Xiao Yue, 28, works in Beijing. On the night of Nov. 12, he was returning to his rented house after having dinner with his wife, when he found the landlord and his wife standing outside their door, trying to change the lock.
After listening to the landlord’s explanation, Xiao Yue realized that there was a problem with the “Eggshell Apartment”, the rental platform used by him and the landlord. The next rent that should have been paid by eggshell to the landlord had not arrived yet. So the landlord is going to change the locks and take the house back.
“I was totally unprepared,” Xiao Yue said. According to his contract with Eggshell, he has signed a one-year lease with a monthly rent of more than 2,000 yuan, and he pays the rent to eggshell every six months. He had not defaulted on any fees, but why had the landlord not received the payment?
The next day, he saw eggshell tenants all over the place on his weibo account, saying that landlords were turning people away because they had not received their next payment. Overnight, many landlords lose rental income and their tenants face the risk of becoming homeless while holding on to their contracts and paying for them.
At the center of the storm is eggshell Apartment, a Chinese housing rental platform. This platform featuring long rent claims to have served more than one million clients in total, making it the second largest long rent apartment platform in China. It manages more than 400,000 rooms in 13 cities including Beijing, Shanghai and Guangzhou, making it the choice for many young people aged 20-30 to rent apartments in the past two years. Eggshells were listed on the New York Stock Exchange in January 2020.
Experts interviewed by BBC Chinese believe that the Internet platform companies, tenants and landlords that operate the eggshell are to blame for the problem. Experts also pointed out that the process of the eggshell “exploding overnight” also reflects the risks caused by the brutal expansion of some Chinese Internet companies, as well as the lack of social responsibility and professionalism. Call on the government to strengthen effective supervision.
A particular business model
“Good faith signing, stable long lease”, “0 agency fee, move-in bag, save time and worry”, the official website of Eggshell introduces its services.
Eggshells are mainly facing the first-tier cities in China, such as Beijing, Shanghai, Guangzhou and Shenzhen. These places are crowded with young people, and there is a great demand for rental apartments. Eggshell will decorate and provide home appliances and cleaning services for the houses rented from the landlord. The relevant transaction is operated through the Internet platform, so that the tenants can directly “carry the bag”, which is welcomed by many young people with busy work.
Xiao Yue recalled that he chose Eggshell because of its convenient online service and large housing supply. “When I first came to Beijing, I didn’t know much about it and I was too lazy to do it. Later, I found a good house online and called all the agents. Eventually, an egg-shell person would call you back. After looking at several houses and decorating them, I could live there. I felt that it was really easy, so I moved in.”
Eggshell claims to “transform the traditional housing rental industry with the Internet”. Like many of China’s most successful new Internet platforms, the company quickly rose and expanded by targeting market gaps in a short period of time. But at the same time, there were many hidden dangers, which laid the foundation for today’s situation.
The first problem with eggshells is the company’s business model. Different from general housing rental agencies, eggshell adopts the form of “sublet + rent loan”, that is, “real estate + finance”, forming a four-corner relationship with owners, tenants and banks.
Eggshell signs a contract with the landlord, obtains the right of subletting from the landlord, makes proper decoration of the house and collects rent on behalf of the landlord. After finding the tenant, Eggshell will sign a contract with the tenant alone. The tenant pays the rent to Eggshell in the form of annual rent, semi-annual rent, quarterly rent or monthly rent. No matter which form the tenant receives the rent, Eggshell will pay the rent to the landlord in the form of monthly or quarterly payment.
In this process, there is no direct contractual relationship between the tenant and the landlord. This leads to the fact that when the eggshell cannot pay the rent to the landlord, although the landlord who has not received income has the right to terminate the contract with the eggshell, the contract between the tenant who has paid the rent and the eggshell is still valid. Therefore, although there is a conflict of interests between the landlord and the tenant, it cannot be directly resolved between the two sides.
The two faced such a problem after Xiao Yue’s landlord failed to receive his next rent. “The landlord wants to remove me from the eggshell relationship and move on to the next one to continue renting, but my contract with the eggshell is still valid and he can’t rent it out unless I leave.”
The eggshell club, which provides appliances and cleaning services for apartments rented from landlords, allows tenants to “carry their bags” and is popular with busy young people. But its particular business model has many pitfalls.
In the end, xiao Yue and the landlord both chose to terminate the contract with the eggshell. Since Xiaoyue’s contract itself is about to expire, if eggshell fails to pay the termination fee in accordance with the contract, Xiaoyue will lose the last month’s rent and the deposit equivalent to one month’s rent, and the landlord will also lose one month’s rent.
In addition, many eggshell tenants also face another risk — debt. When signing a contract with a tenant, Eggshell tends to attract the tenant to pay one year’s rent in a lump sum on preferential terms. In this process, financial institutions will provide rent lending services to the tenant. Tenants in need will pay the rent to Eggshell through Tencent Webank, the lender of eggshell “rent lending”, for one year.
Therefore, when there is a problem with eggshell housing, the tenant who has already made the loan for the next year will face the risk of continuing to pay the loan but not having a house to live in.
According to the annual report of Eggshell Apartments, 91.3%, 75.8% and 65.9% of eggshell tenants borrowed for rent in the three years of 2017, 2018 and 2019, respectively, with loans totaling billions of yuan.
In this four-corner relationship, Eggshell collects long-term rent from the tenant in a lump sum, but pays the landlord in the form of monthly payment, controlling most of the tenant’s funds in its own hands for a long time, and then using the funds to further find and decorate other housing sources, so as to expand its own market.
Xu Jiajian, an associate professor of economics at Clemson University in the US, told BBC Chinese that the combination of increased trade frictions with the US and COVID-19 has created a crisis in the business model.
“It’s good when the economy is good, when the economy is not good, or their investment in renovating their new home is bad, or for some reason one party can’t pay the bills, or the tenant can’t pay the rent, their money chain is bad,” he says.
Eggshells are mainly facing the first-tier cities in China, such as Beijing, Shanghai, Guangzhou and Shenzhen. These places are crowded with young people, and there is a great demand for rental apartments. But young people have also been the main victims of the crisis.
In June, the situation worsened for eggshell apartments, which had already been affected by the outbreak. On June 18, Eggshell said its co-founder and CEO, Gao Jing, had been investigated by local government authorities. Although Eggshell said gao was taken away because of business investments he was involved in before setting up eggshell, this has had a significant impact on the capital chain of eggshell.
Based in silicon valley and vc fund Race Capital partners Edith Yeung (Edith Yeung) that shell packaging, although the use of the Internet company but it is not a Internet industry profit way of pattern, in essence is a use of financial engineering method for lease company, the operation not only brings great hidden trouble to the Chinese society, also is against Chinese Internet company’s reputation abroad.
“Housing-related businesses are socially responsible. The company was absolutely ruined from a financial point of view, but from a social point of view it was worse, a lot of ordinary people didn’t understand their model, so they took advantage of young people and let them make leeks, “she told BBC Chinese.
“Another thing to be aware of is that eggshells have such a big problem in less than 10 months, which could give Chinese companies a bad reputation in the United States,” she warned.
Webank said in a statement on Dec. 4 that it had developed a “legal and compliant” solution that would allow customers to pay off their eggshell apartment rents even if they do not continue to repay them. This will reduce property and credit losses for many eggshell tenants. But the details of implementation remain to be seen.
Xiao Yue believes he is luckier than other tenants who have been evicted. His landlord did not turn him away. Both of them have successfully terminated the contract with Eggshell. Although they did not get the money back, they found a new agency and signed a new lease contract.
He was even prepared not to take his money back or pursue it.
“There’s no way to think about it, and if you think about it, you feel like you’re losing out, and you’re not getting anything,” he said.
“As a wage earner, I have neither the strength nor the energy to go to court, and the time, energy and money I spend on a case, even if I succeed in maintaining it, will not make up for what I have spent. It’s all the same old story, and that’s what happens here.”