Stylish rental homes gain favour with urbanites

Gehong returned to China from the US in 2008 after taking part in the launch of JW Stone, a real-estate investment trusts (REIT). He became president and CEO of Grand China Fund, a Chinese real-estate private equity fund, before founding the China Young Professionals Apartment (CYPA) Management in 2012. He is also a partner with SAIF Properties Fund.

Here Wang explains why the dividend of the “secondary leasor” model is gone, and how to survive now, businesses have to compete on quality.

Can you give us a brief introduction to CYPA?

It’s a long-term contract apartment brand founded in 2012. In Beijing we have projects in Guomao, the Forbidden City, Shunyi and a future one in the 798 art zone. We are very detail-oriented. For example, we offer electrical cars and bicycles to our tenants for free. There is no smell in the building because we provide proper garbage disposal facilities. Many young women decide to settle at our developments once they enter the lobby and smell the fragrance – prices matter less.

How do you view China’s professional rental market?

I see a huge market. China’s millennials are much more willing to spend on a good quality of life. They have low tolerance of the long commute and prefer to rent near their workplaces or subway stations, despite higher costs. For them, where they live is not just an issue of accommodation but also lifestyle, health, identity and attachment.

I did intensive research before establishing the startup. I found two key decisive factors for young people. The first is size and total price of an accommodation (a steep total price is unacceptable). Also, there should be surprises. When my designers consult me during renovation, I tell them not to worry about how to satisfy “me”, but how to satisfy our potential customers. Our quality products and services differentiate us from our rivals and that is why we can charge a 30 per cent premium.

Why do you think many similar businesses fret about rising rent.

I’ve long argued that the dividend from the “secondary leasor” model is gone. Ten years ago, economy-class hotel chains mushroomed in China’s biggest cities because landlords were not clever as they rented their buildings at very low prices. Now rent in the biggest cities are rising every year and those chains have been squeezed by the narrowing gap between cost and rent. That’s why I say the day when we could compete on just quantity and price are over.

Landlords in today’s biggest cities are being chased by hotel chains, rental condo, co-working space, specialty clinics and so on. We face a grim environment as rising rents are trimming profits. So our only path is to make the best products and charge a premium. This way we can also gain an upper hand in negotiating with landlords because rent is not their sole concern. A good brand can also help landlords boost their asset value.

As you prefer the buyout model, how do you plan to scale up?

Buyout is good but to achieve that you need a very professional team. Global private equity funds such as Blackstone Group mobilise a very professional team that built a reputation for distressed asset buyouts. But sometimes competition is so intense that it’s hard to find anything to buy. Another good model is brand export. We don’t pay the rent or revamp costs, making it a true “asset-light” model.

So it’s really important to prove to my partners that my flagship store can succeed. Once we achieve this, reaching scalability will be easy. We are ready to launch our expansion plan this year. I plan to open more than 10 projects nationwide this year, mainly on the brand-export model. My investors told me the first project would be really hard. From the second to 20 is also difficult. But going from the 20th to 100th will be relatively easy.

Andrew Yan (the Chinese private equity specialist and founder of SAIF Partners China who backed Wang in creating CYPA) is famous for saying he will not invest in the property sector. How did you win over his support?

Yan invested in my firm as an angel investor. I told him that I’m not doing property. Instead I’m creating a “consumer good” for the urban young. There are houses everywhere. But I’m creating space, a community. Think about Starbucks: it’s much more than a space. He asked me how much do I need. I said 20 million yuan. He gave me 50 million yuan. He is really sharp.

CYPA has also established a joint venture with Mao Daqing’s URwork(a co-work space brand) . We created a brand “zuoyou” that is going to cater to entrepreneurs.