A pair of loss-making mainland China apartment rental operators have filed for initial public offerings in the US within days of each other as pressure mounts on their balance sheets.
Beijing-based Danke is seeking to raise up to $100 million by listing on the New York Stock Exchange, while Morgan Stanley-backed Qingke, which operates Qingke Apartments, is aiming to raise $93.6 million through a Nasdaq IPO.
Danke’s move to list comes seven months after closing a $500 million funding round co-led by private equity titan Tiger Global Management and Jack Ma-controlled asset management firm Ant Financial. Qingke raised $100 million last year in a series C round led by Morgan Stanley Private Equity Asia and Singapore private equity firm Crescent Point.
Venture Cash Fuels Expansion
The Form F-1 registration prospectus for Danke, which was lodged on 28 October by parent company Phoenix Tree Holdings, does not provide an expected price range, indicating that the $100 million amount might be a placeholder amount. The underwriters for the NYSE offering are Citigroup, JP Morgan and Credit Suisse.
The housing rental platform, which slices up buildings into dorm-like apartments that it markets to young professionals, intends to use the funds from the proposed IPO to scale up its operations and upgrade its existing stock.
In just four years since it opened for business, Danke has built up a portfolio of 400,000 rooms under management with listings in 13 mainland cities including Beijing, Shenzhen, Shanghai, Hangzhou, Tianjin, Wuhan.
Building out that portfolio resulted in a net loss of nearly RMB 1.4 billion ($191.6 million) last year, a four-fold increase on the RMB 272 million net loss recorded in 2017.
The company’s financial hole has been opening up still more quickly in 2019 with losses for the first three quarters of the year totalling RMB 2.5 billion — already some 44 percent more than its 2018 full-year total.
Losses Mount for Qingke
Qingke has similarly bled cash as it competes with Danke and a host of other mainland rental housing operators.
Since starting substantial operations in 2012, the Shanghai-based firm has grown its network from 40 rental units to 91,234 homes across six cities in China as of 31 December 2018, according to the company’s prospectus.
The venture capital-backed firm incurred net losses of RMB 500 million last year, more than double its 2017 shortfall of RMB 245 million. For the first six months of 2019, Qingke booked RMB 373.2 million in red ink — already 34 percent more than it lost during the full year of 2018.
Through its holding company Q&K, Qingke is offering 5.2 million American Depositary Shares (ADS) which it each represent 30 of its Class A shares, according to the prospectus. The ADS are being offered at an indicative price of from $17 to $19 per share, with Morgan Stanley and CICC serving as joint underwriters for the share sale.
At the $18 mid-point of the indicative price range, Qingke would stand to bring in $93.6 million for the share of its ADS. Principal existing shareholders include California-based internet payment company Bill.com, Inc, and Atlanta-headquartered private equity firm Crescent Capital Investments.
Qingke argues that China’s rental apartment market remains underserved, with rapid urbanization, rising housing prices, the sharing economy, as well as supportive government policies driving growing demand.
According to data cited by the company, the Chinese long-term apartment rental market, which grew to RMB 1.5 trillion in 2018, is expected to reach RMB 3 trillion in 2024.
Growing Market Fails to Translate into Profit
The growth potential of China’s rental housing market has lured numerous startups into the market and created fierce competition.
According to Chinese tech news site 36kr, there are at least 1,000 dedicated operators competing for a slice of the rental market, in addition to 30 property developers and ten real estate agencies, with 20 hotel brands also diversifying into rental apartment buildings.
The sector’s rapid growth has been offset by a string of companies shutting down or defaulting since the beginning of 2018.
In August of this year, three-year-old rental housing operator Lejia announced that it had “ceased operation, closed down all business, and let go of most of its staff.”
In June news reports indicated that a long-term rental housing business operated by Guoan Family, a real estate affiliate of state-linked CITIC Guoan Group, had been accused by landlords of not paying rent on the apartment that it leases to tenants.