Recently, a large number of second landlords have hit the market, from Wework to long-term rental apartments, which are essentially businesses that provide efficiency and services, charging the price difference between landlords and tenants. However, at present, the common problems of rent upside down, huge losses and frequent thunder can not be solved.

Once the unicorn Wework experienced several twists and turns, the valuation chopped and chopped, is still the listing failure. Even investors have lost a lot of money. On November 6th, Softbank Corp. Group reported its first quarterly operating loss in 14 years. It is reported that Softbank Corp. recorded an unrealized loss of 537.9 billion yen related to his investments in companies such as UBER TECHNOLOGIES INC and WeWork in the third quarter, of which the investment loss of WeWork alone reached 497.7 billion yen.

However, Q&K International Group successfully landed on NASDAQ on the evening of November 5, becoming the first share of a long-term rental apartment, rising 6.32 per cent after two days of listing. In addition, the second long-term rental apartment stock is also on its way, and the eggshell apartment formally submitted its prospectus for listing in the United States on October 28th, tentatively under the code "DNK".

Wework, which failed to go public, fell into a more difficult situation and began to survive. What new challenges are the successful Q&K International Group and eggshell apartments waiting for listing, as well as more second landlords, facing?

Housing rental is an important area related to the national economy and people's livelihood, the state attaches importance to, the policy is good, all kinds of capital also want to get a piece of the pie. At present, the industry is still in the stage of relatively "barbaric growth", with many problems and opportunities. Looking ahead, there will be great companies in the leasing industry. But back to the present, rent upside down, thunderstorm frequency is now a long-term rental apartment can not avoid the topic, listing the introduction of public capital, what is the problem that can not be solved?

I. Industry: there is logic and room for growth.

1. The existence logic of leasing platform.

At present, all kinds of long-term rental apartments are mainly operated by institutions in the rental market. Despite the strong demand for housing rental, China's traditional housing rental market is fragmented and inefficient, with individual owners and tenants facing many pain points. This provides a huge opportunity for the long-term rental apartment platform.

Specifically, there are the following major pain points for owners to rent their own houses:

1) cost of decoration, furniture and maintenance

2) dealing with agents and potential tenants requires a lot of time and effort

3) losses will be incurred during the vacancy period after the expiration of the contract.

The main pain points on the tenant side are:

1) the sharing of large apartments, the composition and reliability of roommates

2) contract negotiations and later disputes with landlords / agents (unscrupulous landlords)

3) Private landlords generally have no sense of service and lack of maintenance services.

On the other hand, the long-term rental apartment platform provides an institutional solution for the inefficient rental market. They centrally manage a large number of apartment units, lease them on a large scale and convert them into standardized and refurbished units, while providing efficient transaction processes and post-lease services. In this way, the common living platform solves the suffering of tenants and owners.

2. the growth space of the long-term rental apartment market.

China's residential rental market is large in scale and developing rapidly. In 2018, about 200 million people in China lived in rental housing, accounting for 1.8 trillion yuan of total rental income. According to iResearch, the market is expected to grow to 3 trillion yuan by 2023.

The first-and second-tier cities with active economy, concentrated population and higher housing prices accounted for 67% of the total rental market in the country, and the total rental income of the first-and second-tier cities rose to 2 trillion yuan from 1.2 trillion yuan in 2018.

The growth logic of long-term rental apartment industry space is "high growth of rental market" + "increased penetration of institutionalized long-term rental apartment platform", as follows

1) urbanization continues, and the population is more and more concentrated in the first-and second-tier core urban agglomeration.

At present, China's urbanization rate is about 60%, which is still some room for 80% of developed countries. China's urbanization rate is expected to rise further to more than 70 per cent by 2030, which means that the urban population will increase by 170 million and will be more concentrated in first-and second-tier cities.

2) under the high price-to-income ratio, the willingness to buy a house decreases and the average age of buying a house becomes higher.

When the house price is beyond the range of people's income, under the blessing of policies such as the same right of rent and purchase, the once necessary option of buying a house is gradually abandoned. In 2018, about 43% of young people accepted the idea of renting indefinitely rather than owning property, according to iResearch.

In addition, even those who insist on buying a house have appropriately postponed the time of buying a house. According to iResearch, the average age of first-time buyers in first-tier cities rose from 30 in 2013 to 35 in 2018, adding an extra five years of rental time.

3) accelerated increase in residential rents

In recent years, the growth rate of average housing rent in China is much lower than that of house prices. Looking ahead, housing rents will grow at a faster rate, especially in first-and second-tier cities with strong demand.

4) increase the platform penetration of long-term rental apartments.

As the long-term rental apartment platform has solved many pain points of scattered leasing, with the support of policies and funds, it is an inevitable trend to become bigger and bigger. According to the experience of the United States and Japan, the market share of long-rent apartments run by institutions is about 57% and 80%, respectively. As of the end of 2018, long-term rental apartments run by institutions in China accounted for only 2% of residential rental properties, and there is still a lot of room for growth.

II. Competition pattern

Apart from the traditional intermediary, long-rent apartments can be divided into "housing enterprise apartments", "centralized apartments" and "decentralized apartments".

Among them, although the housing enterprise department entered the bureau relatively late, it has significant advantages in capital and resources, and is expanding and opening at a very rapid scale. According to Kerry's data, by the end of 2018, Vanke Park apartment, Longhu Guan apartment and Xuhui apartment have been expanded by a total of 230000, 100000 and 50, 000, respectively, ranking among the top three of the 2018 housing enterprises.

As a result of early entry and more flexible expansion (scattered in various communities), decentralized apartment operators are currently the largest branch of business. By the end of 2018, free, mutual apartment and eggshell apartments ranked among the top three in terms of the number of houses managed by 800000, 700000 and 400000 respectively. (note: Kerry is a third party, there is a discrepancy between the data and the prospectus; here we need to compare, using Kerry data)

By contrast, the scale of centralized apartments has expanded much more slowly due to capital and resource constraints, with Rubik's cube apartments, World Union Hongpu and Lehu apartments in the top three on the list, with 70, 000, 35000 and 30500 respectively.

Third, looking at the long-term rental apartment from the perspective of eggshell young guests: the scale is high, the rent is still upside down, and the risk of thunderstorm is decreasing.

1. High scale growth and high occupancy rate

The eggshell and Q&K International Group on the market are both decentralized operators with large scale and rapid expansion. Among them, eggshell apartments were established in 2015, and the number of apartments managed by them was 2434 at the end of 2015 and 23600 at the end of 2018, with a compound annual growth rate of 359.7%. As of September 30, 2019, the number of apartments managed by eggshells has reached 40700.

In terms of vacancy rate, when the growth accelerated in 2017, the occupancy rate of eggshell apartments decreased significantly. However, with the establishment of the brand and the maturity of the market, the occupancy rate of eggshell apartments has gradually increased in the past three years, to 86.90% as of September 2019.

Qingke started apartment rental business in 2012. According to the prospectus, there were 96529 apartments managed by Qingke by the end of 2018, an increase of 99.40% over the end of 2017; on June 30, 2019, there were 97621 apartments in five cities, including Shanghai, Suzhou, Hangzhou, Nanjing, Wuhan and Beijing.

In the past three years, Q&K International Group's occupancy rate has been around 90%, which is at a relatively high level. On the one hand, the expansion rate of the green guest is not as radical as the eggshell, on the other hand, it is because the target group is a wider range of people, including fresh college graduates, entry-level white-collar workers and industrial workers, with an average monthly rent of less than 2000 yuan.

Eggshell and Qingke are among the leaders in the fierce melee of long-rent apartments, which have achieved rapid expansion in the past few years and maintained a high occupancy rate.

2. Rent upside down

However, one of the difficulties faced by all current long-term rental apartment platforms is that rents are upside down, scale expansion, revenue growth, and growing losses.

In 2018, the total income of rent + service charge for eggshell apartment was 2.675 billion yuan, of which the rental cost was 2.172 billion yuan, including sales, decoration, management and other operating costs of 1.725 billion, interest expenses of 163 million, and finally recorded a net loss of 1.37 billion.

Q&K International Group's situation is similar, with operating income of 797 million yuan, rental cost of 665 million yuan, other operating costs and expenses of 652 million yuan and interest expenses of 77 million yuan in fiscal year 2018 (September 2017-September 2018), resulting in a net loss of 500 million yuan.

In terms of proportion, the net losses of eggshells and Qingke both account for more than 50% of revenue. This means that 150 yuan of investment can only be exchanged for 100 yuan of revenue. So, is there any possibility and room for improvement in the cost input of 150 yuan?

From the perspective of the changing trend, eggshells and green guests have not yet reached the level of scale effect, and the main cost items are still rising in recent years. Especially the rent cost which accounts for the largest proportion, the rent cost of eggshell and Q&K International Group has increased significantly in the past three years. Eggshell apartments rose from 77.91% in 2017 to 89.01% in September 2019; Q&K International Group rose from 79.20% in fiscal year 2017 to 80.10% in mid-2019. In terms of the increase in rental costs, the situation of the green guest is better than that of the eggshell.

Secondly, the amortization cost of secondary decoration and home decoration has also remained high, with eggshell depreciation and amortization expenses accounting for 15.07%, 13.95% and 15.81% of revenue in 2017, 2018 and 2019, respectively. Qingke's proportion of this cost is even higher, accounting for about 17% of revenue.

In addition to rent and decoration costs, several major expenses of long-term rental apartments include: sales expenses, administrative costs and research and development expenses. With the gradual intensification of competition, the investment on the sales side is increasing. The proportion of eggshell and Qingke's sales expenses in 2019 was much higher than that in 2019, of which eggshell sales expenses in 2019 were-794 million yuan, accounting for 15.88%, and Qingke's sales expenses in the first three quarters of 2019 were 102 million yuan, accounting for 11.37%.

In terms of administrative costs, the characteristics of decentralized long-rent apartments determine that their management costs are high, and it is difficult to improve efficiency after the scale. The latest administrative cost of eggshell is 7.92%, while that of Qingke is 8.47%.

After the pre-APP construction period, the R & D cost only needs to bear the cost of renewal and repair, which is a subject of very large-scale effect. For both eggshells and green customers, R & D costs as a share of revenue are declining.

3. The seller leverages ultra-high leverage through the tenant.

"the platform runs away, and the tenants are driven out of their homes by the landlord, but they still owe rent loans to financial institutions." recently, such scenarios have happened more and more frequently, and long-term rental apartments have also changed from the leader of improving the environment of the rental industry to a fraud syndicate in the hearts of ordinary tenants.

How does this original sin come into being, and why does the long-rented apartment platform have the motivation to do so? Large investment, greater losses, scale growth requires money, where does a lot of money come from? Long-term rental apartments choose to add leverage to the sales side.

At present, the most common way is consumer loan, through rent profit and other ways to guide tenants to use consumer loan to pay rent by installments. As a result, it is equivalent to an one-time recovery of the annual rent, while the tenant establishes a lease relationship with the platform and a loan relationship with financial institutions.

This is equivalent to financing financial institutions in advance through the tenant's credit to pay monthly rent. This is an important source of funding for platforms that pursue rapid expansion. For tenants, it still seems more convenient to pay rent on a monthly basis, or even enjoy a rent discount, which is a good choice.

It is still one that provides housing and services at a monthly rent. The essence of the business has changed from the second landlord who earns the difference to the financial products based on the underlying assets. It seems to be peaceful, with the platform recovering rents in advance, the profit margin of financial institutions, and the convenience of rent discounts and monthly payments for tenants.

However, in this case, the actual leverage of the platform is very high, once the sales side performance decline, capital turnover can not come, the platform capital chain will be broken. As the second landlord's platform thundered and ran away, the landlord had the right to reclaim the house without receiving the rent, and the loan relationship between financial institutions and tenants was still established, and the most vulnerable tenants had to pay their debts while being driven out of their residency. the object of safeguarding rights is only a platform that has long been nowhere to be seen.

Since 2019, thunderstorms have occurred frequently, and the proportion of rental loans has declined. According to the prospectus, 91.3% of valid leases of eggshell apartments in 2017, 2018 and the nine months ending September 30, 2019 used cash loans, respectively. As of June 2019, Q&K International Group had 65.2 per cent of valid contracts using cash loans.

Summary:

The long-term vision of long-term rental apartments is established, but the most important thing is how to solve the above problems in the short and medium term.

At the existing business level, on the one hand, the rent on the sales side rises, which exceeds the rental cost agreed with the landlord to achieve the transcendence of the revenue side and eliminate the rent upside down. This mainly depends on the improvement of market concentration and the economic and psychological affordability of tenants to rent. Secondly, it is to reduce sales, administration, decoration and other costs, from the above data, there are still difficulties.

Another idea is to provide value-added services for a large number of tenant resources, which is equivalent to the role of property management companies. However, for eggshells, green guests and other decentralized long-rent apartments, the maneuverability is not big.

Finally, what problems can be solved by going public? The greatest certainty is the promotion of brand endorsement and the expansion of financing channels. As an alternative channel for cash loans, there is no original sin in many cases.