Coronavirus outbreak cools China's red-hot home rental startups

Beijing

ZHANG Yan learned first-hand how the novel coronavirus is ravaging China's once booming real estate economy.

The Shanghai landlord on internet home-listings platform Danke was surprised when she recently got a terse notice from the company declaring it would withhold all rental payments for a month because of the epidemic.

Customers who have demanded payments owed were rebuffed because of an overload in requests.

"Danke has caused me big trouble," Ms Zhang said of the company, which connects landlords with renters and allows them to lease apartments online. "The platform should protect apartment owners' interests. I also have a family to feed."

China's online real estate startups, which once promised to bring the country's booming property sector into the 21st century, have been side-swiped by the public health crisis.

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Danke - a unit of US-listed Phoenix Tree Holdings, which is valued at US$2.2 billion - offers a rare glimpse into how a sector that's attracted billions from Tencent Holdings and other investors is on thin ice because of the market collapse and tighter government scrutiny in the wake of the outbreak.

Apartment owners across the country have set up WeChat groups to discuss countermeasures. On one forum, with as many as 200 landlords claiming to lease houses on Danke, heated discussions have lasted late into the night.

In Shanghai, property owners rushed to Danke's offices, demanding the company hand over rents as usual. Some have threatened to cancel their contracts with the firm.

Danke acknowledged on Feb 13 that it has been "severely hit" by the spread of the coronavirus known as Covid-19. A plethora of new virus-prevention measures imposed by local governments have inflated fixed costs as demand for its services collapses.

"At this critical moment, all stakeholders in the housing rental market need to make reasonable sacrifices so that we can overcome the difficulty together," the statement from Danke said.

On Monday, it apologised in a statement for "communication issues" and asked for support from its hundreds of thousands of landlords.

In Wuhan, where the outbreak took off, Danke said it would stop paying rent for 90 days to apartment owners.

The emerging rental management sector still only accounts for a small slice of China's property industry but was expected to rapidly expand by the end of this decade.

Growing strains in the sector could harm Beijing's plans to create a modern rental market that's necessary to ease burgeoning housing demand.

The country has 190 million workers who rent, according to research from real-estate agency Lianjia. That is more than three quarters of all people living away from their homes. A robust supply of rental properties can also help delay home-buying and tame runaway real estate prices.

Other long-term rental startups such as Ziroom and You+, which operates one of China's largest co-living communes, also face a double whammy.

Newly introduced measures in cities like Shenzhen and Hangzhou compel landlords to alert authorities about tenants from Wuhan's province, or face punishment.

In addition to dealing with increasingly angry landlords, they also must handle tenants demanding rental waivers because lockdowns have prevented them from returning to their rented apartments.

Last week, Airbnb extended a freeze on all Beijing business by two months, following strict local regulations aimed at curbing the virus.

"The epidemic is subjecting many rental startups to a more rigorous survival test," said Wang Xiaoqiang, an analyst at property-data firm Beijing Zhuge House Hunter Information Technology.

"The majority of players haven't broken even yet, and now here comes the blow from the coronavirus."

Before the outbreak, some rental managers were counting on a seasonal bump in business after prospective tenants return to large cities for work after the Lunar New Year Holiday, Mr Wang said.

Instead, they're now forced to cope with a decline in revenue. Fixed costs, such as rent payment to apartment owners, may exacerbate financial pressure.

It's a sharp reversal of fortune for rental-management startups, once one of the hottest sectors in China.

Tencent, Warburg Pincus and Sequoia Capital were among the venture capital funds spending billions to win a slice of a market expected to grow to 4.2 trillion yuan (S$842 billion) by 2030, according to estimates from Orient Securities. That is equivalent to almost half of total home sales in China in 2017.

Ziroom, backed by one of China's largest real estate brokers Beijing Homelink Real Estate Brokerage, raised 4 billion yuan led by Warburg Pincus, Sequoia and Tencent in 2018.

You+ counts DST and Shunwei Capital Partners, the VC firm backed by Xiaomi's founder Lei Jun, as backers. Warburg Pincus, which has invested at least US$8 billion in Chinese companies, has put money in at least three companies in the field.

Authorities have imposed a raft of new requirements to curb the virus. "It's understandable," You+ co-founder Liu Yang told Bloomberg News.

Ziroom has 1.5 million tenants and operates properties for half a million owners throughout China. It's been offering free cleaning services every day and has promised to help provide supplies for those tenants that are required to undergo quarantine.

Since late January, property rental associations from around the country have called on apartment owners to waive rents for as long as two months.

In a letter of appeal posted on its website on Jan 30, the Guangzhou Property Rental Association asked property owners and managers to work together to get through this difficult period. "A wave of business closings may occur if rental companies' cash flow depletes," the letter warned.

"If Danke survives this, then I can stay until my contract ends," said Beijing tenant Song Jun, writing on a WeChat forum, adding that if the landlord asked for his apartment back he would seek a refund from the online platform.

"Since we're already in this situation, all I can do is wait," said Mr Song. BLOOMBERG