Features On the Cusp PropTech

Home rental giant Ziroom is jilting landlords

ziroom, second landlord, apartment rental

In August 2019, Sarah Zhang (pseudonym used at the request of interviewee) signed a five-year lease with home rental platform Ziroom to manage an apartment she owns in the nearby city of Nanjing. Based in Shanghai, she chose the so-called second-landlord platform to handle maintenance and tenants in the hope of saving time and travel costs. Instead, it was the start of even more trouble.

At the time, the second-landlord industry was booming. Zhang received offers from multiple platforms, bidding up the price of her apartment.

Ziroom wasn’t offering the highest rent, but it had the best reputation. Zhang chose the SoftBank-backed platform, believing she was starting a long-term relationship.

Zhang agreed to share the cost of renovations with Ziroom. She agreed to waive eight and one-half months of rental income during the five-year lease: The first four and one-half months of the lease would cover turning the one-family apartment into a three-tenant dorm, and one month’s worth of income in each of the following years would cover maintenance and other expenses.

After four and one-half months, Zhang started to receive monthly rental income in January 2020. Her choice of Ziroom turned out to be wise—as landlords on competing platforms Danke and Qingke complained of payments that came late or not at all, her apartment paid like clockwork through the worst of the pandemic year.

That is, until November, when she got a surprising call from a Ziroom housing agent. The platform wanted her to accept a lower rent. If she didn’t like this, the agent said, Zhang could end the contract—but she might be required to reimburse Ziroom for remodeling costs.

Zhang was furious. She had held up her end of the bargain, but now the platform wanted to change the terms.

The platform said that it was forced to cut rents by a market downturn, but Zhang was sure the company was still making a profit from the contract. While she was receiving a monthly rental income of around RMB 1,000, Zhang calculated that the platform was making at least RMB 2,000 per month from her apartment. The apartment is subdivided into three separate rooms, each of which could rent for around RMB 800 per month at market prices.

“There were tenants living in my apartment in Nanjing when they forced the rental cut on me,” said Zhang. The tenants moved out during her dispute with the company, but she does not know why.

Zhang says Ziroom called an end to the contract without her consent and suspended rental payments in December. By sending her the password of the apartment, the platform handed back her property.

The 47-year-old Shanghainese is now planning to sue the company to demand it honor the contract or pay her compensation, after writing a letter to the Nanjing city government to ask for government intervention.

Join the club

Zhang is not the only Ziroom landlord facing similar demands to renegotiate rents. Although the number of Ziroom landlords being affected is not clear, TechNode found a chat group on messaging tool QQ that has attracted close to 1,600 angry landlords across the country. Dozens of them say they plan to take the dispute to court to either enforce the contracts or get more compensation.

Ziroom, which managed more than 1 million apartments across the country as of November 2019, is facing rising user complaints. They come on the heels of the rapid downfall of troubled rival Danke; both platforms adopt the controversial second-landlord model.

Real estate serves as an investment pool for many people like Zhang. In some cases, landlords rely on rent to make mortgage payments.

Landlords accuse the high-profile company of using manipulative tactics to trick landlords into terminating their contracts, according to conversations in the QQ group. 

Ziroom is also distancing itself from old users. Xu Xibai is a Beijing-based Ziroom landlord who helps his parents to communicate with the platform for an apartment they own in suburban Beijing. After renting out the apartment to Ziroom for five years, Xu received a call from a Ziroom employee in July. The employee “required” him to immediately lower the rent for the 100-square-meter apartment near the Sixth Ring Road from RMB 4,700 to RMB 2,700 per month.

The steep cut, and the brusque tone of the person on the phone, led the 38-year-old international politics scholar to believe Ziroom wasn’t trying to negotiate. Instead, Xu believed the company was hoping to make landlords take the blame for ending the contracts, hence reducing compensation, he told TechNode.

As with Zhang, Ziroom told Xu that the company would charge him compensation for the renovation expenses. When he received a final two-month rent payment in November, it was RMB 5,800 rather than the usual RMB 9,400 per two months, but Ziroom did not break down the reason for the RMB 2,600 shortfall.

Xu didn’t talk directly to the tenants before they left, in part because Ziroom suggested he speak with them after ending the contract. Xu believes direct communication with tenants would suggest he consented to Ziroom’s ending the contract.

Like Xu, Zhang saw the request to cut rent as an excuse to break a contract. “The rent cut could be a random figure that ranges from hundreds to thousands of RMB per month,” Zhang told TechNode. “Even if you agree to the rent cut, they will end your contract anyway and you will get less compensation per month,” she says.

TechNode repeatedly reached out to Ziroom to comment on the matter, but hasn’t heard back. 

In a written note that’s widely circulated among Ziroom users, Miao Mingyu, a law professor at the University of Chinese Academy of Social Science, wrote that Ziroom has been bombarding landlords with phone calls requesting reductions in rent and threatening to end contracts. Miao created the QQ group to offer legal advice to the landlords.

But Miao writes that Ziroom’s tactics, while coercive, generally don’t give landlords grounds to sue. Ziroom may postpone the rental payments to exert pressure on landlords but is rarely late enough to count as breaking a contract, he says. Miao wrote that probably only 50 out of more than 2,000 landlords with whom his team has had contact could file a credible lawsuit. 

Why break contracts?

It’s not entirely clear why Ziroom is jilting landlords, as it continues to take on new properties while abandoning old ones. It doesn’t appear to be short of cash, but may be trying to cut costs as a slower housing market and the collapse of major rivals present opportunities to pick up cheaper leases.

Chinese second-landlord platforms, such as Ziroom, Qingke, and the recently-tanked Danke, run on a model similar to the office-rental platform WeWork: They rent apartments from landlords on long-term leases, renovate them, and then rent out individual rooms.

In a healthy second-landlord business, the platform earns profits from the difference between lower-cost leases to landlords and higher rentals from tenants. But in their race for growth, platforms competed for limited housing resources in an attempt to gain a larger market share, thus pushing up the rents owed to landlords.

The weakness of the model was obvious: It could easily fall apart if rental demand suddenly dropped. When COVID-19 swept the country in the first half of 2020, that’s precisely what it did as people lost jobs and migrant workers stayed in their hometowns due to the national lockdown coupled with the economic downturn. Platforms that leased apartments at very high prices from landlords were forced to rent out at lower rates than they had anticipated. 

Even before the disruptions of 2020, the home rental platforms had received a heavy blow in July 2019, when the state rolled out new rules to prohibit any changes to the internal structure of a building, including the use of partition walls to increase the number of housing units available for rent. 

Xu suspects Ziroom regretted overpaying as competition in the second-landlord market cooled down. For Xu, the ultimate cause of the landlord disputes is Ziroom’s attempt to ditch over-priced apartments. In his most recent lease, renewed in late 2019, his rental income from Ziroom was increased from RMB 4,000 a month to RMB 4,700, a big jump according to market rates at the time. 

However, Zhang argues that the platform didn’t overpay, noting that she chose Ziroom over other platforms that offered higher rental income for her apartment. The driver for Ziroom’s recent moves is “nothing other than the pursuit of higher profits,” she says. “Danke’s collapse gives Ziroom more opportunity to create a monopoly. By ditching low-profit units, the platform is chasing higher profit.”

Zhang Yi, consulting CEO and chief analyst at iMedia Research, says Ziroom’s recent disputes are more a result of the market downturn as fewer people migrate between cities due to the pandemic. 

“The low occupancy rate of home rental platforms, as a result of slower population flow, led to less income for companies like Ziroom, which have skyrocketing fees to cover from rental fees to apartment owners, maintenance fees as well as bank loan interest,” said Zhang. 

Ziroom faced criticism of exploiting users this past February, when it reportedly suspended rent payments to apartment owners while still collecting rent from tenants. In response, the platform offered a rent-free month or other discounts to those affected by whose income was affected by the pandemic.

In good health

Ziroom does not appear to be short of cash. After receiving $1 billion from investor SoftBank Vision Fund in March, the company recently announced the acquisition of rival Best Bond.

At the same time, Ziroom rolled out a plan to take over apartments previously managed by Danke in eight cities including Shanghai and Guangzhou, keeping tenants in their apartments at the same rent and waiving service fees to new landlords.

Local reports point out that taking over Danke’s ready-to-rent apartments could also save time and remodeling costs for Ziroom as it expands into its rival’s former territory.

In response to public concerns, Ziroom responded in mid-November to a user on Quora-like platform Zhihu, saying that the company’s services were operating normally with rental loans/rental income ratios “far less than” the legal maximum of 30%. In contrast, Danke’s ratio was over 80%. Ziroom also stopped signing new rental loan contracts on Nov. 27. The statement also says its occupancy rate is higher than last year’s level.

These signs suggest Ziroom is “financially stable so far,” according to Capucine Cogné, a real estate industry specialist with Swire Properties. The risks are not too high, Cogné added, but “part of me is a bit doubtful of how perfect the picture they are portraying is.”

Unlike troubled rivals Danke and Qingke, Ziroom is still private, meaning that it is required to release far less information. Yet it claims to be the largest player in the field, managing twice the number of rental units as the other two combined did prior to their collapses.

However, the rising number of user complaints shows that the way Ziroom does business is increasingly brutal.

Disgruntled landlord Zhang asked a question about the mammoth rental platform, now valued at $6.6 billion. “With eroded trust and credibility, who will trust their properties to Ziroom?”