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Published by the CIPS Network of the National Association of REALTORS®
Third Quarter 2002
Real Estate Franchising in Mainland China Today
By Bill Hunt
Now that China has joined the World Trade Organization, the experience of Century 21 Real Estate Corporation in China may provide valuable insights about that market
When I entered the real estate industry in the U.S., there were only a few regional real estate firms. There were no national or international real estate companies. Franchising was a new concept, one not associated with real estate in any way. There were no computers, no Internet, and most real estate offices were tiny two or three agents plus a broker. The market was chaotic. There were very few regulations. Consumers rarely gave an exclusive agency listing, because they didn’t trust the broker and saw no value in his services. Most developers sold their own projects. Training programs were non-existent. The average age of the person in the business was over 50 years old. How times have changed! Now, real estate is conducted on a global basis, using leading edge technology by highly trained young professionals who only take exclusive agency listings from sellers or sign buyer representation agreements to assist buyers exclusively, for a fee.
I believe that history is repeating itself today in the developing China real estate marketplace, and that change will occur there at an even more rapid pace. The Century 21 China experience illustrates how.
Changing Cultural Norms In 1989, when Century 21 Real Estate Corporation registered its trademark in the Peoples Republic of China, two things still had to occur before there could be a viable real estate franchise business there.
First, China had to become a member of the World Trade Organization, which would require Chinese law to conform to international law. That would give franchisors both trademark protection and intellectual property rights in China. Following marathon negotiations, China’s accession to the WTO was ratified by a ministerial conference in Doha, Qatar, on November 10, 2001.
Second, the concept of individual homeownership had to be introduced into the culture. But, in 1989, there was no individual homeownership in China. Under the Communist system of welfare housing, people lived in government housing, controlled by factory managers. They paid very low rents, typically around US$15 a month for small one or two bedroom apartments. Then, around 10 years ago, the Chinese government began to sell these apartments to the occupants for low prices ranging from US$500 up to US$3,000 to US$4,000. There was no bank financing available. Occupants typically paid cash.
Then, once the concept of homeownership was established, a rapidly growing college-educated middle class generation began to emerge. They were in their mid-twenties and early-thirties, and entering the market as new construction buyers. This was the beginning of the real estate market in China essentially only about eight years old. Mostly government-owned real estate developers began a construction boom of new, low-income apartments. In recent years, high-rise apartments priced for middle-income buyers have been added to meet a newly created pent-up demand. Right now, one-third of the world’s sky cranes operate in China as a result of the construction boom.
Today, most real estate offices in China are tiny (150 to 200 sq. ft.) storefronts. It is not uncommon to see 40 offices lined up in a row on a single street. In each office, two or three untrained sales agents just sit and wait for walkins. There are no proactive marketing activities at all.
As a strong advocate of prospecting for buyers and sellers, Century 21 has met great resistance to this concept in sales classes for new agents. There is strong cultural resistance to approaching people to ask for their business. We are gradually changing this, especially in dynamic markets like Shanghai where, for example, we now have brokers who pass out 20,000 personalized flyers each month with excellent results. The minimum standard for a Century 21 China office is 500 sq. ft. In the dynamic Shanghai market, it is 800 sq. ft. We have signage and office decor standards to help create a professional image. Already, some chain stores one-owner, multiunit operations are beginning to mimic this approach.
Managing Bureaucracy
At the moment, government policies for regulating the real estate industry are still fragmented and chaotic. There are three distinct levels of government bureaucracy in each market. The Ministry of Construction of the Central Government has the overall control of the industry. Beneath that is the Provincial Government, which either interprets the Central Government’s mandate, modifies or simply ignores it, and goes its own way. Finally, Local Governments also either enforce the regulations from the higher authority, or create their own sets of rules and procedures. An international franchisor like Century 21 China, operating nationally, can have major problems getting approvals to operate in some regions. Local officials will sometimes insist on approving franchise contracts. One such official has actually told us that franchising was not allowed.
Laws regulating the licensing process for offices, brokers and agents are also inconsistent. Local Government real estate bureaus control the education process. They effectively limit the size of the industry by allowing only a few thousand agents to enter the market each year. In some markets, the government owns the biggest real estate chain stores, and they receive preferential treatment over the competition in licensing, so they can grow faster and bigger.
The Century 21 strategy for dealing with these layers of bureauocracy has been to build strong relationships with the various levels of Government. In 2001, on two occasions, we took delegations of senior government officials, including the Minister of Construction of the Central Government, to the U.S. to visit our headquarters in Parsippany, NJ, to meet with our president and some NAR officers. We showed these Chinese officials some Century 21 offices with 100 to 150 sales agents in one office to help them visualize how we want to work with them to transform China real estate markets.
Within China, I represent Century 21 Real Estate and demonstrate Western concepts as a keynote speaker at a variety of government sponsored seminars on franchising and real estate. I also make personal calls on local government officials to explain who and what we are. I stress that we are not the competition, but that we are in China to help develop a professional industry to better serve Chinese consumers.
Introducing New Concepts
Franchising is still a new concept in China, and is not well understood by consumers, businessmen or governments. Chinese franchisees think the franchisor will come in and operate their businesses for them. In reality, a franchise system simply provides branding, the operating systems, and ongoing support to what are independently owned and operated small businesses. In the beginning, Century 21 China had to cancel some contracts because of the franchise owner’s lack of understanding of this concept the franchisee are clearly understood.
Franchisors expect that monthly royalty fees will be paid on time. They expect to be able to do periodic inspections of franchisee’s books to ensure accurate reporting of revenues. In China, however, unrecorded cash transactions are an accepted business norm. A franchisee, therefore, cannot obtain legal or tangible evidence of every transaction on which fees are owed. Even with the use of mandatory electronic filing all of listings as an alternate method of tracking business, it’s a good bet some transactions slip through the cracks. To compensate for royalty revenue lost in this manner, Century 21 China has adjusted its royalty structure, establishing rather substantial monthly minimum fees.
Exclusive listings are rare in the China marketplace. Sellers will list their property with every office on the street. The likelihood of an agent doing a deal with a buyer or tenant outside of the office and pocketing the entire commission is high. In order to control access to this information, brokers don’t give their own agents the names of their sellers. Century 21 China is advocating exclusive listings. It is training its agents to give a professional listing presentation explaining the benefits to the sellers, offering a Sellers Service Pledge that gives sellers the right to cancel the listing if they are not happy.
Establishing a Structure
Century 21 China is built on a two-tier franchise business model establishing a master franchise license for Mainland China, out of which 30 sub-franchises will be granted for regional operations. We will establish and support the individual offices that are franchised under the regional operation. Our goal is to have 2,000 offices and 14,000 sales agents in the next four to five years. Currently, nine regions have been sold five are already open and the other four will open this fall and 70 offices are operating with 550 sales agents. We expect to sell another five regions by year-end.
We began by opening three regions in China in Beijing and two very small provinces. The two provinces have very immature real estate markets with very little resale activity, which has made the development of offices there slow. Because Beijing does not have a strong resale market, growth there has also been slow. The combined impact of this in the first year of operation made regional sales very difficult, because we did not have good results to illustrate the value of our system to other major prospects.
Then, we signed the biggest property developer (1.4 million meters of residential property developed last year) in Guangzhou and the biggest building supply company in Shenzhen the two southernmost cities of China as regional operators. This gave us the track record we needed to validate our system with future regional partners. We recently signed a new region in a major port city, Ningbo, where our regional franchisor has 15 real estate offices and over a 30 percent market share. This will be our most profitable region to date.
The Markets
China is geographically vast. This creates many totally different markets some of which are mature and others of which need several years of development before they can become viable real estate markets.
In the capital city of Beijing, new construction is still the dominant market sector. Developers employ their own sales teams onsite. Apartment resale is still less than 3 percent of the entire market. The other dominant sectors are apartment leasing and expatriate relocation. At the moment, Beijing’s 700 licensed real estate brokers and 4,000 unlicensed brokers do mainly leasing with very little resale and new construction sales.
China’s other major cities such as Shanghai (16 million people) Shenzhen (6 million people) Guangzhou (10 million people) are three to four years ahead of Beijing in the development of a viable real estate market. New construction and resale sectors are equal and the leasing and expatriate housing markets are also strong. In Shanghai, there are 2,200 licensed brokers. Another 5,000 unlicensed brokers compete for the business.
In Beijing, perhaps 100 offices compete for expatriate relocation business from multinational firms doing business in the major Chinese cities. These corporate giants need not just housing for relocating executives, but also area familiarization and cultural orientation. Real estate firms who specialize in relocation fill both needs. Commission is typically one month’s rent between US$2,500 and US$5,000 per deal ranging as high as US$10,000 for the top villas.
At Century 21 China, we have established a Corporate Relocation Department, staffed by two expatriates. They work with multinational firms to win their relocation business and then refer it on within our franchise network to those who have received VIP Relocation Certification. This department is also responsible for the delivery of this training program within our regions, to brokers and agents.
Some international real estate firms like CB Richard Ellis (www.cbrichardellis.com); Jones Lang LaSalle (www.joneslanglasalle.com); and Colliers Jardine (www.colliersjardine.com) work with developers on their market research, planning process and presales and property management services. Century 21 Corporation has opened a joint venture office to compete in this arena and to provide support for our franchisee network.
The Future
In China in the twenty-first century, consumers will have higher expectations and begin to demand quality service. They will seek out government licensed brokers and agents they can trust. They will learn to equate brand recognition with quality service. Brokers will provide a full menu of services, demanding exclusive agency in return. The Chinese consumer will become more mobile as a large middle class of executives and managers develops. They will relocate between the major cities of China as well as globally. This will create a demand for national and international real estate companies to serve their needs, including complete relocation services. Successful Chinese brokers will support the agency relationship with a menu of consumer services that includes the mortgage loan, insurance, and legal assistance during the transaction phase plus complete after sale services such as home decoration, and warranty insurance.
With the accession of China into the WTO, every international real estate company and franchise network will enter China. Many large existing Chinese chains will expand their reach and, in some instances become national in focus by continuing as a chain, or by adopting the franchise business model. As the wave of multinational businesses entering China increases, the global recognition of the international brands such as Century 21 will give them the first opportunity to capture this relocation market. Only the biggest firms will be able to succeed and prosper in the next few years. Offices will become bigger and will have a large staff of agents and support people. Brokers will need to control their incomes to cover their expenses and will only take exclusive agency listings so that they can be guaranteed of an income stream from the sales.
Consumers will demand to be able to find the property of their choice anywhere in China or globally both online through the Internet and offline. Brokers will have to belong to a Multiple Listing System (MLS) such as MLS China (a joint venture with Century 21 China) that will list the properties for sale or for rent including new construction on the Internet. One broker will represent the seller and another broker will represent the buyer.
As the housing demand by the upwardly mobile middle class increases, the supply of new construction will dramatically increase. This increasing supply of new housing will create a move up economy where people will want bigger and better homes. They will need to sell their existing home first and will use the real estate broker. This will result in a dramatic increase in the resale market in every city. With resale brokers controlling these move up buyers, developers who currently use inhouse sales teams to market their product will also need to enter into an agency contract with these local real estate brokers to provide a wider access to their move up customer base. In some cases this will be an exclusive agency contract and in others they will employ several brokers under a non-exclusive agency contract.
As a common Chinese saying goes: While prospects are bright, the roads have twists and turns. This is a perfect description of the road we’ve traveled in China up to now. I suspect it is also the road to the future.
K. William Hunt, the President of Century 21 China, can be reached at +010.6561.7788, or e-mail him at Bill_Hunt@century21cn.com |
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