How a China rental housing operator went bust

Lejia Apartment, China's third-largest rental apartments operator, has suddenly gone bankrupt, creating big trouble for hundreds of thousands of its tenants.

To rein in property speculation, Chinese authorities have been encouraging the development of the apartment leasing industry. But the operating model of Lejia was fundamentally flawed, leading to its abrupt collapse.

Lejia Apartment was founded in May 2016 in Nanjing city in eastern China. Within less than three years, the number of apartments under its management grew to more than 200,000 units across the country. The company once had a valuation of over US$2 billion.

Lejia, however, never had a solid foundation to support its rapid expansion.

Basically, the company operated as a middle-man platform, matching landlords and tenants. Average yield of mainland residential properties is rather low, less than 2 percent in general. In order to scale up quickly, Lejia often offered excessive returns to lure landlords, and at the same time, lured tenants with bargain deals.

If the macro-environment was robust, Lejia could have been able to sustain the cash-burning business model by raising new capital. But as China’s economy has been cooling amid a worsening US trade war war, the option was no longer available.

Lejia had been rumored to be facing a credit crunch since June, and many individual home owners complained they were not able to receive rental payment.

The company dropped the bomb on August 7, announcing that it’s shutting down after all attempts to sustain the operation failed.

It’s a common practice among rental apartment operators to collect one year of rent from tenants in advance, and then pay to individual home owners on a monthly basis.

Lejia took the money from tenants, spent it all and is now unable to make payment to home owners.

The company is now asking the owners and tenants to sort out the mess themselves.

Some tenants have been expelled by the landlords and many others may soon face the prospects of becoming homeless.

Most of the tenants are said to be young people, and losing one full year of rent money is no doubt a big financial blow to them.

Tenants are complaining to the local governments, but so far they have not heard anything encouraging from the authorities.

This article appeared in the Hong Kong Economic Journal on Aug 12

Translation by Julie Zhu

[Chinese version 中文版]

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