The author is employed by Swire Properties Ltd., a real estate company. She does not work on mainland residential real estate, and her company does not have an interest in the “second landlord” market. The opinions expressed in the article are those of the author and do not represent Swire Properties Ltd.
Businesses thrive easily in good times. It’s the bad times that reveal the cracks under their surface.
China’s “second landlord” apartment rental platforms have had their share of PR crises in the past, but the coronavirus has exposed some really deep cracks.
In February, the Shenzhen Consumer Council opened an investigation of rental platform Danke, following complaints that they increased rents during the Covid-19 pandemic while suspending payments on its own leases. The investigation’s conclusion has not yet been published, though the department has noted that in the three months following March 1, 219 Shenzhen residents filed complaints (in Chinese) against the platform.
Now, another platform is under fire. Not only did Qingke, like Danke, use the coronavirus as an excuse to stop paying landlords without pausing tenants’ payments, but it also left many tenants still on the hook for rental installment loans despite their already moving out (or being kicked out) of their apartments.
READ MORE: No apartment, but rent still due—Qingke tenants trapped in rental loan contracts
Now, Qingke faces many complaints and lawsuits filed by tenants. Regulators have yet to launch investigations into Qingke, but it was these kinds of complaints that led Shenzhen regulators to investigate Danke in February. It will be tough for Qingke and Danke to restore consumer confidence.
Bottom line: China’s “second landlord” platforms—companies like Ziroom, Qingke, and Danke—are highly susceptible to economic downturns such as that caused by the Covid-19 pandemic. Their business model of funding rapid expansion with tenants’ rental loans is unsustainable. Amid business challenges and increasing regulatory scrutiny, they will at minimum have to rethink this model. Many platforms have already collapsed—and there’s no guarantee even the largest will survive.
WeWork for housing
The “second landlord” model emerged between 2010 and 2012, the period when industry leaders Mofang Gongyu, Ziroom, and Qingke were founded. By 2018, there were at least 107 second landlord platforms in China. Three companies have emerged as leaders:
- Ziroom, the largest (as of mid-2019), is backed by Tencent, Sequoia, and General Atlantic, and is still held privately. Estimated number of units leased: 850,000 as of June 2019.
- Danke has been listed on the Nasdaq since January 2020. It operated around 440,000 units as of December 2019.
- Qingke has been listed on the Nasdaq since November 2019. It operated about 97,279 units as of December 2019, primarily in Shanghai.
- Mofang Gongyu is backed by Canadian pension fund Caisse de Dépot, Avic Trust, and Warburg Pincus & Co. It operated 70,000 units as of March 2019.
- Major Shenzhen-based property developer Vanke dipped its toe in the water in 2017, but abruptly scaled down plans two years later. Vanke has continued to expand its Port Apartments (dormitory-style “co-living” spaces), though at a much slower rate than competitors.
One-stop househunting: The appeal for consumers is obvious. What WeWork did for workspaces, second landlord platforms do for apartment-seekers. They make the process easy: A renter only needs to visit the space (virtually or physically) and can sign all necessary documents via the app.
- Renters told TechNode they chose the platforms for ease and security: no need to negotiate with landlords, no need to worry about being scammed or figuring out the utilities. The platforms do it all.
- While most Chinese landlords provide furniture, it’s often shoddy or strange. Tenants note that the rental platforms guarantee an Ikea-like standard of quality and taste.
- Rental platforms also make it easy to find one room in a shared apartment.
Lease long, rent short: Like Wework, these platforms earn profits from the difference between the price of long-term leases and short-term rentals, and by packing more people into the same space. All major platforms operate on roughly the same model, although we know a bit less about Ziroom, which is privately held. The second landlord platforms secure long-term (usually 5-6 year) leases from landlords, renovate the apartment—often converting the living room into another bedroom—and then offer shorter-term (usually 1-2 year) leases to tenants. In a typical case, a two-bedroom apartment could become three studios with a shared kitchen and bathroom.
- Platforms rely on algorithms to set prices, saving on human assessors.
- In the race to get the biggest market share, all platforms consistently offer major discounts—such as waiving management fees for fresh grads—which eat into margins.
Rocket fuel—rental installment loans: Collecting rent is a slow business—if you make a single sale, it takes a year or more for cash to trickle in. For companies racing to dominate a fast-growing market, this isn’t fast enough. Second platforms use financial wizardry to bring in cash faster; “rental loans” let them collect a whole year’s rent in advance while tenants pay a month at a time. Let’s take Qingke as an example. The company expanded by 106% since 2017 while creating a very large pile of debt in its tenants’ names.
- Qingke encourages tenants to pay one year of rent upfront with incentives like 5% off the total lease, while they usually pay the landlord in quarterly installments.
- Most tenants can’t pay a year in advance—but Qingke partners with 11 financial institutions to offer tenants loans to cover their one-year lease. Qingke, rather than the lender, screens tenants for credit risk. The money goes from the bank to Qingke, and tenants then repay the loan in monthly installments.
- According to 2019 corporate filings, 65.4% of Qingke’s leases are backed by rental loans, which adds up to RMB 1.1 billion (about $152 million).
What went wrong
What if a tenant moves out early? Qingke claims to guarantee its rental loans. According to its annual report, the platform charges a fee to the tenant should they surrender their lease early, and the platform must reimburse the bank for the rest of the loan. Should the tenant default, Qingke must also reimburse the lender.
Pandemic put a crunch on platforms
- The Covid-19 pandemic hit revenues by postponing the return of white-collar workers—Qingke’s target market—to China’s Tier 1 and Tier 2 cities.
- Many current tenants cut their leases short, while potential tenants stayed in their family homes.
- Qingke is not the only one suffering: January to March saw a major dip in the real estate market. The Chinese New Year period usually brings about many sales as people travel home, and developers tend to rely on pre-sales for cash flow—which were effectively halted given that showrooms were closed.
Tenants pay while Qingke backs out:
- Xiaoliang, a factory worker from Anhui, told TechNode that he signed a contract with Qingke in Shanghai for 26 months in November; then he realized Qingke had not paid the landlord while he was still paying the loans to reimburse his pre-paid rent.
- After terminating his lease, he found out he owes the bank the equivalent of the rest of his lease: approximately RMB 15,500.
- Xiaoliang and the landlord are now jointly suing Qingke. Based on remarks in WeChat groups from other people in similar situations, legal action seems to be the only way for tenants to get their money back.
Worse, tenants are kicked out:
- Some tenants were even kicked out by their apartment’s landlord because Qingke had not paid the landlord—leaving them homeless during the Covid pandemic.
- Tenants in both situations found that they are still liable for paying the rental loans, and a default on these would impact their credit scores.
Clearly, then, there is more to what Qingke’s annual report suggests. It seems that if Qingke (the loans’ guarantor) does not pay the loans when the tenancy is suspended early, the tenant becomes liable for them. This is pretty common: 49% of tenants left their lease early in 2019, according to the company’s annual report. The report says most left because they changed jobs. Since Qingke cannot afford to pay for the remaining loans, tenants remain liable.
Where did all these platforms come from?
China’s second landlord platforms have mushroomed in the last four years, driven by a confluence of factors.
Shift to renting:
- The Chinese real estate market is highly dependent on policy (even more so than other countries). Since 2017, Beijing has encouraged the growth of the residential rental market.
- In 2017, China’s rental business made up only 2% of the property market, compared with 20% to 30% in developed economies.
- However, sky-high housing prices and an increasingly mobile population make renting necessary.
- Policies pushing rental sector growth range from granting temporary residency to renters,
allowing them access to free healthcare and education privileges, to incentives for developers to develop large-scale rental projects.
Same old story: Before rental loans, P2P lending platforms peaked from 2016 to 2019. In the beginning, they complemented government policy and enjoyed lax regulation. But as problems emerged, P2P lending was first strictly regulated and then banned. Second landlord platforms are likely on the cusp of an oversight push, with December 2019 guidelines (in Chinese) restricting rental loans, beginning with this trend.
- Even before Covid-19, second landlord platforms struggled: Dingjia’s tenants were also left on the hook for rental loans when the company went under in August 2018.
- In December 2019, six government departments published new regulations (in Chinese) stating that by the end of 2022, only 30% of leases on these platforms could be funded by rental installment loans.
- Qingke stated that they may not be able to meet this deadline, which will undoubtedly slow the company’s expansion.
Irrational competition: Second landlord platforms have also focused too much on winning the market, and not enough on building sustainable businesses. They echo decisions made by companies such as Luckin Coffee, which essentially bought its customers through discounts, the bike-sharing pioneers Ofo and Mobike, and WeWork.
What now?
The model is not sustainable, and these companies know they must change.
- The “second landlord” model needs a major rethink. The demand for short-term leases and a one-stop shop for related services is certainly there. However, the ruthless competition between platforms drives the prices down and pushes them to expand faster, making them unprofitable businesses.
- The platforms realize the need to change and are trying new models: Qingke has started cutting renovation costs by leasing already furnished apartments from landlords, while Danke introduced the dormitory-style “Dream Apartment” a year and a half ago, in which entire floors or buildings are sub-leased as dorms with shared kitchens and facilities.
Regulation will shape the future of the market
- The new guidelines (in Chinese) limiting 30% of the leases to rely on loans, along with the Shenzhen regulators’ investigations into these platforms seem to signal a tightening of policy.
- This, along with the losses suffered by the companies during Covid (Qingke and Danke’s stocks decreased by 23% and 54% in the last five months, respectively), will make it even tougher for the platforms to stay afloat.
Only time will tell which platforms will survive, but currently, it seems likely Ziroom will win the race to capture the second landlord market.
Ziroom is already the biggest platform in the number of apartments leased, and the only one that has been able to sustain steady funding without going public. It has gone the furthest in recovering from the Covid PR crisis by waiving 20-50% of 44,318 customers’ rent in March (in Chinese).
On the other hand, as rentals go mainstream, second landlord platforms may run into larger, deeper-pocketed competition. The residential rental market in China is still dominated by large developers (some of them SOEs). Perhaps they will find a way to incorporate tech platforms into their models—eliminating the need for the less-reliable platforms like Ziroom, Qingke, and Danke.
Eroding consumer trust and new regulations will force platforms to wean themselves off rental loans. This will mean either finding new sources of funding—or simply accepting slower, safer growth.
