Beijing Serves Notice to Unruly Apartment Middlemen

Six Chinese government agencies released a list of recommended behaviors for middleman operators of apartment rental platforms, nearly a year after a cash crunch at former leader Danke saw thousands of tenants evicted from their homes even though most had already paid rent.

Publication of the document late Monday on the website (link in Chinese) of the Ministry of Housing and Urban-Rural Development marks the government’s first formal guidelines for oversight of the asset-light industry. Middlemen like Danke typically sign long-term leases for apartments with their owners, then make improvements and sublease the units out at higher rents, pocketing the difference as profit. 

Other government agencies whose names were attached to the guidelines included the National Development and Reform Commission, China’s state planner, as well as the China Banking and Insurance Regulatory Commission.

“Recently the capital chain has ruptured at a few of these house leasing companies, seriously affecting tenants’ lawful rights and interests,” the document said in an introduction containing seven major new guidelines. Such documents are typically called “opinions” as they are not legally binding, even though violators can still face administrative measures as punishment.

Last year’s Danke scandal cast a spotlight on some of the industry’s more problematic practices. Most notably, such companies were often demanding long-term rental payments of up to a year for their own subleased properties, even as they paid rent to those properties’ actual owners only on a monthly or quarterly basis.

That model worked well when apartments were full and rents were going up. But it quickly broke down when rental markets became weak and the company got stuck with long-term contracts at rents above market rates. Danke, whose Chinese name means “egg shell,” quickly became delinquent on payments to its landlords when its cash ran low, even though many of its own tenants had already paid rent.

The result was widespread clashes between landlords and the subleasing tenants actually living in the properties, with the former often demanding eviction of the latter.

Last June, the company’s CEO Gao Jing was placed under investigation over “certain matters related to his business ventures prior to the founding of Danke,” the company said in a statement at the time. Cui Yan, a co-founder, was appointed interim CEO of its operator, Phoenix Tree.  

Read more: Cover Story: How Chinese Apartment Rental Giant’s Business Fell Apart https://www.caixinglobal.com/2020-12-07/cover-story-how-chinese-apartment-rental-giants-business-fell-apart-101636345.html

To avoid similar future conflicts, the new guidelines recommend that such middlemen register in a system set up by the Housing Ministry. They would then be required to report terms of their individual agreements into that system, including deposits and payment methods.

The recommendations further state that such middlemen should also set up escrow accounts at commercial banks to deposit rental money, with banks making sure the money went to pay actual rents. Such companies would also be limited to charging no more than three months’ rent at a time, and deposits would be limited to a single month of rent.

The recommendations also tackled the issue of rental loans, which became a common tool for companies like Danke to rent out their properties and collect the large advance payments it was seeking. The recommendations called on banks granting such loans to play a role by making sure the amount of their loans wasn’t higher than the total value of the lease. Those banks were also asked to ensure that loan funds be transferred into the tenant’s own bank account — a reference to the fact that many times such funds went directly to companies like Danke previously.

The document also said middlemen should not include rent loan-related content in their leasing agreements, and called on such companies not to help renters use their own credit to obtain such loans.

Danke listed its shares on the New York Stock Exchange in January 2020 under the Phoenix Tree name when the company was still flying high. But the stock continually fell after that, with declines accelerating in the second half of last year as its cash crunch grew. The shares had lost more than 80% of their value when they were suspended last month. Earlier this month the NYSE announced it was preparing to de-list them for violating several listing requirements. 

Contact reporter Yang Ge (geyang@caixin.com)

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