Deal focus: Mofang pursues quality and scale

The rise of China's rental housing market is not a new story. Amid skyrocketing property prices and a corresponding nationwide push to encourage more people – especially youngsters – to rent rather than buy, more than 200 million people are now tenants. They generate trillions of renminbi in rental income every year, according to JLL.

However, complaints about housing quality are not uncommon. This is largely a function of a fragmented market that comprises millions of landlords and tens of thousands of agents working for different companies. Standardized services are a pipe dream for most tenants, let alone transparency on pricing, terms, and property condition.

Mofang Apartment wants to fill this gap. It is one of several reasonably large rental apartment operators that have emerged in recent years, focusing on long-term contracts, one-stop services, and young white-collar workers. Inevitably, the tool used to achieve consistency in service and information access is a mobile app. 

Mofang’s potential is such that it recently raised a $150 million series D round led by Caisse de dépôt et placement du Québec (CDPQ), with participation from Warburg Pincus. The company has completed four rounds of funding worth a cumulative $650 million from the likes of AVIC Trust and DT Capital Partners. But Warburg Pincus has been a consistent presence since 2013.

“Mofang’s compound annual growth in revenue since inception is over 100%. While a number of its rivals are struggling to survive, Mofang has achieved profitability for the projects in nearly all of the cities in which it operates,” says Qiqi Zhang, a managing director with the private equity firm. 

The business model is straightforward. The company leases entire buildings in prime locations, where young urban professionals tend to gather. It renovates and furnishes the rooms in a standardized style, equips buildings with management teams, and offers a range of value-added services like laundry and cleaning.

A premium offering commands a premium price. The difference between what Mofang pays for these properties and what it receives in rental income over time translates into a healthy profit margin. The company now has over 87,000 rooms in more than 20 cities, and claims to have served over 200,000 customers so far.

Zhang explains that Mofang’s competitive edge lies in its ability to leverage big data in its daily operations. For example, calculations of the future use of individual units drive lease negotiations for entire buildings, and analysis of customer feedback means needed improvements can be identified and implemented quickly.

By simultaneously carefully bringing online more supply and maintaining robust demand, the company’s operating cost on a single-room basis has dropped by 30-40% over the years, while the tenant renewal rate is 50%, much higher than the industry average, Zhang says.   

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• Topics
• Greater China
• Real estate
• Expansion
• China
• Growth capital
• Warburg Pincus Asia
• Caisse de depot et placement du Quebec (CDPQ)