Written By Rui Ma
The most consistent question I get from all of you these days is -- what's up with Beike $BEKE, the real estate platform company that we did a podcast episode on a year ago when it went IPO? Since then, it lost its founder to lung cancer this May, and has experienced a precipitous decline in stock price, -62% in the last two months. Most people think it's because of downward pressure on the Chinese real estate market, as the government tries to rationalize property prices in an effort to solve the demographic crisis and slow growing social inequality. Well, let's take a look at all the factors that have been mentioned:
Rumored agent fee cuts.
The rumor is that agency fees will be capped at 3x local average salaries (in Chinese), which would be a big hit to Beike's chief revenue. Note that Beike stirred up controversy earlier this year for adjusting upwards its secondhand homes transaction fees from 2% to 3% (in Chinese). However, they are within legal rights to do so, since the maximum is 3%.
The ratio of home price to average salary varies quite a bit in China, but even taking rough estimates, ranges from more than 30x for the first-tier cities, to mid-teens for second-tier cities (based on 2016 data). So it would really affect mostly first-tier cities, if at all.
A quick search shows that Beijing has an average income of ~100K RMB, which when tripled, means you can buy a 10MM RMB or $1.5mm USD house at 3% commission.
Edit: It appears that the rumor was on monthly income and not annual income, even though the word it used is typically an annual income. Although duh, that would make sense, since YEARS of (average) income spent on agency fees would be pretty bad, even though that's exactly what it's looking like in Beijing! Anyway, if that is indeed the case, then we're looking at a ~90% reduction in agent fees, of course. Most experts don't think that makes any sense, however (in Chinese), and China is already on the low end of real estate transaction fees in the world. I still think this is mostly fake news ...
I think it's important to point out that the rumor was attributed to a competitor, Dafangya, whose decentralized business model is a standard 19,900 RMB charged per sale. (Dafangya has since denied they said anything and is even paying for reports of such rumors, 😆). The state-owned newspapers don't seem to take too hard of a stance, and The Paper's coverage on this largely covers quotes from economists at real estate firms who of course all point out that this does not seem like a particularly effectual way to cool down the housing market and that agent fees should be a product of the free market (in Chinese). I give up trying to predict what is actually happening here.
While Reuters reported that Beike is under antitrust investigation (as of late May 2021), the company has denied it. Of course, just because a formal investigation is not under way doesn't mean that Beike is free of scrutiny. Competitor 58 has been very vocal about accusing Beike of 2-choose-1, which looks to be the easiest way to get in trouble with Chinese antitrust authorities right now. So far, there does not seem to be consensus amongst experts as to whether or not Beike's "exclusive arrangements" with landlords trigger antitrust (in Chinese). That's because exclusivity is fine as long as it's not coerced. In addition, depending on how you define the market, Beike really has either a pitifully small or majority market share (~4% of nation, or 50%+ of Beijng). So a lot hinge on how SAMR sees things.
Compelling pieces of evidence that they do have dominant market power would be the increase to 3% commission I mention above and the fact that again, for a city like Beijing where they're the biggest player by far, they've managed to increase commissions for new housing to 5%+ (as high as 10%) from 1% before.*** [See below for important clarification.] That seems like problematic behavior, but I don't know what the remedy would be, a fine? A law requiring lower commissions? If you're as confused as I am ... don't worry, Xinhua doesn't really take a side either (in Chinese). We're getting into advanced antitrust territory here, not Alibaba's egregious AML 101 that was super obvious to everyone.
Perhaps the more existential crisis facing the company would be some sort of breakup between its platform and agency business because there is an inherent conflict of interest. But I think that is a low probability event, because such arrangements exist throughout the business world and China is still catching up in terms of antitrust, I'm not sure it's ready to be more aggressive than the developed world just yet.
The recent 10% decline might have been due to a transfer of voting rights following the founder's passing. But it was to another co-founder and the price has since recovered? So it only took one day for people to change their mind and think it's NBD?
In addition to the above, the real risk to Beike, IMO, is just the general pricing pressure on real estate. First of all, various cities have already pushed out stricter purchase requirements and the government has made some moves to reduce developer credit etc. in an effort to tamp down on prices. But also, it seems that the government is signaling some fundamental change in inventory:
In an essay (in Chinese) by the Chief Analyst YANG Chang at Zhongtai Securities, he explains that the future is in shared ownership housing and rental housing. Even though I worked in real estate investing in China from 2007-9, and actually owned property there, I was unfamiliar with the term "shared ownership housing" (SOH). But here is the definition:
In China, you own the housing together with the government or affiliated entity. You may be required to live there, own no other properties, and typically have a few other restrictions such as the inability to re-sell for a period, and the government will have ROFR when you do decide to sell. The government will always own their portion of the housing regardless. Beijing introduced such a system back in 2017, for example (official portal here).See AlsoWindows 10 Activator TXT Download - Free Windows ActivatorRiyadh Postal Code Zip Code Of Riyadh Saudi Arabia Postal Codes 2022 - Gulf Inside2022年08月《抖音热歌排行榜550首》最火热门音乐歌曲合集[高品质MP3-320K/4.71GB]百度云网盘下载 - 歌曲搜List of Exchange Programs
It is noted that shared ownership housing is used in developed countries to alleviate high housing prices. You can read this blog here about the various flavors that exist in the US (there are a lot!).
As for rental properties, these are not public properties, but private units meant to accommodate low-income individuals. Technically, the word is "guaranteed rental housing" 保障性租赁住房. The government has just issued guidelines on this (in Chinese), which mostly revolve around incentivizing private developers or property owners to build new or retrofit existing properties into units that would fulfill this criteria.
China has a dual-tiered system for urban-rural land use.* Rural land must enter into the urban system in order to be developed for commercial real estate purposes. Some experts are arguing (in Chinese) that the new initiatives pushing for guaranteed rental housing would basically circumvent the dual-tiered rule and unleash a lot of land supply, since from the perspective of renters, there is no difference between urban and rural land. I don't know how to think about this in depth, and would welcome some feedback here.
*China has a unique land use system in which there are two types of land ownership, namely, state-owned urban land and farmer collective-owned rural land. Despite strict restrictions on the use rights of farmer collective-owned land, rural land is, in fact, developed along two pathways: it is formally acquired by the state and transferred into state ownership, or it is informally developed while remaining in collective ownership. (Source)
TL;DR: I'm not sure I have one! There are so many uncertainties / headwinds against Beike that it's very difficult to know what the business looks like in the near term. Real estate reform is always on top the government's mind, but as many have noted, change has been much slower than promised. After reading into it, though, the antitrust fears about being broken up don't seem justified to me, the agency fee caps don't seem particularly real, and while a general lowering of fees from 3% back down to 2% (which could happen under anticompetitive reasons) would hurt much more*, obviously, any other pain I can think of comes from anticipating real estate pricing or transaction curbs in general. (*Beike commissions are 2.8%*** probably much higher for new homes this latest Q and 2.7% for existing homes.) And on that, I don't think anyone has any idea what the government is prepared to do, but the healthier the rest of the economy, the more aggressive they can be with this aspect ...
Edit: literally as I'm writing this the company came out with revenue guidance that is 25%+ lower than the same period last year. Ouch ...*** New Home Commissions
As Daye Deng rightly pointed out, we have to separate the platform commission from the agency commission that Beike gets for new homes, and this is one of the few things that the management does not break out. GTV for New Homes is 415Bn RMB Platform vs 84Bn Lianjia. The revenue is 13.9. Assuming the take rate for platform 1.5%, which would be 5x the 0.3% it charges for secondhand homes, then Lianjia's commission would be 9.2%. **See Steven Shi 's rebuttal on this math below, although it is still a fact that this would be actually consistent with what I read in the news & mentioned above about Beike being able to charge as high as 10% commission for new homes in certain cities (新房分销佣金).An acceptable rate for the industry should be 2-4%, just from what the developer can typically bear (in Chinese). However, it's been steadily creeping higher in parts of China due to developers unable to shed their inventory, and a growing reliance on commission based selling through channels such as Beike. Whereas before developers used to buy advertising and have internal staff to sell the houses, now it's been overtaken by these channel providers who do all the sales (in Chinese). Beike's market dominance is what some folks think has them charging premium rates, but they don't seem to be the only ones (5% seems to be market practice). Obviously, since new homes are a much easier transaction than secondhand, the commission rate should not be so artificially high. (It's also been blamed for the massive number of real estate agents in China, a disproportionately large amount, because of the $$ involved. And of course, for the various bad practices in the industry, such as false advertising, hiring actors to pretend to be other buyers, etc.) The concerns around these sky high commissions got so bad that both Anhui and Tianjin governments came out with guidelines on how much agents could charge (~2%, in Chinese). However, these were just guidelines and not laws, so I'm not sure they did that much. Since new home commissions (especially if they are so high!) directly contribute to the real estate bubble and the "peoples' burden," and if the government is really serious about lowering it, I'd definitely expect more explicit, harsher rules in the future. And if I had to guess the limit ... based on past judgments and the fact that 2% is an acceptable average for secondhand homes? 2%! You can play around with the commissions but at the lower end supposing new homes are 0.3% platform fees and 2% Lianjia fees we're looking at a decrease of 80% in new home revenues, which would be a decrease of 40% in the latest quarter ... so yeah ... ouch.
Finally, you can read this speech by $SFUN Chairman on the future of the Chinese real estate agency business (in Chinese) if you're interested! He acknowledges the market is a mess & commissions are too high, but thinks more transparency will fix things. And of course, making sure there are no monopolies. 😜
China Tech Analyst, Main Writer & Co-Host
Why is Chinese real estate in trouble? ›
Much of the property sector's rapid growth was fueled by developers taking on debt. House prices soared, generating worries of a bubble, while forcing families to take on debt to buy a home. Beijing began an earnest crackdown on developers' use of debt in 2020.What is happening with the Chinese housing market? ›
The Chinese housing market crash is contributing to a rapid slowing of the Chinese economy, which has been the engine of global growth for more than a decade. The World Bank has revised down its forecast for Chinese GDP growth to 2.8% in 2022, down from 8.1% last year.Are property prices falling in China? ›
China's property market continued its slump in October, with private data showing home prices and sales falling, suggesting lacklustre sentiment and a bleak outlook amid strict COVID curbs, which hit consumer confidence.Is Chinese real estate in trouble? ›
China's real estate sector has a debt problem. Large property developers like the embattled company Evergrande have racked up massive amounts of debt, leading to construction stoppages and lots of angry homebuyers.Why are so many houses empty in China? ›
For many years, the bubble in the Chinese housing market led to rising property prices and developers scrambled to build ever-more units. But demand for units has now shrunk, due to a number of factors, including increasing unaffordability of homes, an aging population, and slowing population growth.Why are Chinese buying property in USA? ›
Many Chinese and Hong Kong nationals may find this an intriguing option because of the relatively cheaper housing prices in the United States (compared to metro areas of other western countries) and the availability of coastal area properties in many country locations.Is China buying up American homes? ›
Chinese investment in US homes contracts by the most in 10 years. Chinese buyers' average purchase price of just over US$1 million was the highest among foreign buyers, with nearly a third purchasing property in California.Why are Chinese so obsessed with buying property? ›
Why are the Chinese obsessed with real estate? Because of population to land, there is always a shortage of land in China; land is highly valued. Land is something to pass on to the next generation. Land is a sure sign of wealth.How many unsold properties does China have? ›
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House prices are expected to fall across the board as mortgage rates skyrocketed this summer, but not all properties will feel the crunch in the same way, says Hina Bhudia.
Is China having a housing crisis? ›
More than two-thirds of urban households' wealth is tied up in property and the industry underpins a fifth of gdp. The housing market is slumping into a deepening hole, dragging the economy down and even causing small outbreaks of social unrest. Listen to this story.Why are houses so expensive in China? ›
High population density and urbanization – High population density and inflow of migrant workers have put upward pressure on cities' land values and home prices, as developers and home purchasers compete for scarce land resources.Why are Chinese property prices falling? ›
The declines are weighing on sentiment along with a mortgage boycott by homebuyers who are waiting for cash-strapped developers to complete delayed projects. Rising unemployment and China's strict Covid restrictions are also denting economic activity.Why are Chinese property developers defaulting? ›
So when Chinese officials ratcheted up steps to reduce the risk of a bubble and temper the inequality that unaffordable housing can create, it touched off a crisis that has sent some major developers into default. A sales slump that began during the pandemic was deepened by aggressive measures to contain Covid-19.Who owns the most real estate in China? ›
China's biggest property developer Country Garden Holdings has reported a 96% drop in profits, blaming a “severe depression” in the country's crisis-hit property market in which “only the fittest can survive”.What country has the most abandoned houses? ›
|Rank||Country||Vacant Homes ( (% of total homes)|
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Poor adherence to safety standards, including the illegal addition of extra floors and failure to use reinforcing iron bars, is often blamed for such disasters. Decaying infrastructure such as gas pipes has also led to explosions and collapses.How much US property is owned by Chinese? ›
While China raises concerns over American boots on the ground in Asia, the country continues to grow its own footprint in the U.S. USDA's latest data shows China owns over 191,000 acres of U.S. lands, but that was before a North Dakota land sale this Spring.How many homes in the US are owned by China? ›
Eight percent of the properties were going toward 'student use' and another eight percent for "other" purposes. A small six percent said the properties would be used for vacations and rentals. A total of 6,100 properties in the US are owned by Chinese citizens and they spent an average of $470,600 for it.
How much land does Russia own in the United States? ›
|Total Land Area (million sq. miles)||Cropland *|
|Canada United States||3.8 3.6||103 448|
|north america USSR||7.4 8.6||551 566|
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United States Imports from China was US$541.53 Billion during 2021, according to the United Nations COMTRADE database on international trade. United States Imports from China - data, historical chart and statistics - was last updated on October of 2022. Base metals not specified elsewhere, cermets.Do Chinese pay property taxes? ›
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"There is no private ownership of land in China. One can only obtain rights to use land. A land lease of up to 70 years is usually granted for residential purposes. Foreigners who have worked or studied in China for at least a year are allowed to buy a home.Do Chinese citizens pay property taxes? ›
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The average vacancy rate across mainland China is 12.1 per cent, according to BRI's report, released earlier this month.Can a house be unsold? ›
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|Region Average (2019)||RMB 90,501||USD 13,231|
If China's real estate sector goes bust, it could have adverse effects on the Chinese economy and global markets. The real estate sector has fueled China's growth into an economic powerhouse and with its collapse, China could fall into a recession rather quickly.
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Earlier this year, Yang Huiyan, Asia's richest woman and majority owner of Country Garden—China's largest property developer by sales—predicted a 70% profit plunge for the company as the nation's property crisis deepened. Country Garden's slide exceeded Yang's forecast.Which real estate company in China is in trouble? ›
What started as trouble with China Evergrande Group is now snowballing into a crisis that risks engulfing the majority of the country's developers, its biggest lenders and a middle class that has significant wealth tied to the property market.Who is the largest owner of real estate in the world? ›
|1.||China Evergrande Group||Real Estate Company|
|2.||Sunac China||Real Estate Company|
|3.||Tishman Speyer||Real Estate Company|
|4.||Hines Group||Real Estate Company|
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