaning in these issued policies, published reports and news reports (Braun & Clarke, 2019). Market
performance can then be scrutinized against the backdrop of financialisation and institutionalisation,
examining whether the newly layered policy provides a panacea to the “chronic disease”, or just temporary
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relief from the socio-economic contradictions of the previous rounds of urban policies (Jones & Ward,
2002).
4 The rise of LRAs: Policy layering for the deregulation and cultivation of the
private rental sector
After China’s market-oriented housing reform was initiated in 1998 and the state’s stimulus package,
injected mostly into the housing market, was announced in the wake of the global financial crisis, house
prices in China’s megacities soared, taking the leading position among the most unaffordable cohorts
around the globe. As a result, low-to-middle income residents were forced into the PRS (Huang & Clark,
2002), while low-income residents were driven into informal housing (Huang et al., 2021). To tackle the
housing affordability crisis being felt by the worse-off groups and to increase the tenure security of the PRS,
the Chinese central government sought a panacea involving the cultivation of the PRS, aiming to cool down
the overheated real estate market.
4.1 Policy layering for the cultivation of PRS
In 2015, the Ministry of Housing and Urban-Rural Development (MHURD) issued guidance on
accelerating the cultivation of the PRS – a key area that had long been neglected by the government. The
post-reform PRS in China faced a series of institutional dilemmas, such as the mismatch between the limited
supply and mounting demand, insufficient institutionalisation, tenure insecurity, lack of market supervision
and sluggish legislation (Shao, 2020), highlighting a need for state interventions. Policy layering over the
PRS from 2015 to 2018 (as shown in Table 1) was the government’s solution to the overheated housing
sales market and the housing shortage in megacities, aiming to standardise the previously disordered private
rental market.
Firstly, on the supply side, the government secured more land for the development of rental projects, and
encouraged more institutional suppliers to enter the PRS (MHURD, 2015; MHURD et al., 2017; SC, 2016).
To this end, the central government sought to spur institutional innovation by legitimising the construction
and operation of LRAs on collective rural land (MHURD et al., 2017), making a major breakthrough in
China's urban-rural dual land regime and profoundly increasing the provision of LRAs in the nation’s
megacities. Additionally, institutional investors, including state-owned or private real estate enterprises,
brokerage agencies and start-up LRA firms, were all encouraged to provide LRAs managed by professional
rental services. In particular, institutional investors are encouraged to convert and revitalise previously over-
built or inefficiently-used residential, commercial or industrial properties in the city centres into LRAs
(MHURD et al., 2017).
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Secondly, on the consumption side, the government deregulated the use of the Housing Provident Fund
(HPF) to increase the attractiveness of private renting. Previously, the HPF could only be accessed for
purchases of homes in the housing sales market, but with the enactment of new policies it can now be used
to pay monthly rents (SC, 2016). Other actions include the promotion of equal rights among homeowners
and tenants in their access to public resources (e.g., compulsory education arrangement) in China’s major
cities since 2017 (MHURD, 2020).
Thirdly and most efficiently, the state has broadened the financial channels and has de-regulated financial
markets (MHURD et al., 2017; SC, 2016; SRC, 2018), and encourages financial institutions to support the
cultivation of the PRS, e.g., through the provision of cheaper loans or broader financial instruments. The
financialisation strategies pursued by China’s institutional investors involve raising funds through private
equity financing (PEF), asset-based securitisation (ABS), special corporate bonds for rental housing
(SCBR), real estate investment trusts (REITs) or initial public offerings (IPO) (Berke Research Institute,
2019). Notably, a new financial instrument known as the rental loan has been established and is seeing wide
application in LRA development. Rental loans are a unique form of consumption loan collateralised on the
tenants’ social credit, and are a new means of everyday financialisation in Chinese society (Chen et al.,
2021). Although the central government has issued guidelines to strengthen the supervision of the PRS (SC,
2016), there have been no concrete follow-up clauses or legislations, leaving loopholes for policy layering
and allowing market opportunism in the rapid development of LRAs.
Table 1. Policy layering in the developing PRS since 2015
Year
Ministry
Policy
Policy layering
Jan
2015
MHURD
Guiding opinions on
the acceleration of
the cultivation and
development of the
rental housing
market
● Cultivate institutions that can operate rental housing and expand the
supply of rental housing
● Upgrade rental service, standardise renting behaviours and promote the
development of the private rental market
Jun
2016
SC
Opinions on the
acceleration of the
cultivation and
development of the
rental housing
market
● Under the regulations, commercial houses and other houses are
allowed to be converted into rental houses.
● Supporting qualified rental housing enterprises in issuing bonds and
real estate securitisation products. Promoting the pilot of real estate
investment trusts (REITs).
Jul
2017
MHURD et
al.
Notice on
accelerating the
development of the
rental housing
market in large- and
medium-sized cities
with a net inflow of
population
● Encouraging real estate enterprises, brokerage institutions and property
service enterprises to set up subsidiaries for the development of rental
housing businesses
● Megacities can carry out pilot works ahead of the building of rental
housing on collective rural land.
● Encourage the conversion of idle and inefficient state-owned factories
and commercial office buildings into rental housing in accordance with
the regulations
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Apr
2018
SRC,
MHURD
Notice on
promoting the
securitisation of
rental housing
assets
● Support enterprises with rental businesses in the issuance of
securitisation products with properties as underlying assets
Note: MHURD: Ministry of Housing and Urban-Rural Development; SC: State Council; SRC: Securities Regulatory
Commission
Source: Government documents collected by the authors
The bundle of policies issued between 2015 and 2018 (Table 1) may be considered the first stage of
policy layering aimed at cultivating the PRS, referring to the “grafting of new elements onto an otherwise
stable institutional framework” (Thelen, 2004, p. 35). At this stage, institutional changes targeting both
the supply and demand sides of land/housing provision, the stimulation of rental housing consumption
and the financialisation efforts have efficiently altered the trajectory of PRS development. Notably, more
corporate landlords and institutional investors have entered the LRA market, broadening considerably the
supply cohort of the PRS.
As a result of the strong state support, a host of corporate landlords and institutional investors flocked to
PRS, including, but not limited to, rental agencies, real estate companies and newly established LRA firms.
Between 2015 and 2019, some 750 enterprises were established as LRA firms or subsidiaries (Beijing News,
2020), and around 44 existing major real estate developers had established in-house LRA departments by
2019 (Beike Research Institute, 2020). Policy layering has had a profound effect on the expansion of LRAs
in China, with the share of rental apartments provided by LRA firms in megacities exceeding 20% in 2020
(Economic Daily, 2021). The provision of LRA has particularly catered to the housing needs of fresh
graduates and young professionals in megacities (Chen et al., 2021). However, while the state has strongly
encouraged the entry of institutional investors and developers into the PRS, what has actually happened is
that the majority of so-called LRAs have come under the control of newly-established LRA corporations
who have taken them off the hands of small-scale landlords through leases (Zhao et al., 2018). Consequently,
the market share of institutional operators was below 5% in 2018 (Shao, 2020), far less than in such
advanced economies as the United Kingdom (25%) and the Netherlands (37%) (Aveline-Dubach, 2020;
Fields & Uffer, 2016; Scanlon, 2014).
In general, as part of the policy layering, it would seem that the deregulation and innovation of financial
channels are the most effective approaches to the stimulation of PRS development and the direct
intensification of capital flows in the PRS (Haffner et al., 2008; Kemp, 2015). While housing has been
viewed as an essential investment vehicle in China due to soaring sales prices, private landlordism is not
that profitable due to the meagre rental yields (Wu et al., 2020). Accordingly, the change in the investment
environment triggered by policy layering – the deregulation of the PRS – has increased the entry of
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institutional investors. In China, the financing of LRAs is rising at an incredible rate as a result of supportive
financing policies – by the end of 2019, 82 private equity financings with a total value of around 27 billion
yuan had been injected into the PRS. The asset-based securitisations (ABS) issued by LRA firms amounted
to 11.55 billion yuan in 2018 and 7.04 billion yuan in 2019. Moreover, 17 special corporate bonds were
issued for rental housing in 2019 with a total value of 17.14 billion yuan, and with an average interest rate
of 5.43% (Beike Research Institute, 2020).
At this stage, the government target is more than just economic efficiency improvement or social welfare
enhancement. The institutional adjustment related to the PRS is required to serve multiple goals, including
alleviating the housing affordability crisis and maintaining social stability, similar to the shantytown
redevelopment schemes introduced in the previous decade (He et al., 2020; Zhu et al., 2019). Lured by
policy bonuses, investors and developers have flocked to the LRA market to compete for a piece of the
action. Many LRA expanded to attract more venture capital, even in the absence of a profitable business
model, that is, the rents they paid to the original landlords were higher than those paid by the tenants. In the
absence of government supervision, financial instruments are also being widely employed in the
expansionary rental market where the preferential policies and under-regulated housing rental market have
led to an instant boom in the LRA market. This excessive expansion and under-regulated financialisation
were the harbingers of what is to follow later in the story.
4.2 Emerging rental loans as an innovative solution to financing difficulty
The PRS is always at the mercy of inferior asset liquidity, low investment return rates, large financing scale
and long cycle investment recovery (Fields and Uffer, 2016; Pawson and Milligan, 2013), meaning that
external financing and high leverage are necessary for PRS development. The relatively mature PRSs in
advanced economies (e.g., the US, Japan and Germany) are characterised by a large proportion of
institutional investors and highly leveraged financing tools, among which REITs are the most important
and widely-used (Lima, 2020, Aveline-Dubach, 2020, Fields and Uffer, 2016). For example, the
capitalisation of specialised residential REITs in the United States was the world’s largest –180 USD billion
in 2018, while residential REITs in Japan ranked second with capitalisation of 25 USD billion (Aveline-
Dubach, 2020). In contrast, there were few effective, stable and large-scale financing channels in China for
the newly established asset-light LRA firms. In most cases, they do not have the property rights of assets
for use as collateral in asset-based financial instruments, i.e., REITs, Corporate bonds, ABS, etc. (Beike
Research Institute, 2019). The rise in popularity of the asset-light business model has grown out of the
meagre rental yield rate (i.e., 1–2%) and the long-term investment recovery associated with asset-heavy
business models in most Chinese cities (Tsai and Chiang, 2019).
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Asset-light LRA firms are likely to take advantage of the financial deregulation of the PRS to create new
financial instruments – i.e., rental loans – to meet their financing needs (Beike Research Institute, 2020),
which banks believe will generate steady cash flows from rental leases in the future, facilitating their use
as collateral. Asset-light LRA firms make use of the “social credit” of tenants as collateral to obtain loans
from banks, and attracted by discounts, tenants are then lured into signing “rental loan” contracts with the
bank. LRA firms then receive a lump sum of upfront rent from the bank, and pay the landlords only monthly
or quarterly, using the loans as pools of capital to facilitate excessive expansion (Caixin News, 2020). This
loan-backed business model, however, comes with significant leverage risks as the company’s capital chain
is over-reliant on stable rent leases, lying in wait for the inevitable burst of the LRA market bubble.
5 The burst of the LRA bubble: Policy drift under market opportunism and
the COVID-19 pandemic
While preferential policies contributed to the rapid expansion of LRAs in Chinese megacities, the market
was not as stable or robust as expected (Shao, 2020, National Bureau of Statistics, 2021). Many newly-
established LRA firms take advantage of policy dividends to realise rapid expansion, but are vulnerable to
new risks and changing socio-economic circumstances, i.e., the COVID-19 pandemic. Some capital
problems have already been encountered since 2018 as a result of excessive market expansion strategies
through “paying high-rents to original landlords but charging low-rents from tenants” (Xinhua News, 2020)
that opened the Pandora’s Box. The situation has been worsened by the COVID-19 pandemic with the
decreasing occupancy rates and a wider collapse of cash flow for LRA firms, resulting in the bankruptcy
of many (Caixin News, 2020).
5.1 LRA bankruptcies resulting from over-financialisation
A number of LRA firms have faced severe financial difficulties or even gone bankrupt since 2018 due to
ruptures in the capital chain (Xinhua News, 2020), and the COVID-19 outbreak led to a decrease in the
transaction volume of PRSs – declining by 10.84% in 2020, with an average drop in rents of 7.7% in Beijing
(China News, 2020). The pandemic dealt a fatal blow to LRAs due to their strong reliance on cash flow.
Some 170 LRA firms collapsed from 2018 to 2020, accounting for 15% of the total (Xinhua News, 2020),
bringing about extensive social discontent, especially among the affected tenants. Danke, a typical asset-
light LRA firm, was well known for its over-use of rental loans and defaulting on owners’ rents, and its
bankruptcy was considered the fuse that ultimately ignited China’s LRA market time bomb.
Founded in 2015, Danke developed rapidly by riding on the wave of state policies and was a typical asset-
light LRA firm that acted essentially as a “second-hand landlord”. The company collected apartments from
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small landlords, renovated them to a standard, and then sublet the apartments or individual rooms as single
units to tenants at relatively affordable rents (Caixin News, 2020). The practice of sub-division caters to the
affordable living requirements of the younger generation, similar to co-habiting or co-housing in the
Western context (Tummers, 2015).
Through the launch of a data-supported asset management online platform, the number of apartments it
managed jumped from 2,400 in 2015 to more than 430,000 in 2019, during which the firm obtained over
5.8 billion yuan in private equity financing (Danke Apartment, 2020). The development of Danke, however,
relied heavily on rental loans and gradually entered into a vicious circle of financial idling. In 2019, the
proportion of rental loans in its total rental income reached 67.9% (Danke Apartment, 2020), far exceeding
the governmentally regulated cap (30%). Although Danke went public on the New York Stock Exchange
in January 2020, raising US$149 million through its IPO, it was short-lived and de-listed in April 2021, due
primarily to the pandemic-induced drop in occupancy rates, which accelerated its bankruptcy. From 2017
up until the first quarter of 2020, Danke Apartment suffered a cumulative loss of 6.303 billion yuan (Danke
Apartment, 2020).
5.2 Policy drift under shifting socio-economic circumstances
The previous deregulation has had a chaotic effect on the PRS and particularly the LRA market, with such
prevailing issues as false housing information on Internet platforms, the malicious deduction of bonds, the
illegal use of rental loans, disputes between landlords and the forced eviction of tenants (Xinhua News,
2021). The pandemic had a devastating effect on the LRA market in 2020, with occupancy rates being
severely compromised (Economic Daily, 2021). In the current situation, the development of LRAs has
largely deviated from the original policy goal of providing affordable and high-quality accommodation for
the floating population, which can be interpreted through the lens of policy drift. Resultantly, excessive
expansion and under-supervised financialisation have undermined tenure security and exacerbated housing
inequality in the country’s megacities, inducing social instability. The private rental market is therefore in
need of urgent rectification, as the new socio-economic conditions faced by the PRS and the market
opportunism of corporate landlords have rendered the existing renting institutions unable to adapt to the
shifting context (Béland, 2007). In the following text we present a detailed analysis of the policy drift and
its consequences.
Firstly, LRA firms take advantage of the under-regulated financial market to raise funds aggressively and
to expand in scale to attract more venture capital, even without a profitable business model. The rental loan
is an over-used financial instrument that emerged out of the deregulated financial market. While it alleviated
13
the financial constraints of asset-light LRA firms, the subsequent abuse of financial channels inevitably led
to over-financialisation and reduced resistance to risk. The deregulated financial policy failed to adapt to
the fast-changing market behaviours under capital speculation, eventually leading to social instability and
social unrest (Fields, 2017). The prevailing and excessive use of rental loans can be viewed as a form of
policy drift, filling the gap between the original policy goal and the actual market operation.
Secondly, most LRAs have been collected and renovated from existing residential neighbourhoods. So the
planned increase in the total supply of rental housing through the conversion of commercial/industrial
buildings or leasing unsold housing stocks, encouraged by the original policy, has failed to materialise. The
discrepancy may be related to the ambiguity of the original policy, thus aggravating policy drift in a rapidly-
changing society (Zhu et al., 2020). LRA firms, regardless of whether they are light-asset (collecting
properties from small landlords) or heavy-asset (properties owned by corporations), are eligible for the
benefits of the preferential policy. Ostensibly, collecting apartments from small landlords is less costly, and
so corporate players are more likely to seek more multi-family rental housing in existing residential
neighbourhoods, which can trigger gentrification in some low-income neighbourhoods, as seen in Toronto
(August and Walks, 2018).
Thirdly, the emerging problems and rising rents of LRAs contribute consistently to the insecurity and
precariousness of the PRS, which has been referred to as “residential alienation” associated with the fear,
stress, anxiety and disempowerment featuring the rental experiences of tenants (McKee et al., 2019). Policy
drift usually occurs when the rules remain static amid rapid socio-economic changes under exogenous
shocks (Hacker et al., 2015). In the present study, the status of some LRAs was already controversial, with
reports of indoor air pollution resulting from low-quality decorations and high rents since 2018. Adding to
the woes, COVID-19 served as a “critical juncture” at which the market equilibrium has been undermined,
accelerating the bankruptcy of many LRA firms and leaving LRA market segment in a state of chaos, with
myriad disputes and contradictions. The result is a significant deviation from the original goal of providing
tenants with secure, stable and affordable accommodation.
5.3 Legislation and re-regulation of LRA amid the growing housing crisis
Faced with the chaos and disputes in the LRA market, new policies were promulgated to rectify and
standardise the rental housing market, starting in late 2019 (MHURD, 2020; MHURD et al., 2019, 2021).
The newly layered policies further institutionalised and re-regulated the order of the private rental market,
and to rectify the over-use of rental loans, the central government issued guidelines to set a 30 per cent cap
on the share of rental loans in total rent revenues in 2019 (MHURD et al., 2019).
14
At the same time, legislation governing the PRS emerged and underwent constant improvement. In 2020,
the Ministry of Housing and Urban-Rural Development (MHURD) issued the first legislative document
plugging the existing legal loopholes and protecting tenants’ interests (MHURD, 2020). The newly
promulgated law delineated the duties and responsibilities of all parties and strengthened the supervision
of the rental market by constraining and standardising market operations. In particular, the supervision of
corporate financing was strengthened and forced rental firms to de-leverage, thus enhancing their capacity
to resist exogenous risks. At the core, these newly-issued regulations paid considerable attention to the rents,
terms of tenure, living safety and quality, and rights to public facilities, aiming to provide affordable and
comfortable accommodation to millions of tenants. In 2021, the MHURD issued a supplementary policy to
further strengthen the supervision of LRA firms (MHURD et al., 2021). A series of de-financialisation
measures were taken, and financing was placed under strict supervision to address the disorder in the market
to stabilise the LRA market (see Table 2), while on the other side, the central government provided direct
financial support to alleviate the financial difficulties of LRAs (Table 2).
Table 2. Policy layering to re-regulate PRS since 2019
Year
Ministry
Policy
Policy layering
Jul
2019
MHURD
, etc.
Notice on carrying out the
pilot central financial
support project for the
development of the rental
housing market
● Financial support of the central government for the development of
the rental housing market: One billion yuan per year for
municipalities directly under the central government, 800 million
yuan per year for provincial capitals and cities under separate
planning, and 600 million yuan per year for prefecture-level cities
Dec
2019
MHURD
, etc.
Opinions on rectifying and
standardising the order of
the rental housing market
● Strengthen the financial supervision of rental housing businesses.
● The proportion of rental housing loans shall not exceed 30%
Dec
2020
MHURD
Rental housing regulations
● Supervise the operation of “rental loan” for LRAs
● Encourage LRA firms to sign contracts with tenants lease terms of
more than three years.
Apr
2021
MHURD
, etc.
Opinions on strengthening
the supervision of light
asset rental housing
enterprises
● Rental loans prohibited from being pooled and misused.
● Rental housing firms are prohibited from conducting financial
business in a disguised form.
Source: Government documents collected by the authors
The wave of regulatory policies that were introduced manifested a new round of policy layering to tackle
the over-financialisation and the detrimental effects of the pandemic, which exacerbated the growing
housing crisis. Compared with the rent regulations or rent controls commonly applied in European countries
to improve economic efficiency or enhance social equality (Haffner et al., 2008), the policies or laws
layered at this stage were more about restricting and standardising the entrepreneurial behaviours of market
players, in particular, prohibiting the irrational expansion of the LRA market through over-financialisation
(MHURD, 2020; MHURD et al., 2021). Notably, in countries with well-developed rental sectors, e.g.,
15
Switzerland, Austria and Germany, government policies towards the rental sector seek to enhance tenure
security through rent regulations, thus rendering the PRS a reasonable alternative to homeownership
(Elsinga & Hoekstra, 2005). A stable and secure financial system is often maintained through policy
layering under changing circumstances (Hacker & Pierson, 2010). Policy layering over LRAs from 2019
onward limited the systematic risk and sought to rectify the drifted LRA market. Unlike in European
countries, where the emphasis is on improving tenure security through rigid rent regulation, Chinese
policies focus more on maintaining the stability of the political and financial system and strengthening the
social governance of the mobile rental population. On the other hand, tenants’ rights are still somewhat
ignored, necessitating stronger legal protection.
6 Discussion and conclusion
The PRS is largely shaped by changes in institutional settings, be they long-term alterations (Hulse and
Pawson, 2010) or occasional significant changes within a short timeframe (Wu, 2020). Corresponding to
the punctuated equilibrium model, institutional settings in China’s PRS have transformed considerably to
fall in line with the changing socio-economic context in recent years, coping responsively with endogenous
market opportunism and unexpected exogenous shocks (Krasner, 1984). The favourable policies attracted
numerous institutional investors, and the LRA sector saw significant expansion prior to the pandemic. This
paper investigates the evolution of institutional changes in China’s LRA sector, from all-around
deregulation to the increasingly strict re-regulation under shifting socio-economic circumstances and
evolving market forces.
While the enduring policy legacies have led to strong institutional inertia (Pierson, 2004), path-departing
reforms may still occur in the vent of exogenous shocks and critical external junctures (Hacker, 2004). The
institutional changes in PRS can be traced back to 2015, when the first state guidance on the development
and institutionalisation of the rental housing market was issued. The institutional transformation can be
divided into three phases, based on the degree of institutional regulation and the shift in market performance
(Figure 1): 1) A → B (2015-2018): policy layering for deregulation, cultivation and institutionalisation of
the PRS; 2) B → C (2018-2019): policy drift as a result of market opportunism and changing socio-
economic circumstances; 3) C → D (2019-2020): policy re-layering for the re-regulation and strengthening
of market supervision and legislation.
16
Figure 1. Institutional change in the PRS in China
The first was characterised by preferential policies aimed at cultivating and institutionalising the PRS, and
particularly the LRA sector. Similar to certain Western countries where the deregulation of the rental market
attracted huge investment from landlords, the Chinese LRA market expanded at an astonishing speed. The
under-regulated financial market and broadened financial channels were highly effective in attracting
corporate landlords, similar to the situations seen in the United Kingdom, Germany and the United States
(Fields & Uffer, 2016; Hulse et al., 2019; Kemp & Kofner, 2010). There are international examples of
tenancy rights and rent regulations being left intentionally superficial as a means of attracting institutional
investors (Hochstenbach & Ronald, 2020), and in such situations, the PRS emerges as a sector that is ripe
for speculation, providing a channel for the over-accumulated capital in the real estate sector and attracting
a wealth of “financialised landlords” (Chen et al., 2021, p. 2). This deregulation, however, means less
protection for tenants.
In China, the boom in the PRS is not associated with the declining investment in social and affordable
housing, as seen in countries like the UK and Australia (Pawson & Milligan, 2013). The government aims
to expand the provision of rental housing through multiple channels, including legitimising office-to-home
conversions and the creation of rental housing on rural collective land, without spurring a decline in
affordable housing construction. In practice, however, the increase in the provision of rental properties has
not been substantial, as existing housing stock collected from small-scale landlords and renovated accounts
for the majority of LRAs in Chinese megacities. With regard to the financial instruments, unlike in Western
countries in which there is a reliance on REITs or publicly listed real estate firms (Wijburg et al., 2018),
corporate loans provided by large banks and rental loans provided by small financial institutions are major
sources of funding for the development of LRAs in China (Chen et al., 2021). Rental leases can be used as
17
a form of collateral. For tenants in some countries, there is only a shallow regulation of tenure rights in the
private rental markets, bringing more flexibility to tenancies and rents (Hochstenbach & Ronald, 2020;
Kemp, 2015). In China, tenure security has long been neglected to the benefit of economic development
and social governance. Although long-term tenancy is encouraged in the PRS, especially in institutionalised
LRAs, the layered policies have led to the financialisation of these rental leases with little consideration for
the tenants, and largely encroach on tenure security.
The dramatic expansion of the LRA sector launched a period of chaos and conflict-laden particularly to the
infringement of tenants’ rights. This was rooted in a series of policy drifts in the forms of 1) over-
financialisation and the invention of rental loans, 2) reliance on the renovation of existing residential
housing stock collected from small-scale landlords instead of converting commercial/industrial buildings
for increments, and 3) worsened tenure security. All these have exacerbated the existing social inequality
and increased economic insecurity, and the overall situation in the LRA sector was made even worse by the
COVID-19 pandemic, which can be considered a critical juncture in the punctuated equilibrium model. The
pandemic proved to be an exogenous shock that undermined the previous institutional equilibrium and
enlarged the deviations between policy goals and market performance. All of these created the conditions
for the establishment of new institutions and spurred another round of policy layering with a view to
regulating the disordered PRS development, as shown in the second phase.
The third phase was characterised by the re-regulation and de-financialisation of the LRA market to address
the emerging problems of the highly-leveraged business model and the lack of financial supervision. This
new round of policy layering emphasised the standardisation of market order through 1) legislation to
safeguard tenants’ rights, akin to the well-regulated rental markets in Germany and Switzerland
(Hochstenbach & Ronald, 2020); and 2) strengthening the supervision of financial market for de-leverage,
corresponding to the appeal for de-financialisation in advanced economies (Lima, 2020; Wijburg, 2020).
Looking back at the institutional changes in China’s PRS development, financialisation can be seen to have
been the most effective catalyser, and to have deeply influenced policy evolution. As Nethercote (2019, p.
2) notes, “The entry and growing stronghold of institutional investors in many urban rental markets
constitute and contribute to a broader paradigm shift within urban housing systems characterised as
financialisation”. Institutional investors in China, like those in global cities, make use of various financial
channels and their increasingly high leverage (Wijburg et al., 2018). In contrast to the financial instruments
commonly applied in advanced economies (i.e., REITs and securitisation), rental loans in China are
innovative financial tools falling within the asset-light model (China Daily, 2020). Asset-light LRA firms
make use of tenants’ social credit to achieve capital accumulation and to realise the necessary excessive
18
expansion for further financing, placing them in a highly fragile and unstable position in the face of
exogenous shocks (China Daily, 2020).
The boom and bust of LRA development in China brought about new policy implications for different
stakeholders. First, the regulatory and supervisory responsibilities of the government were fundamental.
While nurturing the development of the PRS is considered a panacea for the housing shortage, governments
need to consider such key issues as how to balance the interests of the tenants and investors/landlords, how
to keep market opportunism under control, and how to protect the basic security and rights of tenants, who
often hold less power than landlords and developers. Only through appropriate regulation and supervision
can the LRA market operate and develop steadily and soundly. Secondly, investors and developers should
be expected to operate the LRA business model with a more long-term perspective. The recent collapse of
such famous LRA firms as Danke has demonstrated the risk of short-term explosive expansion in the
absence of a long-term and healthy business model. Rental loans may appear to be “innovative”, but their
overuse creates risks for the future. Thirdly, and associated with the earlier points, financial institutions
should keep a close eye on the risks associated with such financial instruments as the exploitative and over-
used rental loan. Excessive financialisation – primarily via the accumulation of rental loans – has left many
tenants homeless as LRA firms have gone bankrupt, as seen in the collapse of Danke. Instead, such financial
conduits as REITs, which are widely employed in Western countries, may be explored and localised to
facilitate the development of China’s PRS, while paying attention to its possible detrimental effects on local
residents.
The institutional approach provides an innovative perspective to understand the ebbs and flows of the LRA
market in China. Compared with the economic efficiency approach or the social policy approach widely
used in housing studies, the institutional approach is more appropriate for the Chinese context where the
government utilises market instruments to achieve its developmental objectives (Wu, 2018, 2020), and
where the related institutions and regulatory environments need to “constantly adjust themselves to align
with market imperatives” (Wu, 2020, p. 327). The COVID-19 outbreak, however, had a considerable
impact on the rental market, and was a critical juncture that triggered subsequent institutional changes.
There was a serious undermining of institutional equilibrium due to the exogenous shock of the pandemic
and excessive financialisation. A policy drift occurred as a result of the institutions in the PRS being unable
to adapt to the new market circumstances. China’s rental market is characterised by “regulated deregulation”
(Aalbers, 2016), in which the loose regulation in the initial stage of LRA development and the lack of
supervision of corporate landlords and the financial market led to a state of market disorder under the global
pandemic.
19
With the prevailing global financialisation of the PRS, policymakers have started to pay attention to the
struggles, contestation, and resistance of communities to excessive financialisation (Fields, 2016). The
highly attractive financialisation of housing is anticipated to accelerate neighbourhood upgrading and the
displacement of the original – and often low-income – households, threatening the occupancy of existing
tenants and expanding the gap in urban inequality (Lima, 2020). Institutional settings can thus be expected
to evolve under the shifting global environment and exogenous shocks to ensure citizens’ basic housing
rights. A new package of regulations, as analysed above, has been introduced to keep the market under
control through de-financialisation – a form of regulated marketisation (Hochstenbach & Ronald, 2020). In
China, policy re-layering over the PRS – as seen in the third phase of development – has started to
emphasise tenants’ rights and tenure security through more stringent state supervision of the over-
financialised market and more rent regulations, and while this is a good sign, it should be further observed.
In China, the floating population in 2020 is 69.73% greater than in 2010 – a total population of 376 million
(National Bureau of Statistics, 2021). This considerable number indicates a continuous rise in demand in
the PRS, making the construction of a healthy and sustainable housing market vital. Although the
development of LRAs has encountered challenges recently, the state needs to remain vigilant and to come
up with policies to support the development of the LRA sector. State-owned enterprises will play a vital
role in the provision of LRA in the upcoming period, specifically for the accommodation of migrants and
the maintenance of social stability. Operating on the principle that “housing is for living, not for speculation”
(Xinhua News, 2016), institutions involved in the PRS need constantly adapt to the new socio-economic
conditions and pay greater attention to safeguarding tenants’ rights and tenure security.
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