Rent overdue

Danke in damage control after letting debacle


Dirty laundry aired

At a time when apartment hunting is hardly a priority for millions of Chinese, property giants like Evergrande are trying to lure back homebuyers with steep discounts.

The developer has made what it describes as an “unprecedented” offer: knocking 25% off the prices of new homes if people buy them directly from the company’s virtual showrooms.

The campaign comes at a time when local governments have ordered the closure of property sales centres around the country in a bid to prevent the spread of the Covid-19 infection. That’s creating a major headache for developers, many of which have grown more reliant on property sales proceeds to keep their highly leveraged businesses going.

Evergrande’s promotion seems to have worked: over three days it sold 50,000 units, raking in Rmb58 billion ($8.2 billion), reported National Business Daily. But while Evergrande has won over thousands of new homeowners during the health crisis, apartment management platform Danke has done the opposite with existing landlords and their tenants.

The company, whose name translates as “eggshell” in Chinese, has come under attack for suspending payments on leases to landlords despite continuing to collect rents from tenants.

Danke’s business model is to sign long-term contracts with landlords and then sublet their units to tenants after renovation. After it leases the apartments from owners it typically converts the living rooms into dormitory-style accommodation with shared kitchens and bathrooms in a bid to increase yields per square foot. It then rents out the rooms to individuals on shorter-term, higher-priced contracts.

The company went public on Nasdaq in January this year, raising $150 million. Its investors include Ant Financial and Tiger Global Management.

The controversy first came to light after people took to social media to complain about the platform’s practices amid the coronavirus outbreak. Some apartment owners claimed that they were informed that they needed to offer a rent-free period because of national policies designed to mitigate the economic impact of the outbreak. On the other hand, it was reported that Danke had continued to collect rent from its own tenants.

In damage control mode, Danke issued a statement last week saying that it had reached a compromise with landlords in which it will offer a month of free rent to its tenants in light of the outbreak. Anyone taking advantage of the concession will see their contracts extended by an extra month.

Danke is now one of China’s largest rental players, with 430,000 units under management in 13 cities across the country. In the prospectus for its IPO it claimed an occupancy rate of 89% and revenues of Rmb5.7 billion in the first 10 months of 2019, ranking first in its sector.

But it is still bleeding cash. Between 2017 and 2019, it reported net losses of Rmb272 million, Rmb1.3 billion and Rmb2.5 billion, respectively.

To finance its fast-scaling business, Danke also facilitates ‘rental loans’ to its tenants, offering discounts on its service fees as a lure and acting as a guarantor to the banks. As many as 91% of its tenants took advantage of such loans in 2017, although the percentage tapered down to about two-thirds in 2019, reported Securities Times.

Still, the business model has caught the attention of regulators and Shenzhen’s finance and insurance watchdogs announced a joint investigation into Danke’s lending practices last week.

“Rental loans usually see the tenants applying for loans to pay rent to the enterprise for several months or up to a year in advance. The tenants then repay the loans to the financial institution every month. Danke obtains a large amount of deposited funds upfront under this model. It has become a driving force for the rapid expansion of long-term rental apartment companies like Danke in the last two years,” Securities Times explained.

Bike-sharing brand Ofo adopted a version of the same strategy to fuel its own growth, using advance payments from riders. However, when the company collapsed, millions of consumers lost their deposits.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.