Big companies are bullish and demand is huge — but renting is still the traditional broker's game | 2016 Big-Company Digitization ⑨

If we're going to talk about real estate for young people, it's time to take the rental market seriously.

Traditional big companies are still trying to reach young consumers, hoping to use the internet to remake their industry chains and the competitive landscape. QDaily presents its year-end 2016 digitization series — ten articles on what big companies gained and lost as they went digital. This is the ninth.

Few industries lean on the word "young people" as hard as rental housing.

Vanke's long-term rental brand Boya leads with the line "a long-term rental brand built for young people." Ziroom calls itself "a community exclusively for the young." Plateno (7 Days) hotel group's Woke Light Community writes "the metropolitan new youth's thirst for socializing" into its website copy. The wording all sounds more or less the same, and "youth" and "young people" are everywhere in it.

Open these brands' websites and the photos are mostly brightly colored walls and interiors; the pitch is about young people's social spaces and lifestyles. Some even cap tenants' age and require a minimum level of education.

Hunting for a flat in an app, electronic contracts, mobile payments, a "butler" you can reach in the app when something goes wrong — every step of renting a place looks as if the internet has remade it.

But in fact, even today, the vast majority of rentals still go through traditional agents. The average tenancy at these branded apartment blocks is only ten months — most people don't renew.

After renting a few times in Beijing, Shanghai, or Guangzhou, your demands may shrink to this: sign a contract without being cheated, no squabbling along the way, get your deposit back in full when you leave. And by the end you have enough experience to warn younger colleagues or students which rental traps to watch for.

Renting is a textbook sharing-economy service. Yet in a sector crowded with startups, brokerage giants, internet companies, property developers, and hotel groups, tenants still worry about the most basic things.

• China has 247 million floating-population migrants, 18% of the total population. With market demand on that scale, why has no rental brand reached scale?
• In big cities especially, the housing vacancy rate is 25% while finding a place to live is hard — so why has no effective platform emerged to fix this, the way Didi fixed the empty-taxi problem?
• The short-term rental market has produced a big brand in Airbnb, one that genuinely used technology to solve the trust problem. Why has the much larger long-term market struggled to build anything like it?
• Everyone says the brokerage market is a mess and cares only about selling homes. Why has no company managed to replace it?
• All kinds of big companies have moved in. Why do they all seem so halfhearted?

Every big company with any tie to renting has piled in

Over the past two years, companies with any link to rental housing — traditional agents, internet companies, property developers, hotel groups — have all moved into the branded apartment market.

In April 2015, at the opening of YOU+'s first Beijing apartment block, Lei Jun recalled that when he first came to Beijing 24 years earlier he too had lived in a basement and a farmhouse courtyard, so he understood just how much the idea of home means to anyone who moves to Beijing — which was why he felt a responsibility to help young people, and why he had invested in YOU+.

Those were Xiaomi's best days. In four years it had become the world's most valuable startup by using the internet to remake every step of the phone business. The 100-million-yuan investment in YOU+ was, at the time, the largest single deal Lei Jun had made since founding Shunwei Capital. And what it set out to remake was renting.

Walk up to the YOU+ block on Suzhou Street near Beijing's Zhongguancun and three black towers enclose a courtyard. Before you even reach the door you can see the internet's fingerprints: a UberStation kiosk stands by the entrance with a QR code on it — though scanning it now probably does little. Staff mention that a Mobike dock will go in here soon.

The front door has none of the access controls of an ordinary residential building. The product manager designed a secret button: if you know where it is, one press opens the main door. But once inside you still have to badge in — YOU+ staff say this is meant to make residents feel they belong to a community of familiars, all sharing a little secret.

That philosophy runs through the whole rental experience. You book a viewing through the WeChat account — not that there's much to view, since YOU+ has only two buildings in Beijing. After you book, a YOU+ "butler" replies within 12 hours; the wait reflects a screening process. You have to supply your name, age, education, income, industry, job title, interests, preferred unit type, expected length of stay, and a personal specialty.

Chen Jun, YOU+'s national community operations director, told QDaily that to keep up the quality of tenants' social life, YOU+ runs on a "three-noes" leasing rule: no one over 45, no married couples with children, and no one who dislikes making friends. Earlier on, YOU+ also stressed that residents who showed up at community events less than a set number of times would be asked to leave.

Meet all those requirements and you can move in. A typical single unit is under 30 square meters, with a bed raised above a writing desk — exactly like a university dorm. There is an en-suite bathroom with a shower; by the entrance, a small sofa and bar counter carve out a roughly three-square-meter reception nook.

Red walls, black radiators, tungsten-filament bulbs of various shapes overhead. This is what YOU+ calls American vintage.

Other themes include "anime girl" and "creative youth." Everything tells you this is not the unit some middle-aged landlord down the street once fixed up as a wedding gift for his son.

In the first month after you move in, community staff lead new tenants on a meet-the-neighbors round, and there are weekly themed gatherings, mostly in the ground-floor common room. On the wall there's still Lei Jun's signature from the opening, ringed by the names of people who have passed through the internet world across different eras: Gu Yongqiang, Liu Yonghao, Wang Xiaochuan, Ma Jiajia, Xu Dandan.

There wasn't much else left to change. Rent went from quarterly to monthly, payable by phone.

That is a typical reformed long-term rental apartment.

Similar internet-branded apartments are essentially doing the same thing: lease a whole building, renovate it to a single style, and offer services that are more or less YOU+'s model with a few additions or subtractions.

They set out to solve the headaches of renting — at the cost of charging more. Whole-building apartments in Beijing cost far more than nearby flats. One tenant at YOU+ Suzhou Street told us he pays 4,580 yuan a month for a unit under 30 square meters; with commercial-rate utilities, his monthly cost tops 5,000 yuan. A one-bedroom flat nearby goes for about 3,500 yuan.

Most branded apartments take a more scattered approach, fitting out individual units across different residential compounds to one uniform style.

The biggest player here grew out of brokerage. In June, Lianjia spun its long-term rental brand off into an independent company. Ziroom was founded in 2011 and had until then run as a business unit inside Lianjia.

Ziroom manages 300,000 units scattered across compounds nationwide — all in one decor — with everything from signing to paying rent, booking cleaning, and requesting repairs handled in the app.

Property developers and hotel groups are joining the business too.

This year, real estate companies rolled out long-term rental projects one after another. Longfor, China Merchants, Cifi, Gemdale, Yuanyang, Forte, and Jingrui have either chosen to partner with existing apartment operators or launched their own long-term rental brands. This July, Shilian announced a raise of more than 2 billion yuan to build 130,000 apartment units in tier-one and tier-two cities, purpose-built for rent.

Vanke, for its part, brought several long-term rental brands under the single "Boya" name in May. In the "octopus strategy" Vanke laid out at the start of the year, Boya is one of the tentacles.

Unlike the internet companies' model of subleasing units from landlords, property developers often bring their own held assets to the table — a comparatively "asset-heavy" approach.

The YOU+ model — leasing a whole building, renovating it, then subletting — is called "asset-light." A Boya spokesperson told QDaily that Vanke now runs whole-building Boya projects in more than a dozen cities, including Guangzhou, Shenzhen, Xiamen, Hefei, Chengdu, and Beijing, with asset-heavy projects making up more than half. Both Boya properties now open in Beijing are in Fangshan district.

If property developers enter the business on the strength of capital and real estate, budget hotel groups lean on their existing budget-hotel properties and their hotel management model.

At the start of the year, Huazhu Hotels Group put 45 million yuan into Xinpai Apartments; Huazhu also has its own long-term rental brand, Chengjia.

In June, Comma Apartments was spun off from Home Inns Group.

Add Plateno's Woke Light Community, which formally opened last September, and all three of China's big budget hotel groups now have long-term rental brands. Following the same expansion playbook as the budget hotels before them, these long-term rental brands born of budget hospitality have all chosen franchising. Huazhu has even introduced a hybrid that combines long-term rental with budget hotels — converting one floor of an Orange Hotel into a long-term rental apartment, for instance.

In short, the companies tied to rental housing are changing how we see property agencies. Their job is no longer just to resolve information gaps — they are now also service providers.

Over the past two years, the long-term rental market has come alive

(Compiled from public sources)

2010.1

Mofang Apartment founded

2011

Ziroom enters the apartment market

2012.10

Ziroom's first centralized complex, "Ziroom Apartment," opens

2013

Mofang Apartment secures US$60 million in financing

2013.1

Uoko receives 3 million yuan in angel investment

2013.11

Uoko receives US$4 million in Series A financing

2014.9

YOU+ receives a 100-million-yuan Series A led by Shunwei

2014.11

Uoko receives US$22 million in Series B financing

2014.12

Mogu Apartment receives US$25 million in Series B financing

2015.5

YOU+ receives US$30 million in Series B financing

2015.7

Mogu Apartment receives US$50 million in Series C financing and pivots to an apartment platform

2016.1

Wanliu International Youth Community issues a 1-billion-yuan long-term rental apartment industry fund

2016.3

Xinpai Apartment announces financing from Huazhu Hotels Group

2016.4

Mofang Apartment closes a Series C round of nearly US$300 million; Aishangzu raises 101 million yuan in Series A

2016.5

Vanke unifies its local long-term rental brands — "Vanke Yi," "Vanke Yiju," "Mi Apartment," and others — under "Boya"; Lianjia's long-term rental brand "Ziroom" announces its independence; Leyou City Youth Community receives 200 million yuan in backing; Xiaoluoquzu announces a US$5 million Series A

2016.6

Baozupo announces a Pre-A round of tens of millions of yuan; Comma Apartment spins off from Home Inns Group

2016.7

58.com–Ganji's "Branded Apartment Hall" goes live

2016.7

Shilian announces a 2-billion-yuan raise to build 130,000 long-term rental units, with total investment projected at 2.479 billion yuan

2016.9

Heyu and Mingzhao Capital jointly launch the "Youth Happy Nest Plan — Fund," expected to reach 1 billion yuan

2016.10

Uoko receives hundreds of millions of yuan in venture lending from Huarui Bank

But it seems no one has really changed this market

Centralized complexes like YOU+ and Ziroom Apartment require the operator to lease a whole building, renovate it wholesale, and then sublet.

But neither company has moved fast. Since the first Ziroom Apartment opened in 2012, only eight have launched in all; YOU+ has opened sixteen.

The raw numbers look passable, but in Beijing — where rental demand is strongest — Ziroom added only three buildings in three years. YOU+ has just two for now. Other youth apartment brands in the same category haven't expanded quickly either.

Scattered-unit apartments do somewhat better. But even Ziroom, the largest brand, with more than 270,000 scattered units, still holds a tiny share of the overall rental market. Ziroom's "intake managers," who find landlords willing to hand over their units and sign three-to-five-year contracts, earn ten times the commission for bringing in a new unit that they earn for renting one out. Sourcing apartments remains the hardest part of the whole operation.

As for the services each operator promises, user feedback suggests they aren't good enough to justify rents 20 to 30 percent above comparable local listings.

On the lighter end, Dingding — which had pooled all of Lianjia's rental resources and set out to improve brokerage through an app — couldn't keep going either. This June, Dingding Rental announced it was shutting down.

In the asset-heavy business of renovating whole buildings, just landing a property in a tier-one city is the first hurdle — and already a very hard one

Uoko CEO Liu Xiang recalled in an interview how the first property hunt in Chengdu went: "At the start, two colleagues and I spent a month and a half walking every corner of Chengdu on foot. We found a dozen or so buildings suited to a centralized operation, but couldn't get the prices down. The ones where we could negotiate were things like former military-industrial or state-owned properties — you'd need connections and pull to get a low price. That wasn't the future brand we had in mind, so we gave up." In the end they went with scattered units, sourcing individual rentals through agents and door-to-door canvassing.

A city doesn't have many buildings fit for conversion into centralized complexes. Vivi, head of branding for Woke Light Community, told QDaily that picking a property means good transport links — ideally on a subway line — plus attention to safety, fire-code requirements, and compliance with the government's rules for the sector.

YOU+ started in Guangzhou by picking a site near startup parks with easy transport, turning Colgate-Palmolive's old factory building into more than 600 apartment units. "The traditional approach of securing property by leasing is very hard — the profit simply can't cover the costs," said Chen Jun, YOU+'s national community operations director.

The advantages of centralized apartments are plain: the service radius afterward is tiny, and standardized renovation is easy to control — it's more like a traditional hotel business. Only this model lets you deliver post-move-in service efficiently; otherwise, when a problem comes up, the so-called "butler" can do little more than phone the property-management company.

But the buildings fit for long-term apartments can usually also house beauty salons, hotels, KTV venues, and other businesses that earn more per square meter than long-term rentals. For a long-term operator to land such a building and lease the whole thing, the price is simply too high.

So everything comes back to the ability to acquire property. "In practice, the impact the internet can have on centralized apartment operations is basically negligible," Liu Xiang told us.

As for property developers — the ones who actually can acquire property — they are, to some degree, being pushed along by policy.

Last month, Beijing put four land parcels up for sale. To rein in prices, the auction capped the top bid. During the bidding, the residential portions of all four parcels were ultimately won on the condition that developers hold them — meaning the developer who wins the land can only rent the buildings out, not sell them.

"From the developers' point of view, they haven't raised apartment operations to a strategic priority — they're trying every direction tied to property," said Chen Rui, a researcher at Lianjia Research Institute. Developers are currently also exploring senior housing and resort property.

Heavy upfront capital and a long payback period — this is not a business for quick money. Long-term rental apartments may end up the developer's last resort.

For agents who hold property information, selling homes is a far better business

Compared with traditional rental agents, Ziroom clearly earns more. After an agent matches a landlord with a tenant, it's easy for the agent to be cut out when the lease renews in the second or third year, which makes steady income from renting hard to come by. Ziroom's model swaps the brokerage fee for a monthly service fee: as long as the tenant keeps living in a Ziroom unit, Ziroom keeps earning.

But homes are just so much easier to sell. At a 2.7% sales commission, a 6-million-yuan home sold in Beijing nets the agent 160,000 yuan. On the rental side, even renting the same unit out once a year, it would take ten or twenty years to match that.

The upshot is that within Lianjia's sales hierarchy, junior agents handle rentals, and only after building up enough seniority can they move to home sales. What a brokerage actually cares about is obvious.

Inside any brokerage, the unit that holds the power will always be sales — all the more so now, with prices soaring. That is also a key reason Ziroom was spun off.

"Inside Lianjia, Ziroom was always a very different business. The organizational form it needs, its capability structure — even the systems and culture it has to build — share a lot, but also differ in many ways. So at this point, spinning it off will also be better for its organizational growth," Xiong Lin, CEO of Ziroom shortly after it separated from Lianjia, told QDaily. "Once a field like this [long-term rental apartments] has been proven out, splitting the team off this way also gives it more responsibility and room to grow."

This is a seller's market — internet platforms can't even get landlords to fill in a form

There is no shortage of rental platforms. But ones that can guarantee genuine listings are scarce.

Long Dongping, co-founder of Mogu Apartment, told QDaily: "The reason no apartment-search site today can deliver accurate information is built into its business model. As long as you pay, you can post an ad. And because listings are ranked by price, ad prices keep dropping, which in the end produces a flood of duplicate and fake listings."

Since you have to go inspect any unit in person anyway, both agents and landlords post prices well below the real rent to draw calls. These platforms end up working as online phone directories.

Dingding Rental — also a Lianjia subsidiary — built an online rental platform starting in 2014. Its core pitch was "zero commission, genuine listings," meant to fix the old problem of agents advertising below-market prices and then hiking them at the door. It charged the agency fee to landlords, not tenants.

Niu Huanqiang, senior marketing manager at Dingding Rental, told QDaily that to ensure every listing actually existed and was truly available, the team had to vet each property submission — specifically by cross-checking the unit's location, building number, floor plan, and area against the property database Lianjia had built up over the years.

But even Dingding's model couldn't survive. The apartments were just too easy to rent out. The original idea — getting landlords to pay a brokerage fee in exchange for joining a verified-listings platform — was soon abandoned.

What a platform can change in this market is very limited. And however much of a hassle the process is, you only go through it about once a year. Unlike a short-term platform such as Airbnb, where a property might be rented out dozens or even hundreds of times a year, so landlords have every reason to post accurate information and every guest review carries weight, the economics on the long-term side simply don't push the same way.

The root cause: the profits from long-term rental are too thin, and no one agrees on how to do it

Better service in exchange for higher rent — for branded apartments it's a simple, direct idea.

The trouble is that the service they can actually add up to isn't much. Even if you can file a repair request or reach a butler in the app, the fix still ends up going through the property-management company. As for the cleaning that comes every two weeks — or less often — in a world where on-demand home services are everywhere, that's no differentiator.

Nor can the social features every operator wants to emphasize really be forced.

Ju Jun is a content creator. A month and a half ago he moved into the YOU+ block on Suzhou Street in Beijing. Young residents, the chance to socialize, the standardized decor — these were all things that drew him to YOU+.

"If you're a lively, outgoing person, you can make a lot of friends here," he said. But in the month and a half since he moved in, Ju Jun hasn't been to a single event and barely speaks in the WeChat group. Asked whether he had made any friends there, he answered: "I haven't really gotten around to making friends yet."

Recently, YOU+ converted half of what had been common space into a co-working area.

Asked whether he would renew when his lease ran out, Ju Jun said: "I'll probably look for somewhere else. The soundproofing here isn't great." In a single month, he had already watched plenty of people come and go in the WeChat group.

Several apartment operators interviewed by QDaily said their occupancy is currently 90% or even above 95%. But another figure — the renewal rate — can't be called high.

Chen Jun told us YOU+'s average tenancy runs over ten months. A Woke spokesperson said Woke Light Community's tenancy varies more widely, averaging around a year.

"The current long-term rental market has a short-tenure problem on both sides of the market: tenant leases are short and building leases are short. That is very unfavorable for cultivating professional, large-scale rental operators," said Yang Xianling, dean of Lianjia Research Institute, at the 2016 Internet Real Estate Services Forum.

"It's not just apartments — traditional agents have low renewal rates too. Young people are highly mobile, with shorter average tenancies, which drives up operators' customer-acquisition costs," Chen Rui added.

Heavy upfront investment and thin margins are the other problem facing the whole industry.

"This is an extremely asset-heavy model — like being a landlord yourself," said Long Dongping of Mogu Apartment, founded in 2014 with an initial focus on shared apartments for single white-collar workers. "The early outlay is renovation costs and the rent you pay landlords. For every thousand units, you put in 40 to 50 million yuan; it takes a year and a half of renting before you recoup the renovation and furnishings. The profit only comes after that. We sign eight-to-ten-year contracts with landlords — the money is made in the back half."

"You have to watch the renovation schedule — the minute it's done you need it rented out. Every day it sits empty is a day of lost income." Recalling those early days, Long Dongping still sounded a bit pressed for time.

A year and a half is actually on the shorter end of the payback estimates. Among the other companies QDaily interviewed, recovery timelines of five, seven, even ten or fifteen years came up — meaning the upfront outlay takes five to ten years to earn back.

With prices surging lately, that figure will only move further out.

And among people in the industry, there's no consensus on whether scale is good or bad.

"At one point we scaled up to 10,000 units all at once. By 2015 we realized we couldn't keep going like that — the money we'd raised was about to run out," Long Dongping said. "This is a small-and-beautiful market. The overall market is enormous, but for apartment brands, small and beautiful is the big trend. A few hundred units and you're comfortable; scale up and your profit gets eaten alive — hire a few more people and it's gone."

In 2015, Mogu pivoted from running its own apartments to building an apartment management system, getting ready to serve operators of every size.

Uoko CEO Liu Xiang, by contrast, said you can't even think about profit until you have more than 10,000 units. A brand director at a developer-run apartment operation told QDaily: "Internally, we have to model a 15-year lease term before the math works. The margin is in the single digits."

Soaring prices, heavy upfront investment, sellers in absolute control, too many more lucrative businesses next door to property — in the end, the return on branded apartments holds little appeal.

Making money too slowly may be the one thing everyone in this industry agrees on right now. Until those underlying factors change, renting will stay an ordeal.

Cover image from Kimson Doan via Visualhunt; YOU+ International Youth Community