Facing eviction from an apartment managed by “second landlord” platform Danke Apartment, a young graduate jumped out of his 18th story apartment after setting it on fire in Guangzhou Dec. 3. 

The tragedy was only the latest fallout from the troubled second landlord industry. Numerous tenants of Danke Apartment flocked to social media in recent weeks to share their experiences of being evicted by landlords from their apartments. Some said that the locks of their rooms were changed and they couldn’t go back home after coming back from a business trip. Some said their water, electricity and gas were cut off. 

The crisis at Danke, fueled by mismanagement of small loans and a race for growth, is further spurring a conversation about financial risks associated with major tech platforms—one that’s recently had serious consequences for Ant Group’s IPO.

Thousands of landlords claim they haven’t received the rent from the company for months, while tenants insist that they have been making payments. Many Danke tenants borrow money to pay the platform a year’s rent in advance in return for discounted rates.

It’s not just landlords and tenants. On Nov. 10, hundreds protested at the company’s Beijing headquarters, including suppliers and maintenance workers. Similar protests have happened at Danke offices in different cities across China.

(Image credit: TechNode/Chris Udemans)

Danke, which means “eggshell” in Chinese, is a second landlord platform in China. Similar to Wework, second landlord platforms rent whole apartments on a long-term lease, then divide them into smaller units and furnish each one before subletting them. The company was listed on the New York Stock Exchange in January this year, becoming the second Chinese long-term rental player to list in the US. However, since its founding in 2015, Danke is yet to make a profit.

The company has relied on rental loans to fuel its growth. Under this model, Danke gets one year’s rent upfront directly from a partner bank, while tenants make monthly loan payments in lieu of paying rent. Meanwhile, Danke pays landlords on a quarterly or monthly basis, creating free cash for rapid expansion. But the loans model meant that when a platform runs out of money to make rent payments, tenants can face eviction while still owing money to a bank.

READ MORE: ‘Second landlord’ platforms get tenants in debt to fund growth

By March this year, Danke reported operating over 415,000 apartments in 13 cities. According to Danke’s financial reports, it recorded a net loss of $174.3 million in the first quarter this year, 51% wider compared to the same time a year earlier. In 2019, its annual net loss stood at $493.7 million.

We don’t know the exact number of tenants affected, but Danke partner Webank said Dec. 2 that about 40,000 evicted tenants have registered with them. On Dec. 4, Webank began allowing evicted tenants to assign responsibility for the debt to Danke, in a measure widely assumed to be a response to the Guangzhou suicide. 

 Anger at Danke

The suicide of the fresh graduate fueled people’s mounting anger towards Danke, many expressed sorrow and anger online. In a typical post, a Weibo commentator wrote: 

When will the government deal with this case? Those cheated are mostly poor young people who have just stepped out of the ivory tower. Danke operates [around] 500,000 apartments and serves more than 1 millions tenants around major cities in China, it’s a big issue relating to people’s life. It’s now in a crisis, but no one deals with it—so disappointing.

Danke’s flawed business model has also been condemned by establishment voices:

More evilly, this business model transferred its potential risk from the apartment operator to the landlord and tenants. The company took the profits while leaving the risks for financial institutions or even the whole society.

— Caixin editor Zhang Hong, in a Dec. 2 podcast.

Who’s to blame?

But other voices argue that the model isn’t all bad. Business outlet Latepost argued that the second landlord model is a good idea brought down by risky finance:

An investigation into Danke crisis: in this game of chance, the whole society pays

Latepost
Nov. 27, 2020

The business of long-term apartment rental is not irrational: It has real demand. The “floating population” accounts for nearly 20% of the whole population of China. When renting a house, the quality of its decorations cannot be guaranteed, and disputes always happen when a tenant checks out. 

However, long-term apartment operators can change this situation. They improve living experience with standardized decoration and use technology to match supply and demand efficiently. Tenants can find their ideal apartments more easily, while property owners can rent out their houses more quickly. It’s a win-win strategy. 

 …

But when startups go with the flow of the internet industry and focus on unrestrained expansion, risks will build up quickly. As the industry deliberately pushes tenants to take out rental loans in order to take advantage of the time gap to fuel its expansion, the main risk bearers will no longer be the startups and venture capital investors. 

If the company fails, founders and investors take the risks of entrepreneurship; but property owners’ rent will also be delayed; tenants may be evicted while still having to pay the loans; suppliers bear the debts and workers cannot receive their wages. 

Now everything is in a mess.

No matter how this farce ends, one truth cannot be hidden: business growth relying merely on debt increase will inevitably accumulate risk. Leverage can multiply gains, but also intensify loss. They will not disappear into thin air. 

Webank, an online bank owned by Tencent, also found itself at the center of the crisis.  As Danke’s rental loan partner, Webank helped fund Danke’s wild expansion and allowed Danke to get away with loaning more than 30% of the rent to its tenants, which is the upper limit set by the government.

Several state media outlets blamed internet financial institutions like Webank for lax enforcement of lending rules—such as this article in the state-owned Economic Daily, later deleted.

Regulation of rental loans should be strengthened

Economic Daily
Dec. 2, 2020

The government has required companies to open a custodial account to manage rent and deposits. If related rules were implemented strictly, the money would not be appropriated. Of course, it’s difficult to to count on banks to enforce this rule, so the relevant authorities should take the lead to strengthen oversight of rental loans.

If the company is paying rent monthly, the article recommended, the bank should issue the loans month by month.

According to the rule, if tenants paid rent monthly, then Webank should not pay Danke the whole year’s rent at one time. Traditional banks would have to evaluate every month when they lend; the whole process is complicated. But online banks can innovate payment methods, simplifying operations and allowing rental loans to be granted and repaid on a monthly basis.

A broader moral?

Another piece from Guangming Wang, a state media website, drew a broader lesson from this crisis. 

The broken “eggshell” (Danke) shows the embarrassment of the regulatory environment

Guangming Wang
Dec. 2, 2020

The crisis, the article wrote, was the inevitable result of a new business model under an old regulatory system. It also tied this crisis to the failure of P2P lending—a disastrous case of under-regulation that’s remembered as the original sin of Chinese tech regulation—stating that “the improvement and innovation of related systems have reached a critical point.”

To solve this kind of problems, we should seize the momentum, accelerate reform and innovation of related systems, enhance effectiveness in the operation of the systems, so as to boost the development of new business and new models,” the article read. 

Guangming Wang wasn’t alone in connecting the dots between high-profile failures of star Chinese tech companies.

An article from Digital People TMT, a website belonging to the People’s Daily group, compared Danke to three other failed Chinese companies—LeEco, Ofo, and Luckin Coffee—all of which relied on immense funding for “blitzscaling” growth before flaming out. But what the article has to say about small loans could be most relevant as regulators consider a new approach to fintech firms like Ant Group.

From LeEco to Ofo, from Luckin to Danke, it’s time for an era to end

Digital People TMT
Nov. 25, 2020

This is an era when the virtual economy has misled the real economy… 

If Danke really wants to protect young people like an eggshell, it should have a business model that respects its users, instead of trapping them into debts and leaving them homeless.

This is an era when financial tools and leverage prevail. Because the real economy is being bullied by the virtual economy, whether it is for survival or “exponential growth” businesses have to rely more on financial and leverage tools, which leads to “novel financial services” permeating these so-called “new economy” enterprises, fueling their growth while hollowing them out.

Chinese internet companies’ fascination with finance is increasingly a widespread syndrome– from top giants to unicorns, all want to get involved in making small cash loans… When the systematic financial risks caused by this twisted growth mentality penetrates every aspect of our life through so-called “innovative enterprises,” it’s everybody’s problem.

It’s time for this era to end.

Jason Xue

Jason Xue is a student in Journalism at The University of Hong Kong focusing on technology and financial coverage. He has had internship experiences at Reuters and Caixin.