When the Bubble Bursts

By Tao Xing

When new college graduate Zhang Kunyue moved to Shanghai in June to work there as a data analyst， she found accommodation through Phoenix Tree， popularly known as Danke， one of the largest online home rental platforms in China.

Danke leases homes from their owners for long term， renovates them， splits them up into sub-units and then rents them out. It also provides cleaning and maintenance services， which are included in the rent. Tenants usually have their own rooms but the kitchen and bathroom are shared.

On November 22， Zhang had to move out of her room into a friends place and has since run from police to court， trying to terminate an associated loan agreement.

She was not alone. In November， the rental industry saw an unprecedented situation with tenants， home owners and cleaning staff protesting outside Dankes offices in Beijing， Hangzhou in the eastern province of Zhejiang， and Shenzhen， a hi-tech hub in the southern province of Guangdong.

The tenants had paid up for a year since it enabled them to get a discount on the rent. Some， like Zhang， had taken a loan from WeBank， Chinas fi rst online-only private bank backed by tech giant Tencent. The bank paid the one-year rent to Danke， and she was repaying the loan month by month.

However， according to media reports， Danke failed to pay the home owners， who then began evicting the tenants. When some refused to move out， their water and electricity supply was disconnected or locks on the door were changed.

The New York-listed Danke had more than 400，000 rooms under its management. Though it said on its Weibo account that it had not gone bankrupt and would not run away， Caixin magazine reported that the company had a funds crunch exceeding 3 billion yuan （$459 million）.

The Danke incident renewed the concerns about the risks in the furiously growing property sector. Earlier in September， the Ministry of Housing and Urban-Rural Development （MOHURD） issued a draft regulation for soliciting public feedback， which bans leasing platforms from making tenants pay the rent for a long period with bank loans by offering discounts or other irregular practices.

This time the MOHURD and local governments， including in Beijing and Shanghai， asked Danke to honor the rights and interests of both house owners and tenants and resolve the dispute.

Dankes crisis underlines the importance of regulating the industry， Hu Qimu， a senior fellow at the Digital Economy Institute， a non-governmental think tank， told Beijing Review. Hu said to promote the development of the market in the long run， the exposed problems need to be addressed and targeted measures taken.

A promising sector

Chinas tenant population， consisting mainly of new college graduates and migrant workers from rural areas， has exceeded 200 million and is still growing， according to China Economic Net. The housing rental market is expected to reach 3 trillion yuan（$455.09 billion） in the near future.

Shanghai alone has more than 8.7 million people living in rented rooms or apartments， the largest in China， followed by Beijing and Shenzhen， according to China.org.cn.

Traditionally， the Chinese prefer buying rather than renting a house but limited land resources and skyrocketing housing prices have made it almost impossible for most newcomers to large and mediumsized cities to own property.

To ease the housing stress， the government has been encouraging the development of the housing rental market since 2016. Central and local governments have introduced supporting measures， such as giving tax breaks and fi nancial support to rental companies and increasing the land supply for building rental housing.

Due to the policy support and the gargantuan market， the long-term apartment rental business has developed rapidly， giving rise to platforms like Danke. Many of these agencies acquired leases at the market rate but sublet them at lower rents to grab a market share， confident that the rents would continue to rise and they would make up the deficit from the third year onward.

However， the novel coronavirus disease dealt an unexpected blow to the sector this year. Many cities received fewer migrant workers due to travel restrictions， and jobs and pays were cut， leading to a temporary clampdown on spending.

But despite Dankes predicament， other companies in the sector are continuing their expansion. On November 30， Ziroom， which manages 1 million apartments， announced the acquisition of Bestbond， which has leases on about 5，000 houses. There were also reports that the 5i5j Holding Group， Dankes rival， was in talks with it for a takeover.

Reforms needed

While the business model of long-term apartment rental is good， the tendency to make a fast buck by luring house owners and tenants with so-called fi nancial innovations should be punished， a commentary by Xinhua News Agency said.

The loan arrangement， for example， seems a boon for tenants who are on a tight budget and dont have the money to pay a years rent upfront. However， the large amount of prepayments collected through rental loans is invested by the agencies in other deals. When they sour or the rents dont go up as expected， both landlords and tenants suffer and bubbles form in the industry.

In 2019， with five agencies the MOHURD issued a document， stipulating that bank loans should not exceed 30 percent of the total rent. Enterprises that exceed the proportion have to rectify it before the end of 2022.

But available statistics show that in the fi rst three quarters of 2019， bank loans accounted for close to 80 percent of Dankes income from rents， totaling 3.16 billion yuan （$483 million）.

Besides regulatory efforts by government agencies， the rental agencies should be more service-oriented instead of just focusing on profi ts， according to Liu Hongyu， Director of the Institute of Real Estate Studies at Tsinghua University.

“Rental enterprises should focus on improving services instead of maximizing their financial leverage，” Liu told Beijing Review. “As long as they strike a balance between economic and social benefits， supplemented by an improving policy environment， the industry will have greater opportunities for development.”