As financial woes intensify in Danke, Chinese authorities are stepping in to hold the once promising apartment rental and sharing company to account.
In recent weeks, landlords who haven’t received payments from Danke, who works as a sub-lessor, have started evicting tenants. After a flurry of local reports exposing the company’s massive debt, which is said to be as high as $ 520 million, a district court in Shanghai put Ziwutong Beijing Asset Management, Danke’s parent organization, is on the country’s “social credit” blacklist.
The Chinese government’s social credit system is a set of mechanisms aimed at improving the enforcement of existing laws and violators may face restrictions in their daily activities. In Danke’s case, founder and CEO Gao Jing was barred from “heavy expenses,” which include everything from flying first class, taking a high-speed train, buying property and going on vacation, to registering. of children in “expensive” private schools, according to a court notice.
The move came after a senior judge at China’s Supreme People’s Court told the press that Danke was under investigation by the relevant authorities for his cash flow problems.
Danke – founded in 2015 and backed by leading investors like Ant Financial, Tiger Global, and former Chinese director of LinkedIn, Derek Shen, are committed to making urban housing affordable and enjoyable for Chinese white-collar workers. The catch is that it is progressing through aggressive debt-fueled expansion.
Instead of the traditional rental model, Danke relies on an elaborate financing plan to maintain its cash flow. Tenants are offered incentive prices to pay up front for one year and are encouraged to cover the sums by taking out loans, which are provided by Danke’s partner banks. Tenants who refuse to take out the loans are asked to pay more.
With the capital financed by the loans, Danke then pays the owners, but only on a monthly or quarterly basis. This gives the startup great financial flexibility to rent to owners and spend on renovating apartments, which are then sublet to tenants for a mark-up.
Danke’s model embodies the promises of internet platforms or the so-called sharing economy – a small asset, rapidly evolving, but it also creates huge risks for the providers and consumers it engages in. to serve. When the COVID-19 pandemic hit, the rental market in China cooled, straining Danke’s finance vehicle.
When TechCrunch spoke to angel investor and Danke chairman Derek Shen last year about the company’s financial risks, he had this to say: “There is nothing wrong with the financial instrument itself. The real problem is when the real estate operator is struggling to repay, so the key is to make sure the business is running smoothly.
“What is needed is tighter market surveillance to prevent such cases from happening again,” said one opinion piece published in the public newspaper China Daily. “The involvement of banks and loans made the risks even higher. Given the unsustainable nature of Danke’s business model, it is time for financial supervision departments to consider putting in place stricter financial rules prohibiting such risky practices.
Listed in New York, Danke saw its shares dip to $ 2 last month, from $ 13.5 when it went public in January. So far this year, the company has only released its first quarter earnings report, which posted a net loss of $ 174.3 million.
The financial turmoil is also putting WeBank, Danke’s main partner bank, in the spotlight for its stake in a highly leveraged rental business in exchange for handsome interest. Online banking supported by Tencent ad on social media that he would transfer tenant loan obligations to Danke, who was already subsidizing tenant loan interest at WeBank. In the three months ended in March, Danke paid a total of $ 7.9 million in interest related to “rent finance.”
Danke cannot be immediately reached for comment on the story.