Yujian Apartment failure sparks alarm bells for Chinese rental sector
- Start-up backed by Xiaomi tech guru Lei Jun shuts shop leaving thousands of landlords and tenants in the lurch
The bankruptcy of a major Chinese rented-flat operator backed by Xiaomi founder Lei Jun has highlighted the inherent risk of the previously high-flying sector’s heavy reliance on debt-fuelled growth, according to analysts.
Hundreds of landlords have reported over the past week that they have not been paid October rents from Shanghai-based Yujian Apartment while many of the firm’s tenants say have been asked to leave their flats if they owe rent.
A local bank is also believed to have warned the business to meet its commercial obligations.
Founded in 2014, Yujian claims to manage around 20,000 flats nationwide through various brands.
Tech guru Lei has made two separate investments in the operation, in 2014 and 2015, through his Shunwei Capital and Ce Yuan Ventures.
“I was surprised when I heard the news because unlike many small operators, Yujian is relatively established in the sector,” said Chen Lei, an analyst with zhuge.com, a property listing firm.
“If a firm of its size has liquidity problems, you can guess what’s the condition of other smaller start-ups.”
Yujian is one of around 1,200 rented flat managers registered in China, in a sector which has grown wildly thanks to the government’s recent endorsement of the residential leasing market as an alternative to buying and a way of discouraging investors from holding flats empty.
But strikingly, it becomes the seventh and so far largest such business to fail this year.
In August, another major operator, Hangzhou-based Dwell You, shut up shop due to cash flow problems, leaving 1,700 tenants and their landlords in the lurch.
Analysts say the growing failure rate is due to the sector’s typical business model, which for years has been too reliance on equity and debt capital fuelling what has at times been reckless expansion.
Both Dwell You and Yujian both completed several equity funding rounds and borrowed from multiple banks to scale up their operations.
They had also been known to have been obtaining so-called “rental loans” in tenants’ names from banks or online lenders, sometimes without tenants’ knowledge. The tenant’s monthly “rent” payments were, in fact, loan repayments.
Operators could received a year of rent from such a loan, while paying landlords only monthly, giving them ready, interest-free cash.
Operators also sold the loans as an appealing finance option. If tenants used a loan to pay rent they could just pay one month rent and deposit, in some cases even discounted monthly amounts.
When things work well the option could appeal to all sides, but when operators failed to pay landlords due to liquidity stress, operators, landlords, tenants and online lenders could become locked in bruising, drawn-out disputes, analysts explain.
“If governments don’t take action to check these lurking risks there will be a rash of more bankruptcies before the end of the year,” said Hu Jinghui, former vice chief executive of 5I5J, a major property agency. “Millions of tenants could be evicted by landlords and be left homeless.”
Tommy Jun, who rents a Yujian property, said he has lost 2,700 yuan (or US$389, three months rent) since he opted to borrow 11 months of rent in exchange for lower upfront payments. His repeated calls to Yujian’s customer service department have gone unanswered.
In a statement to tenants, Yujian admitted that it faced a severe cash shortage, that it had collateralised all its asset to pay back its bankers, and that its accounts had been frozen.
Some tenants have been reported as saying they have been told that another Shanghai operator is in negotiation to take over Yujian.
“A major reason for Yujian’s failure is that its management failed to catch up with its rapid expansion,” said Chen. “Low rental yields have squeezed business margins, forcing many to burn cash. It will not be the last to go under.”