Realty check

It has been a very cold winter for China's top real estate agencies, with several of the largest firms closing outlets in the face of plummeting transactions and slipping prices.

Shenzhen-based Chuanghui, before the country's largest real estate brokerage, closed more than 200 outlets in Shanghai in January. The company, with over 1,800 offices across the country, is also closing outlets in other cities.

At the same time leading real estate firms based in Beijing, such as Golden Keys and Xinyitian, were also reported to have significantly reduced their number of outlets to save cost.

"Fewer transactions and falling property prices are the major triggers for property brokers' bankruptcies," says Li Wenjie, general manager of Centaline China (North China region).

According to the Beijing Real Estate Transaction website, among Beijing's more than 2,000 real estate brokerage firms, only 31 inked a deal in November.

"The on-going crisis, though seemingly caused by the gloomy external environment, is in part due to internal chaos at firms and overly rapid expansion," says Li.

When the property market was red hot in the past two years, most real estate brokerage firms easily made money by just opening outlets, Li explains, noting they also were eager to extend their outlets but did little in training of professionals or improving corporate governance. Once the market cooled, the rapid expansion resulted in soaring costs and tightened cash flow, he says.

Chuanghui is one example - it opened 250 outlets in Shanghai in just two months in the second half of 2007.

In addition, due to poor internal controls, a number of real estate agencies were hit with embezzlement.

Zhongtian Real Estate Evaluation Co, one of the country's top-100 real estate brokerages, was shuttered overnight in November when the company's president, Jiang Fei, ran off with over 40 million yuan, leaving behind 170 million yuan in debt.

It was not the first embezzlement case in the past two years. A half-month before, Fuzhou-based Chengye Real Estate Brokerage Co was closed when its boss disappeared with 45,000 yuan.

In the autumn of 2006, Tianjin-based Huizhong Real Estate Brokerage closed all of its operations overnight after 150 million yuan disappeared. In the autumn of 2005, the boss of Taoyuan Real Estate Broker Co, the largest real estate brokerage in Anhui province, vanished with over 60 million yuan.

"A lack of supervision is the key reason," says Lu Hang, vice-president of Century 21, a leading real estate brokerage company. "The introduction of a third party (to hold money) such as banks, law firms or insurance companies, would be better to enhance capital management."

The triggers for the bankruptcies were all similar - the embezzlement of customer funds, whether to fuel rapid expansion, speculate in the stock market or for top management's own use.

"Once the investment fails or the real estate market sees a downturn, the company's tightened cash flow will cause a breakdown," says Huang Jianming, CEO of the Shanghai-based Zhiheng Jiacheng Real Estate Brokers Ltd.

While many domestic real estate agents are shutting down outlets, some international brokerages are quickening their expansion into the mainland market.

Hong Kong-based Midland Realty Estate Agents opened its Beijing branch in January and embarked on an aggressive expansion plan during the depth of winter.

"The current poor situation actually provides us a perfect opportunity to enter the market at lower costs," says Guo Yinglong, director of Midland Holding.

He admits that Midland's outlets were also faced with shrinking transaction volumes. "That is a temporary adjustment and I am still confident in the pre-owned housing market in first-tier cities in the long run," he says.

"We are striving to open 60 to 80 outlets by the end of this year," says Bai Jiyuan, general manager of Midland Real Estate Agents (Beijing).

The company has opened 26 outlets in Beijing since September.

(China Daily 02/25/2008 page3)