Q&K International Group, a Chinese company in the long-term apartment rental business, filed to raise 100 million dollars from a U.S. IPO, according to the SEC.
Founded in 2007, Shanghai-based Q&K, or 青客公寓 as it's known in China, operates a platform that connects young urban workers with ready-to-move-in, affordable and branded rental apartments. Under the ticker QK, the company is planning on using proceeds from the IPO to expand its customer base and improve on its technology side.
As housing prices continue to rise, the average age of marriage increases in China in recent years, more and more single and unmarried people are leaving out the option to become a home owner, hence driving the rental market to grow, reaching CNY 1 trillion. The potential to be tapped remains enormous, since developers are capitalizing on China's high urbanization rate to build more projects, with much of the resources being managed individually and poorly.
Branded apartments, often franchised and managed directly by companies, featuring unified decoration, same furniture and providing ready-to-move-in amenities like free Wi-Fi, regular or on-demand cleaning services, is picking up popularity among China's young professionals, who are often fed up with constantly moving around and having to work out details of a new apartment each time.
As of December 31, 2018, the penetration rate of branded long-term rental tenants was 46% in the U.S., while China's was only 1.8%, according to data shown in Q&K's prospectus. About 80% of renters in China sought apartments with monthly rental charges of no more than $291 as of the end of 2018, according to a report by China Insights Consultancy (CIC).
With the high housing prices, Chinese authorities have been recently adopting new policies to incentivize the apartment rental market, reducing the rental income and value-added tax for rental operators, while decreasing income tax, medical insurance, and social security payment ratio for renters with monthly income below $1,456.7, and also allowing people to submit their rental agreements to apply for tax deduction.
Inspired by the market and policies, long-term rental companies have sprung up in recent years, realizing significant growth. Q&K's available rental units grew from 940 in Shanghai in 2012 to 91,234 across six cities as of the end of 2018, representing a compound annual growth rate of 114.5%.
However, since 2018, with the slowdown of China's economy, the problem of the long-term rental apartment industry, much of it fueled by venture capital focusing more on user growth than viable financial return, has been placed under the spotlight.
In the face of severe competition, many companies are obtaining new apartments at a higher price while attracting new renters with discounted rates. According to CricChina, a real estate information service provider, the rental return rate of apartments aggregated from 20 major Chinese cities is as low as 1% to 3%, taking the booming industry at least 6 years to achieve a positive cash flow.
Q&K is among the better performing ones in the industry. As of the end of June this year, it had USD 49.8 million in cash and USD 393.8 million in total liabilities. The company booked USD130 million in net revenue for the nine months ended in June 30. In FY 2017 and 2018, Its net loss reached CNY 245.4 million and CNY 499.9 million (USD 72.8 million), respectively.
Investors have been pulling out of the sector after suffering huge losses on paper and seeing the lack of sustainability. To date, as many as 25 long-term apartment rental brands have gone or filed for bankruptcy due to capital chain rupture resulted from the blind faith in user growth and poor financial management, many of which are smaller sized players.
Meanwhile, those who survived are proactively trying to remedy the situation by seeking IPOs. In addition to Q&K, branded apartment rental company Ziroom, incubated by established property management company Lianjia, as well rental startup Danke, are also planning to go public in the U.S.