Bets on Homelink, China’s biggest property agent, are risky as curbs hit home sales
As suitors compete for a slice of Homelink ahead of a planned IPO, analysts warn that government tightening measures will hit estate agents’ earnings
While investors fall over themselves to plough money into estate agency Homelink Group, the poster child of China’s secondary home market is seeing its business plunge as local governments tighten their restrictions on property sales.
Experts say the financial capital being thrown at Homelink, the nation’s biggest pre-owned home agent, is a bet on its long-term prospects, so the company’s short-term performance is less relevant.
However recent developments should remind investors of the sector’s vulnerability to regulatory risk, volatility and chronic oversupply.
“The high valuation given to Homelink might not price in regulatory risk enough,” said a Beijing venture capitalist who declined to be named. But for investors, “the dilemma is that Homelink is the sole largest player in the pre-owned home market. You’ve got few other options if you want to have a foothold in this sector.”
Much of the recent large-scale investment in Homelink has come from developers.
China Vanke, the nation’s second-largest homebuilder by sales, announced last week that it would invest 3 billion yuan (US$435.6 million) for an undisclosed stake in the Beijing-based real estate agency, becoming its latest heavyweight backer ahead of a planned initial public offering.
Vanke is the second major homebuilder to invest in Homelink, after Sunac China Holdings – controlled by tycoon Sun Hongbin – acquired a 6.25 per cent stake for 2.6 billion yuan in early January, valuing the property agent at 41.6 billion yuan, or 51.4 times its 2015 net profit.
Before that, Homelink already had the backing of Chinese technology giants Baidu and Tencent, as well as venture capital firms including Huasheng Capital, which then valued it at 36.8 billion yuan. Homelink turned down several suitors as it picked up heavyweight investors before a planned IPO.
Outside investors cited the company’s dominant role in China’s secondary home market, and their bullish view on the market, as the reason for their investment.
Homelink, also known as Lianjia, has a network of over 8,000 stores covering 28 key cities and over 130,000 real estate agents in its workforce. Its unaudited consolidated net assets amounted to 1.6 billion yuan as of the end of June, 2016, according to a filing by Sunac. Pre-tax profit jumped to 1.2 billion yuan in 2015, from 137 million yuan in 2014.
But that boom is generally attributed to the spectacular property market rally of 2015 and most of 2016. With Beijing conducting a sweeping campaign to curb home purchases and waging war on what it sees as the “illicit business practices” of agents, the outlook for agencies, including Homelink, seems bleak, at least for this year.
“The government’s tightening measures will have a direct impact on property agents, including Homelink, which rely largely on collecting commission fees from transactions,” said Yan Yuejin, a senior researcher at E-House China R&D Institute.
“The question is how long the tightening will last. If not long, business will go back to usual after the tightening eases. If not, it has to explore new businesses beyond new and secondary home sales.”
Transaction volumes in the 500 communities monitored by Homelink, in the three weeks from March 17 – a watershed day for Beijing’s property market, with the introduction of a raft of heavy-handed cooling measures – staged a dramatic 74.9 per cent plunge from the three-week period before March 17.
About 27 per cent of the 500 communities tracked by Homelink have seen no sales since the curb, compared with just 2.6 per cent before.
Prices also fell. Selling prices slipped 2.9 per cent in the first week after March 17, and a further 3.3 per cent and 0.1 per cent in the second and third weeks respectively.
Homelink has expanded aggressively in the past two years, acquiring local agents in Shanghai, Chengdu and Guangzhou, but the Beijing market remains the most critical part of its portfolio.
The Beijing government’s crackdown on homes built on commercial and office land was a double whammy to the agent. After individuals and agents were banned from selling them, sales of such apartments tumbled to 24 units last week from 2,264 units in the week before the restriction was implemented. Many Homelink offices located near to communities of such apartments were closed down as business tailed off.
Several Homelink outlets in Beijing were among 53 property agents forced to close after they were found to be listing such apartments, and committing other violations. The agent also said that starting April 8 it would not list homes that were sold less than a year ago, or that have price tags that are conspicuously higher than “market prices”. It is not clear if these are self-imposed rules or government requirements.
Homelink is no stranger to government punishment. In early 2016, after one of its Shanghai stores was reported to have hushed up the fact that homes were being pledged as collateral by previous owners, local governments launched a crackdown on agents, whose transgressions included concealing facts from buyers, spreading rumours to bolster prices and making false contracts.
Yang Xianling, director of Homelink’s research academy, acknowledged that the property agency business still suffers an image problem and remains “terribly inefficient”.
Talent retention is “terribly low” as every year almost the entire team of a particular outlet would leave, to be replaced by new entrants. He declined to comment on Vanke’s investment.
A social media account run by a Caijing real estate journalist reported that the primary purpose of Vanke’s move was to “jump on the bandwagon” as early as possible. Chinese media described Vanke’s investment as “buying a ticket” to get on board the “ship of Homelink”.