State media wield big stick at broken Eggshell, China's WeWork for flats

Crises shakes new business model, leaving thousands on the verge of eviction in winter

Chinese state media is bringing out the big guns at Eggshell, formally known Danke, as thousands of the flat-renting company’s tenants across the country are facing eviction. 

The WeWork-like business, listed on the New York Stock Exchange since January, rents apartments from landlords on long-term leases. It then refurnishes them, and in some cases slices them, before subletting them to individual tenants, often on shorter terms. 

Complementing Eggshell’s business model of rental arbitrage, and now the eye of the storm, is its introduction of bank loans. Tenants are enticed by hefty discounts from Eggshell if they sign up for a loan with its partner bank, which collects repayment, like a mortgage, monthly after paying the sum of the entire lease to Eggshell. On the other hand, Eggshell pays landlords on shorter terms, and the balance is often used to expand its business elsewhere.

By all accounts, an overzealous expansion paired with low occupancy rates, especially fewer new tenants in the wake of the coronavirus pandemic, has dried up Eggshell’s funds. That means while tenants have to continue paying back the bank loan, landlords can’t get the rents in whole from Eggshell, leading to disputes. Some landlords have tried to evict tenants, who are now protesting both online and offline - in the harsh winter weather.

It’s unclear how many have been affected by Eggshell’s bust, but a China’s Youth Daily story quoted an employee as saying that in the Beijing market alone, Eggshell rents from about 40,000 landlords and services over 110,000 tenants.

As of the end of 2019, Eggshell was operating about 432,600 apartments in 13 cities, with most of its tenants being young professionals between 22 and 30 years of age, according to the paper under the national Communist Youth League.

On Monday evening, Xinhua News Agency released a lengthy story and a commentary, warning “ with more than 100 long-term rental companies busted in three years, beware of capital slipping the bill of its ventures to tenants”  and featuring Eggshell. (The usage of the word capital, as an umbrella term referring to private corporates, has grown more visible recently in the market economy with socialist characteristics.)

A real estate lawyer in Shanghai was quoted as saying that “the senior management of the long-term rental companies exploited legal loopholes; once the platform busts, they’d take the money and run, leaving the landlords and tenants to resolve their disputes or enter lawsuits. The real culprit only has to empty three shots of Baijiu,” Chinese for a slap on the hand.

The commentary’s tone was sharper still, urging that “Garlic chive cutters cannot be allowed to get away with it”. The term “garlic chives cutter” is a popular term that describes deceitful businesses that profit off the public using questionable, unethical or outright illegal means.

Also on Monday, 麻辣财经 Spicy Business, an online offshoot of the People’s Daily, released a story titled “Eggshell Apartment went bust, the company cannot shy away from responsibility”, questioning the viability of the very business model of rental arbitrage.

A review of Eggshell-related news showed state media have been cautioning against risks in Eggshell since the beginning of this year, but many web users nevertheless had complained of insufficient attention to their problems.

The sentiment was particularly visible when People’s Daily scolded self-fashioned martial arts master Ma Baoguo on Saturday. Under its Weibo post, a number of users said the paper ought to redirect its energy to Eggshell.

So far, recommendations from state media have largely centered on stricter regulations for the long-term rental business model, suggesting among other measures that the rent collected from tenants be placed in government monitored bank accounts against diversion. 

Draft regulations are already in the pipe, and local governments such as Shenzhen have stepped in, giving priority protection for tenants by ordering property managers not to heed landlords’ call in suspending water, electricity or gas as a means for eviction.

Unlike the scandals of Luckin Coffee in China or Wirecard in Germany, few allegations of fraud have been made against Eggshell, at least so far. There are sporadic accusations of misappropriations of funds, with scant details and largely uncorroborated by state media. 

Instead, the focus has been on its paralysis when crisis hit, hanging landlords and particularly tenants to dry. Also, there is a presumption that the bust of Eggshell and its smaller peers means the WeWork-like model may be inherently unworkable.

Another popular concern is the so-called “over financialization” or 过度金融化, of traditional businesses, meaning introducing banks into the picture unnecessarily complicates the scenario and resolution of any potential disputes. Many tenants, begrudgingly, haven’t fallen on paying back the loan, fearing a default might devastate their credit records, which theoretically would be shared across the Chinese financial world. So when tenants came knocking for their unrealized rent, it’s a double whammy for the tenants.

The name Eggshell envisions giving migrants a warm shell, where a dream can be “hatched”, the company’s founder remarked at the time of its IPO in January.

“As Eggshell breaks, young tenants’ sense of security also breaks,” the China Youth Daily wrote in concluding its story.

Penned by Yang Liu, a contributor to Pekingnology, and Zichen Wang, the founder of the newsletter.