Commentary on Political Economy

Wednesday 18 November 2020


Covid brings China’s high-growth rental industry to its knees

Early on, the pandemic wiped out jobs and drove migrants away from Beijing, hitting the rental market hard © Kevin Frayer/Getty

Be the first to know about every new Coronavirus story

When protesters besieged the Beijing headquarters of an apartment rental company in a rare show of public outrage last week, it shook one of China’s fastest growing and most highly leveraged industries to its foundations.

The dozens of landlords, tenants, contractors and cleaners gathered outside Danke’s offices alleged the company broke lease contracts and defaulted on payments. Such claims are becoming widespread across a sector that manages up to half of the Chinese capital’s rental homes.

“Pay back my hard-earned money,” read one banner carried by the protesters outside Danke’s offices in the centre of the city. 

China’s once high-flying residential rental industry, in which companies sign multiyear leases with individual landlords before subletting the homes to tenants, has been hit hard by the coronavirus outbreak.

While China’s economy is recovering, the sudden shock this year at the onset of the pandemic wiped out jobs, drove migrant populations out of big cities and undermined consumer spending. This has led to heavy losses at more than a dozen highly leveraged rental property operators.

They wanted to cancel contracts without providing compensation. There is no room for negotiation

Dave Wang, landlord

Some of the platforms have recently listed in the US: Danke held its Nasdaq initial public offering in January. Its share price has more than tripled over the past two days following rumours that 5i5j, a leading real estate brokerage, would acquire the leasing platform. Danke's share price is still down 66 per cent from the beginning of this year, while a rival, Qingke, is down by two-thirds.

“China’s rental flat operators are facing structural problems that make their business model unviable,” said Hu Jinghui, chief economist at Jinghui Think Tank, a real estate consultancy.

The turmoil follows years of runaway expansion as leasing platforms snapped up apartments to build economies of scale. Frost & Sullivan, a consultancy, estimates China’s professionally managed flats grew more than 10 times between 2013 and 2019.

Underlying the business is growing rental demand. Official statistics show China had more than 200m renters last year, an increase of more than 50 per cent from six years ago.

To tap into this demand, leasing platforms have pursued aggressive business models. Many paid market rates to acquire apartments and then charged renters a lower price to grow market share. Another common practice aimed at improving cash flow was to pay landlords each month but collect six or more months of rent in advance from tenants.

Analysts said that the strategy was based on two assumptions: that demand for housing would hold up and rents would keep rising. “The idea is to suffer two years of losses and start making profits from the third,” said an official at Qingke.

But the pandemic has shattered the business model. Many big cities are receiving lower numbers of migrant workers as job openings grow scarcer thanks to a slowing economy. Beijing’s subway reported a 30 per cent fall in daily passenger traffic in September from a year earlier, according to official statistics.

“That suggests a lot of migrants haven’t come back,” said Li Naichao, director of Beijing Residential Real Estate Chamber of Commerce. “They are likely to leave the city for good because of a lack of opportunities.”

Rent inflation has also cooled off. Official data show residential rents in Beijing have declined for eight months in a row following a decade of positive growth. Most big cities now report less than 2 per cent rental yield, barely enough for leasing platforms to survive.

The ensuing cash crunch has left many leasing platforms struggling to pay suppliers. At Danke’s headquarters in Beijing, protesters said they were chasing late payments ranging from Rmb200m ($30.5m) renovation fees to Rmb5,000 cleaning bills.

“I will go broke if Danke doesn’t pay me on time,” said a contractor surnamed Wang, who did not want to give his first name and alleged the platform owed him more than Rmb100m.

Landlords have also fallen victim to the slowdown as rental operators delay rental payments or request lease cancellations. The problem is so widespread that dozens of social media groups, each with hundreds of disgruntled landlords from across the country, have emerged in recent weeks.

“They wanted to cancel contracts without providing compensation,” said Dave Wang, who signed a three-year lease in 2018 with Ziroom, another big rental operator. “There is no room for negotiation.”

The delayed payments have prompted many landlords to evict tenants even when they have paid their rent in full to the platforms.

“My landlord has received only four months of rent from Danke even though I have already paid 12,” said Wang Kejia, who was evicted last month from her one-bedroom apartment in the eastern city of Hangzhou.

Court records show Qingke has been listed as a defaulter 115 times since September. Both it and Danke are lossmaking. 

Neither Danke, Ziroom nor Qingke replied to requests for comment. Danke wrote in a post on its official Weibo account that it “hasn't gone bankrupt” and its management “won't flee”. The post added: “Please do not believe in and spread rumours.”

Ziroom said in a statement on its social media account that the company was “in good shape” and landlords were being paid in a “very timely” manner. 

The industry’s problems have not gone unnoticed by Beijing. The Ministry of Housing and Urban-Rural Development warned in September that it would list leasing platforms as an “irregular business” if they continued with practices such as undercharging renters to draw them in or collecting large advance payments.

No comments:

Post a Comment