Following a client uprising over the weekend that drove rumours of bankruptcy early this week, Beijing-based rental platform Danke Apartment may be in line for a buyout, according to local media reports.
Listed on the New York Stock Exchange as Phoenix Tree Holdings in January of this year, shares in Danke rose more than 90 percent on Wednesday on reports that the parent company of online real estate agency 5I5J.com had entered into talks to take control of the troubled Danke, according to an account in Thepaper.cn. 5I5J representatives are said to have confirmed the media account.
Danke’s troubles appeared to peak over the weekend when Chinese media reported that angry crowds of evicted tenants and unpaid landlords had gathered outside the company’s Hangzhou, Beijing and Shenzhen offices demanding termination of the contracts and accompanying loans.
In the wake of the bankruptcy rumours that sparked the rush on Danke’s offices, the platform released a statement through its Weibo account on 16 November assuring tenants that it was solvent and was actively working on a solution to its financial quagmire.
Even so, on Monday tenants and landlords gathered at offices in Shanghai, Guangzhou, Shenzhen and Beijing, where at least 100 people gate-crashed Danke’s headquarters, according to local media accounts. They queued up and went to different registration points, with tenants requesting refunds and deposits while landlords sought contract termination.
A Danke representative at the Beijing headquarters told the National Business Daily that management was still discussing the matter and not ready to go public with solutions to the crisis. He said two key executives, Shen Boyang and Ding Jianwe, and others at the senior level were out of town, making any public statement impossible.
The Beijing Municipal Commission of Housing and Urban-Rural Development told reporters that a special team had been set up for Danke in hopes that the matter would be resolved smoothly and a follow-up plan announced in time.
Police on the spot were making sure that everyone queued up to get into the building without causing any violence, according to NBD.
Light on Assets, Low on Cash
Phoenix Tree was valued at $2.74 billion at the time of its American IPO in January but has since shed 83 percent of its value to a low of $300 million, according to The Paper. Based on Google market data, Danke’s value is currently $800 million.
The company founded by Gao Jing has been plagued by money issues since it started an aggressive expansion campaign in 2017, and it has yet to post a profit. Danke reported a RMB 3.4 billion ($480 million) loss for 2019.
Xiangyu’s interim report stated that the platform’s revenue was down 15.1 percent year-on-year as of 30 June, and it had 253,000 apartments under management.
The company’s rapid expansion since its 2015 founding helped it amass over 400,000 rooms in China. But a COVID-induced cash crunch caused the operator to delay or miss payments on its leases, leading to tenant evictions and obligations for outstanding rental loans with Tencent-backed virtual WeBank. WeBank holds the loans taken out by tenants that allow them to pay a year’s rent to Danke in advance.
On 16 November, WeBank made a statement ensuring tenants that it would not act on loan defaults and would protect crucial social credit scores until March 2021, The Paper said.
In April, Phoenix Tree was sued in New York for misrepresenting the severity of the COVID-19 outbreak in Wuhan and for concealing renter complaints that the company had applied for bank loans under tenants’ names without their knowledge or consent. In June, the Shenzhen Housing and Urban-Rural Construction Bureau launched an investigation into Danke’s business practices.
To make 2020 matters worse, COO Michael Gu Guodong resigned in October.
Shaky Business Model Under the Microscope
The ongoing controversies have raised concerns about the health of China’s long-term rental policies, designed to cultivate a functional rental housing market to serve the predicted 252 million urban tenants who will be living in mainland cities by 2025, according to the China Rental Housing Association.
Danke and many others’ model is similar to that of failed co-working giant WeWork’s. Danke takes long-term leases on existing homes and divides them into dorm-style flats, which it subsequently sublets to young professionals, but which also leaves the company holding long-term liabilities.
The outcry has also put the spotlight on the apartment rental industry’s controversial practice of pushing tenants into rental loans. Danke steers tenants into structuring their lease agreement as a loan, then pays its owners quarterly. The cash, in theory, funds expansion, but tenants are on the hook for the loan regardless of tenancy status.
The dodgy practice is common in the largely unregulated sector and has added to the drama as a host of mainland apartment platforms have defaulted or closed down this year, 58 Anjuke Real Estate Research Institute chief analyst Zhang Bo told the SCMP. “Before Danke, more than a dozen smaller operators have shut up shop this year,” he said.