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Sandy Li

Warnings that margins will suffer because of a reduction in commissions from developers have set off alarm bells

Midland Realty (Holdings) chairman Freddie Wong Kin-yip has sold 47.28 million Midland shares at $2.287 each - netting $108.12 million - following a warning by the firm that its  margin on the sale of new flats will be  squeezed by this week's decision by developers to slash agents' commission fees by up to 55 per cent.

Earlier, Mr Wong had declined to estimate the size of the impact of the fee cut on the group, saying only that revenue would be under severe pressure.

'The whole industry is facing a challenging year ahead.'

His remarks came after the company on Thursday issued a profit warning that first-half earnings for this financial year to December would be adversely affected by the move.

In response to the profit warning, Midland stock fell 8 per cent to close at $2.30 yesterday  - the lowest this month. The counter has fallen 21 per cent since Wednesday.

Earlier this week, industry practitioners predicted the cut in fees would cause the property broking industry to lose about $300 million and result in 500 job losses.

Following the decision to cut fees on Wednesday, realtors said only 30 new flats were sold on Thursday - down from an average 100 transactions daily.

Midland group consultant Albert Wong said net income from selling new flats  totalled $30 million on sales of $455.3 million for the six months to last June - or 53 per cent of the group's turnover.

Allowing for an average 30 per cent cut in agency fees,  the commission rate would fall to about 1.19 per cent from 1.7 per cent, he said.

'It will hurt the company's profitability.'

Sun Hung Kai Research had already revised down Midland profit forecast by 47 per cent to $78 million from $148 million because of the firm's sensitivity to earnings from commission rates.

Sun Hung Kai Research analyst Eva Cheng said: 'The degree of the rate cut is more rapid and drastic than our expectation.'

To tackle the shift in industry power,  estate agents said they would refocus their efforts on the secondary market.

Agents expect this year's secondary market transaction volume to climb 30 per cent to 60,000, up from 46,131 last year. Agents will charge buyers and sellers 1 per cent each as a transaction fee - more than the new commission of 1 per cent to 1.25 per cent they would receive from developers.  Freddie   Wong said Midland would redeploy its workforce in response to the change in market conditions.

Midland and its wholly owned subsidiary Hong Kong Property have about 700 agents selling new flats. The group controls about 35 per cent of primary market sales and has more than 3,000 agents in 224 branches.

'Some of them will shift to cover the secondary market. But we will not abandon the primary market even if the agency fee is less,' he said, adding the group had no immediate plans to lay off staff.

Centaline Property Agency director Louis Chan said the company would lose about 15 per cent of its revenue. 'Training will be provided for those agents who are inexperienced in dealing with  ... the secondary market,' he said.

Ricacorp Properties, a wholly owned subsidiary of Centaline, said the company planned to double its investment in opening new branches in anticipation of a revival in the secondary market.



Chairman dumps Midland stock