China’s recent real estate boom may soon be grinding to a halt, leaving a huge gap between housing speculators with two or three idle pieces of property, and young graduates, couples, and migrant workers who can’t afford an apartment in cities where prices of 100,000 RMB per square meter (about $15,000 USD) rarely raises eyebrows.
Serviced apartments or “white collar apartments” could bridge the gap. Middlemen lease unfurnished apartments from landlords or real estate developers, spruce them up, and then sublet them to tenants while providing added services like housekeeping and maintenance.
Figures show that there were about 1 million sets of serviced apartments last year, a number that is expected to double by the end of 2016, according to a report by the China Hotel Association. Seven out of ten of theses serviced apartments were leased from individual homeowners, while the rest came from real estate developers, shedding light on just how much the market has overbuilt and over bought.
MOMFO, a startup based in Shanghai, is helping serviced apartment franchises raise money from individual investors. For apartment operators, the cost of furnishing and building supporting facilities is a large, one-off investment, while capital inflow from rent is a much longer process, spanning six months to a year. Ling Jun, the CEO of MOMFO, says they’re creating a platform to help operators raise capital so they can focus on providing better services. In the meantime, investors can earn some returns – the rate is 10% if you keep your money with MOMFO for three months.
But there’s a catch. The reason why operators struggle to obtain loans in the first place is serviced apartments have little or no collateral. The companies have no ownership of the apartments, hence the wariness from banks. At the end of the day, what MOMFO is selling on its platform is a wealth management product and investors are putting their faith in MOMFO’s contracts with the serviced apartment companies and a fund custodian. This is supposed to ensure that the MOMFO doesn’t handle the funds directly and eliminates the possibility of cash pools, the notorious factor behind many of China’s recent P2P defaults.
More importantly, they are betting that once in service, these serviced apartments won’t be vacant. Mr. Ling claims that there won’t be solvency issues unless more than half of the existing tenants fail to pay rent.
At least for now, venture capitalists are wagering on the market. The company raised 95 million RMB (about $14 million USD) in their Series A round last week from Gobi Partners and Kaitai Capital, a Hangzhou-based firm. Michael Zhu, partner at Gobi Partners, said in a release that they were happy to support MOMFO in tapping into underused property to create revenue for companies and investment returns for the wider population.
Housing prices in China have blown through the roof, prompting potential homeowners to rent instead of buy. Despite this, Chinese people are still very much attached to concept of “property” and “land.” Given the country’s history in the past two decades, the idea that real estate is a surefire form of investment has become deeply embedded in people’s minds.