Redefined: China’s highly fragmented and inefficient residential rental market.
Founded in 2015, the mission of Phoenix Tree Holding Limited (“Danke”) (NYSE: DNK) was “redefining China’s highly fragmented and inefficient residential rental market through technology.”
By the end of 2020, however, the innovative rental model and redefinition of the market took the shape of Danke Apartment landlords cutting off electricity and water to tenants and even a tragic suicide of a tenant who jumped out of his 18th floor apartment (Chinese only).
Danke’s business model was to source and lease apartments from individual property owners on a long-term basis, design, renovate, and furnish such apartments, and then rent them out to individual residents.
With favorable policies and significant financial support, the company grew at a meteoric rate. The number of apartments under management has increased approximately half a million by the end of 2019.
But this rapid growth strategy, or rather growth at all costs, was the company’s downfall.
Danke’s business was to match landlords with tenants and did not own property by itself. To increase its stock of properties for rent and to show significant growth the company consistently offered landlords a premium on their rentals, and then invested additional funds in design and renovation. To maintain rapid growth the company then rented out the apartments at low prices.
Growth, at all costs, was the vision.
To further “redefine” the market and to provide the funds to continue this rapid growth, Danke then started charging renters on an annual basis (while still paying the property owners monthly).
The majority of Danke’s renters were unable to pay the rent one year in advance, however, and ended up taking out loans from affiliated financial institutions. At this point Danke was financially over-leveraged, it’s renters were financially over-leveraged, and property owners were having a field day getting a premium on their property. A perfect time for a listing on the New York Stock Exchange.
The listing, however, did not change the fundamental fact that the business model was flawed — and as Danke rose like a rocket it fell like a stick.
The year 2020 brought about a sharp drop in new tenants and rise in existing tenants that could no longer foot the bill. Danke’s property owners have since found themselves no longer receiving rent; and renters who took out loans or paid rent a year in advance found themselves without running water, electricity, or even a place to live. By the end off the year, Danke took all apartments on its APP offline (Chinese only).
Another market “redefined”.