Is a Revolution Coming to Second-Hand Home Sales? Lianjia, an Industry Insider, Weighs In

For a big, traditional company, transformation is never easy. And in the end, the one that "lets change happen" may be a company that does not yet exist.

"Let change happen."

It does not sound like a slogan a real estate agency would shout. But a month ago Zuo Hui, founder of the 14-year-old Lianjia Real Estate, stood before the press with those words in large characters on the wall behind him. Zuo rarely appears in public these days, and he came to announce a major decision: Lianjia Real Estate would be renamed simply "Lianjia," with a new logo, "lianjia.链家" (the characters read "Lianjia"). Zuo said the change served a strategy of turning the company into an internet platform, and that a real estate O2O (online-to-offline) platform was its next goal.

Lianjia has worked the brokerage market for many years. It holds 50% to 60% of Beijing's second-hand home brokerage market, an overwhelming lead. In the first half of this year it bought Shanghai's Deyou, which made it the second-largest brokerage in Shanghai, behind Centaline Property. Besides Deyou, it has bought, in quick succession, Chengdu's Yicheng, Beijing's Yijia, Shenzhen's Zhonglian, Hangzhou's Shengshi Guanjia and others. It now has more than 3,500 stores and 50,000 agents in 17 Chinese cities.

Lianjia founder Zuo Hui

Shortly after that press event, we interviewed Peng Yongdong, CEO of Lianjia.com. Lianjia's headquarters sits on a busy stretch of Beijing's East Second Ring Road; Lianjia.com's office is far out beyond the North Fifth Ring Road, in Xierqi. More than 600 engineers work there, many of them formerly at Baidu, Alibaba and Tencent. That was the main reason for the location: many programmers live nearby, so hiring is easy.

Peng joined Lianjia in 2010 as director of its corporate development center and online marketing center. Before that he worked at Arthur D. Little, the world's oldest consulting firm, and was a senior strategy and change consultant at IBM, serving clients such as China Mobile and Samsung.

Consulting made him keenly attentive to data, and putting real estate information and data online is his job at Lianjia. Lianjia.com grew out of "Lianjia Online," a home-search website Lianjia launched in 2008 and renamed Lianjia.com last November.

In the internet strategy and O2O platform Zuo describes, Lianjia.com will play a central role: it is both a channel that brings in customers and a service provider while they buy a home. "Online is data and information, which help users make decisions; offline is service, and behind service are people and commitments," Peng said. He returned several times during the interview to one point: both the online and offline experience of buying and selling homes is poor today, and the whole service process needs to be rebuilt.

When the market is good, everyone chases it and nobody wants to change, even if people in the business can see the problems. But 2014 was different. "A lot changed starting that year," Peng told QDaily. The clearest sign is that deals take longer: they used to close in one to two months, and last year it took three to four months or more. Longer deals mean lower efficiency.

According to Soufun's second-hand housing monitoring center, transaction volumes fell year on year in all 14 major cities it tracks in 2014. Nanjing fell most, by 41%, followed by Beijing, Qingdao and Shenzhen, down 34%, 32% and 30%. According to the Beijing Municipal Commission of Housing and Urban-Rural Development and Centaline Property's market research department, Beijing registered about 105,100 second-hand home sale contracts online in 2014, the lowest of any year since online registration became universal in the second half of 2008, and 35.4% fewer than in 2013.

"The core question now is who can get closer to customers and understand their needs better, because they have the better chance of closing a deal," Peng said.

A recent QDaily Research Lab poll, "What bad experiences have you had renting or buying a home?", drew 1,214 responses.

The most common complaint was unreliable information, including false information (22.7%) and incomplete information (16.9%). If you have ever rented, for example, you have surely learned not to expect much from a listing that says "fully renovated," and "all amenities nearby" may mean being woken at 6 a.m. by the produce market downstairs.

Plenty of users have also been burned by agents: 16.8% said agents' tricks bothered them most. An agent might first show you a few run-down flats, then show you a good one beyond your budget. Or lure you with an attractive listing, then tell you on site that it has just sold, and would you like to see something else?

Peng acknowledged these problems, and said false and incomplete information are among the things Lianjia wants to change. "We want to change how information moves in this industry, change how deals are done, and change how agents come across."

As an insider, how far can Lianjia fix the problems it sees in its own industry? And how much can the internet help?

Home Sales Are Still Far From Truly Moving Online

"The internet has reshaped every industry deeply, but even today only 15% of listings are posted directly online; 85% come from offline," Peng said. Over the past five years that share has grown by only 5%, barely a change.

The listings online may be dizzying, but useful information is scarce. Say you want a 90-square-meter two-bedroom (perhaps with more conditions) in Shanghai's Xujiahui or Beijing's Wudaokou. It is hard to find out how many such homes are for sale, or how much demand there is for them.

Much offline data has never been digitized, and Peng himself thinks Chinese users have a very poor experience searching for homes online. "There is no single place where you can see every new and second-hand home for sale in all of Beijing, or in 25 cities, or 50 or 100. There isn't even one place where the information is entirely true, let alone detailed."

Sellers face the same information gap. Suppose your compound has five floor plans and your flat is Type A. Roughly how many Type A flats are there? Is that relatively few or many? How have they sold in the past? Are they easy or hard to sell? What kind of buyer likes them? What return have past buyers made? Peng believes all of this is data waiting to be mined, and it is the information that really needs to go online. "Collecting the history of each home and building products from it, to serve buyers and sellers, leaves a lot of room for improvement."

Yet China's online real estate market today is full of false information and fake listings. Users mostly waste their time there, because they are dealing with false information, which is pointless.

Another Question: Will the Internet Eventually Kill Off the Store?

Since the second half of last year, internet brokerages such as Aiwujiwu and Soufun have pushed into this market. They charge low commissions and tout the advantage of "no stores, low costs"; to agents they offer "high base pay, high commission."

Take Beijing. Data from the Beijing housing commission show that in June's existing-home contracts, Aiwujiwu and Soufun had climbed to fourth and fifth place, ahead of traditional brokerages such as Centaline Property and Century 21 by volume.

Some therefore ask whether Lianjia's asset-heavy model will drag down its margins against rivals without stores. But the figures Peng gave QDaily show that store costs come to less than 10% of Lianjia's total revenue, or about 1,500 yuan per agent. Even without stores, each agent would still cost 1,000 yuan, so the difference is small.

Lianjia also believes stores are worth far more than they cost, especially in China, where housing is densely packed and a good store network makes agents much more efficient.

Besides their value as advertising, stores bring trust, which matters more. Agency stores usually sit close to residential compounds, and most owners now list their homes through a store. "Buyers and sellers exchange information in completely different ways. A buyer is retrieving information; searching online costs you nothing. A seller is putting information in, much of it sensitive and private: who I am, my door number, my phone number, and you also have to upload the property deed. The security requirements are very high." Peng said the internet cannot yet persuade owners to hand over their listings this way.

Many sellers are also buyers. In first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen, demand from people trading homes is strong, so each store effectively gets customers twice.

In Lianjia's plan, stores will become hubs for community O2O services. The company said its Beijing store network is basically saturated, and expansion in other cities will depend on the market. But by 2017 its agents may double from 50,000 to 100,000.

Can Lianjia, an Insider, Achieve the Change It Wants?

Whether through stores or an internet platform, Lianjia's ultimate aim is to bring more people in to buy and sell. To compete, it has to get both its online and offline service right.

"The offline experience across the real estate business is bad, and the online experience is worse," Peng said. The first thing to fix, he believes, is whether listings are true. That is why Lianjia has put great effort into its "Building Dictionary": on entering a city, it first counts every home there, gives each one a number and enters it into a database, so that any later sale can be looked up quickly. "The goal is still to make deals more efficient and earn more from the business."

He even thinks the current buying process makes no sense. Today you buy a home first and then apply for a bank loan; if the bank refuses, you are exposed to a big risk. He believes brokerages should design a better buying process that reduces such uncertainty. Lianjia is trying financial products, such as short-term loans that tide customers over while they are between homes.

As for the industry-wide problem of dishonest agents, Peng sees it as a stage every industry passes through. "Every industry goes through this. A few days ago I was in Taiwan, talking with someone in the same business. Today being a real estate agent in Taiwan is a respectable job, and many graduates of top universities such as National Taiwan University and Fu Jen Catholic University become agents. He told me that 30 years ago in Taiwan, at signing they would shut the door and ask whether you were going to sign, like a scene from a gangster film." Lianjia, too, needs a rating system and internal rules for cooperation to keep agents in line, much as passengers now rate drivers after a ride-hailing trip.

His answer is a file on each agent plus a rating system. When you hire an agent, you can check his credit record first. And when owner and buyer close the deal, each can see the other's record.

But Peng admitted that an industry does not change quickly: after one year you will see little, after three to five years you will see the difference. What Lianjia must do, he said, is "first, strengthen trust in the brand; second, make my product more interactive, so that when you deal with me, you don't feel so much anxiety."

In the end this comes down to honesty and safety, and here the companies Lianjia should watch may not be its traditional rivals but firms like Airbnb and Uber.

For a big, traditional company, transformation is never easy. How much of the change it wants Lianjia can achieve is hard to say. And in the end, the one that "lets change happen" may be a company that does not yet exist.

QDaily Also Asked Peng Yongdong About Other Industry Issues:

Q: You said 2014 was a year of great change for real estate, with deals taking longer, for example. How do you see this change?

A: Business really did get harder, but I think this is normal, and what came before was abnormal. Buying a home is a major decision; you shouldn't decide quickly, buying after one look. The way people used to scramble to buy was unreasonable.

Once deals take longer, things change, and the gap between good and bad service widens. When everything sold easily, you could score 100 and I could score 80 and I'd still sell; scoring 100 didn't gain you much. But today's buyers compare, and the key is who can get closer to the customer, understand their needs better and steer them to the right properties. That is what gets a deal done.

Last year we also saw some cities flip: new-home sales slowly fell and second-hand sales rose. There are certain inevitable patterns here. When a city's GDP per person reaches US$4,000, it starts building new homes and everyone buys new, because the city is small. When GDP per person reaches US$8,000, people have spare money, resources grow, and the second-hand market gradually develops. That is because second-hand housing is a service industry, while new housing is manufacturing.

Q: Many people who have looked for a home have had this bad experience: after one agent shows me a flat, a great many other agents start calling me. I'd probably rather have one person give me a complete solution.

A: People who genuinely want to buy or rent don't reject information during that period. The problem is that there's a lot of contact but the contact is poor. If every agent who contacted you told you something useful, you wouldn't actually mind. You care about this information while you're buying a home, so why would it annoy you? The core problem is that the contact is poor, so it feels annoying and intrusive. If everyone gave you good information, say, another flat has come up in the compound you saw last time, or the flat you viewed has dropped its price, you wouldn't be annoyed. How do we fix this? Through the internet: by making every interaction better.

Q: Many brokerages now also sell new homes. Are the margins higher?

A: As a business, new homes are easier than second-hand ones, because the product is more standardized. If you treat each home as a product, each second-hand product has an inventory of about 1, while a new one has about 10. For example, flat 301 may be gone, but 401 and 801 are still available. Brokerages also hold a large pool of customers and resources, and someone shopping for a second-hand home may well want a new one, so we reuse the same customers, which lowers our cost of acquiring them. As for margins, the big lines of business should be about the same, with new homes perhaps slightly higher.

Q: Some internet brokerages charge only 1% or even 0.5% commission. How much pressure does that put on traditional brokerages? (Lianjia charges 2.7% on second-hand home sales.)

A: I think low prices will certainly find a market. We sent people undercover to competitors, and they tell customers, "Go view homes with someone else first, and come to me once you've found one (and I'll close it at a low commission)." That's common practice for them right now.

Some customers are certainly price-sensitive. But I don't think this model can last.

First, buying a home is a major purchase with many risks for the customer, and everyone weighs them. Only the earliest wave of customers is price-sensitive enough to accept that risk for a lower fee in the short term, and it will get harder from here.

Second, their business model can't last, because they lose money on every deal: commissions of 0.5% and 1% can't cover costs.

Q: China's real estate industry has long had an integrity problem, for example agents of very uneven quality. Specifically, how do you improve that?

A: We think the key to managing agents is, first, building a system of cooperation.

For example, closing one second-hand sale involves who first entered the home into the system, who held the keys, who took the photos, who kept up the relationship with the owner, who signed the exclusive listing, who entered the customer into the system, and who showed the customer the home. In theory seven agents share the commission. So we need a cooperation mechanism that sets how each role is paid.

Second, there has to be a rating system that restrains agents' behavior. Many people in this business look only at short-term gain, with nothing long-term to hold them back. The good thing about the internet is that it lets information spread, and magnifies everything, good and bad.