Q&K International first in China to go public in home rental, but the future for the company looks bleak

As real estate industry in China remains bearish in recent years, private property sales continue to be suffocated. Commercial property sector also suffers from the blow of the recent economic downturn globally and in China. Though according to the real estate 2019 report from the State Information Center, the public institution directly affiliated to the National Development and Reform Commission (NDRC), the number of real estate development projects remains high, the Chinese government is lowering down the amount of funds made available for borrowing in banks for real estate development projects, possibly trying to protect real estate developers from wasting too much money on properties that won’t sell; or in the effort to further cool down the real estate industry and hence press the housing price level down for more households to afford.

The good news for common households is no doubt a depressing message for most of the real estate players in China. However, the positive side of the story is: property lease is receiving a large amount of momentum, not only due to the government’s strategic moves in stabilizing China’s housing price, and its encouraging altitude towards long-term apartment rental, but also the strong demand for low-cost living and fairly comfortable living space form young professionals in China, as the speaker from Q&K International said lately.

It was such a shock for me to see Q&K International went to IPO in NASDAQ, to be frank. Since I have been observing the long-term apartment rental industry evolve in China for about 4 years’ time. I have read analysis reports on the big names, written my own analysis articles on them, witnessed some of them swallowing more and more property resources, and the downfall of some smaller brands. Q&K International is never even being considered seriously as a competitor for the giants in this sector. Yet it made the first in going to IPO in the US, faster than Ziroom and Danke. Behind the glorious and joyful festive like celebration image, numerous ugly facts remain hidden to the US investors.

Is this the right timing for IPO?

When being asked why Q&K international decides to go to IPO now, the speaker lady from the firm said it’s because they are ready at this stage. The real reason behind this is, however, possibly a very bitter story.

Most of the long-term home rental companies in China are still striving for making their ends meet after 5 years since incubation, including the No.1: Ziroom and the No.2: Danke, both are rushing to go public, but still yet to ink the deal.

In fact, home rental companies in China are in a very interesting situation now: The government encourages them to develop because it relies on them to provide essential housing for the young and economically struggled in big cities; on the other hand, it does not wish these businesses to make a lot of money because this money is highly likely going to be out of the citizens’ pockets in the mean of housing bill.

Struggling in this dilemma, most of them are still burning money to survive, collecting a countable number of dimes after spending a whole lot on acquiring house resources, refurbishment, and management. There is an end to money burning. Where will the money come after they are scratched out?

Raising capital by going public is assuredly an option. However, this one right now for Q&K International is not going to be a wise choice.

More publicity of the company will reveal to investors what the company is really doing, and these hidden facts are not enjoyable to see.

·The company is no different from its other competitors, experienced two disastrous years of loss (between USD 28 million to 75 million) in 2017 and 2018, continues to lose more, though debt increasing rate is declining slightly, in the first three quarters of 2019.

·The company has been gaining an army of criticism in terms of services and housing conditions, as well as an unfair amount of water, electricity and internet fee from its users.

·The company does not even pay its own employees timely, which leads to complaints and information leaking from its own ex-employee.

The devil is in “Service”

The secrets for most successful businesses are very similar. The business finds its customers, and it serves its own customers’ well. When competitions become fierce, and customers get picky, service will be the next key factor after management, funds, and product which helps to determine whether the company stands out from the crowd or not, especially when the company is doing service-related businesses, in this case, means their employees or contractors get the opportunity of face to face communication with their customers in most of the business deals. The home rental industry obviously falls into this category.

In fact, the most fundamental factor in the long-time survival of home rental businesses in China is whether they can provide reasonable rent and quality service to their customers. The more money a home rental company earns, the more it gets suspicious by the government. The government wants to ensure its people could live in the houses these companies provided happily. Q&K International offered low-cost houses for many young professionals, via sacrificing residents’ living experience by putting them into shabby rooms with continuous leak problems and mold stains, let them endure poor services, unfair water, and internet bills, as well as lengthy and unbearable rental agreement ending process. Endless troubles brought by Q&K’s houses will not make its customers happy, nor will it please the Chinese government.

A long-term apartment renting company tries to earn trust from investors but failed at satisfying the most important two parties for the company-the Chinese government and its customers are highly unlikely to win the home rental battle in China.

The future for home rental in China is fine, maybe not a sector to earn a big fortune, but definitely worthwhile to invest in. The government will not let them die because they solve many Chinese people’s living problem, and help to reallocate many house resources otherwise remain unused. When these home rental businesses find the best pricing strategies for both the house owners and their customers, also the best balance between the cost in refurbishment, house management and services, and the quality of room conditions as well as service, the home rental businesses will start to see a large volume of cash flowing towards them. That’s also the harvesting time for investors.