On April 20, 2018, Source Code Capital’s 2018 Annual Code Class Conference themed “Opening Sources, Decoding the Future” convened in Beijing. Mr. Zuo Hui, president of Lianjia Group, gave an outstanding speech on “The Changed vs. The Unchanged in the Real Estate Market”.
According to Mr. Zuo, due to the factors like changes taking place in the demographic structure and population density in China, the evolution in the entire real estate industry is picking up momentum. More and more cities are encountering aging problems within its population, and quickly degenerating. However, densification in population does not mean necessary equal to loss in efficiency in resources consumption.
Research from Lianjia indicated, for instance, that since the emergence of bike sharing, housing rents close to subway terminals was actually dropping and leveling with housing rent within a 3 kilometers perimeter.
Amid these changing trends, real estate industries will foresee great development opportunities in terms of online digitalization and public space operation. The figure for new developments in real estate in China is around 10 trillion, with purchase deliveries around 1 billion square meters. Significant opportunities lie within the market of developing more cost-efficient residential homes based on the booming trend of mobile internet.
Mr. Hui Zuo, president of Lianjia Group
Mr. Zuo’s full speech is as follows:
Good morning everyone! The real estate industry is relatively large in size and always attracts significant inflows of funds. We see that Softbank invested billions of dollars in real estate, such as in Airbnb and many other portfolio alternatives. The changes taking place in the entire real estate industry always arouse everyone’s attention.
1. The changes in the real estate market
We can see that the evolving of the entire real estate industry is picking up its momentum. What interests us most, however, is what will future Chinese real estate transactions look like?
When comparing world markets horizontally, we can refer to this index: homes purchase ratio per 1,000 people. This indicates how many transactions on average are taking place per 1,000 urban citizens, and how these transactions look like. What we see here is that this index should be a constant. In terms of China, the turbulence around this constant has been picking up momentum over the past decade.
We can see that in the last decade, the housing price of Beijing multiplied by five, and Shanghai experienced a similar trend. A 500% growth indicates that the market has experienced great volatility. Also, we can see for other municipals like Chengdu and Wuhan, housing prices seemed more stable with smoother changes concerning home purchase per 1,000 persons. As a matter of fact, we studied markets in a good number of regions including Japan, Britain and the U.S. Relatively speaking, the smaller the changes in home purchase per 1,000 persons, the less volatile the housing price. From the point of organization management, how can we tackle this volatility? Actually, this sort of volatility does not limit itself in the real estate industry, but also happens in many other industries as well.
Let us revisit the investment return rates of various asset classes from the past decade. Taking the Chinese stock market as an example, the return rate would rank at the top in the category in one period and find itself at the bottom of the list in another. This also indicates that that asset class is experiencing great volatility. From our perspective, this indeed is the volatility of the market. No matter if we are investing in portfolios or managing a business, the key factor would be how we address this volatility. This is a critical question we are about to encounter.
Looking back on Beijing’s 10-year housing price by month sequentially, we can see that beneath this 500% increase, the actual volatility was concentrated within a 12 months’ time frame. It is surprising that the 12 months contributed to nearly half of the hike. In other words, the changes are not distributed evenly, but burst out in certain moments in time. These sudden changes will bring about many stimulated reactions.
Lianjia has become a fairly large platform in residential trades. We need to figure out how to address these market reactions. We are also considering, of course, how Lianjia can contribute to easing off these volatilities. This is an utmost important topic for us in future.
2. Changes in demographic structure and densification
The second factor would be that the Chinese population has experienced significant changes. This graph shows how the population between ages 0-14 has changed over 50 or more years. As we can see, the percentage of young population in China has declined rapidly, far exceeding the growth rate of GDP. This issue, though discussed frequently, still startles us when actual figures are presented.
As we can see, our young population’s weight today has fallen way behind many mid-income nations and narrowed its distances to those high-income nations. The average age of China is ten years greater than that of India, and 15 years greater than that of Vietnam. Under these circumstances, fundamental changes would take place in future real estate and other fields of commercial activities.
When great changes take place in our demographic structure, more gigantic changes occur in population density. Among the 300 Tier 1 cities that we studied, more and more are experiencing a decline in population. More cities are having the problem with an aging population and are quickly degenerating.
In other words, people are still quickly relocating to central regions. See here the dependency ratio (the working population vs. the dependent population) of all provinces in 2016. Guangdong has a ratio over 9, which means more and more young people are being attracted to the entire Dawan district. However, for the three provinces in North Eastern China, including Inner Mongolia, we see a ratio slightly over 1. This situation is terrifying.
We can see that the densification in population in China today is mainly due to the contribution from those major Tier 2 cities. Some cases are rare even in the entire history of real estate: residential supply was divided into three categories, one to customers, one to businesses, and one supplied by the government. Generally speaking, governments play the role of subsidizing below median income groups. However, among those Tier 2 cities in China, talented, capable young citizens were the ones being subsidized. These cities include Wuhan, Hangzhou, and Xi’an, etc. We saw a comment online a while back saying that, the police in Xi’an were interrogating people randomly on the streets. The police would ask if they have a college degree, and provided the college credential holders with Hukou (registration) upon return.
During the whole process, we have been observing the changes in how those cities attract young citizens and which of those cities would be more likely to succeed in attracting young population. There is a strong correlation with the environment, the concepts of the administrators of the city, and even with some characteristics that lie within the city itself. Let us take traffic conditions for instance. Traffic congestion is severe throughout China. A Tier 3 or Tier 4 today would not do much better than Beijing. What are the changes in living conditions in a city to its citizens, or simply, what is the overall condition of living in a city? These all have a close connection with how people relocate in the future.
We have come to the judgment that the densification of the population does not necessarily hinder the efficient use of resources. We have a highly significant index which is the number of intersections per square kilometer. We can see that in the Pudong district of Shanghai and in Beijing, the number of intersections is just over 10, while in Tokyo and Paris the number comes to around 100. This is an interesting scenario since the distance between the intersections can affect efficiency and service provided by the entire city. Even by studying between these domestic municipals, the index is scattered widely apart. The Puxi district of Shanghai has around 80, setting itself far apart from Pudong district. Lots of cities in China are expanding to new districts. These expanded new districts have wider streets, fewer pedestrians, as well as fewer shops. Let’s look at Tokyo as an example, for the past decade, Tokyo has also experienced densification in population. Eastern and Western districts in Tokyo has about a 85% population ratio between day and night. This figure indicates that in the daytime, 85 out of the 100 people would not be moving around. These changes within the city under this trend will greatly impact commercial real estate.
We recently had researched on changes in fundamental infrastructures. For instance, how bike sharing would impact the rental market of the entire city. The research indicates that as bike sharing becomes more popular, housing rents closer to subway terminals were actually dropping and leveling with housing rents at around 3 kilometers away. So we see that how these talented young citizens distribute throughout the cities in China can be a significant variant in the future.
3. The online trend in the real estate industry
Another important trend would be going online and digitalization. In my perspective, the real estate industry would be the last or one of the last few industries striving to go online – the root cause being the remarkably lengthy industry chain. Under this circumstance, it is relatively tough to motivate consumers to make a large purchase online.
Here we see the PV and UV value behind each real estate transaction. We can skip the U.S. since the real estate industry in the U.S. in a special case. U.S. has the Multiple Listing Service (MLS) which suppressed the development of the entire industry. However, see many other countries, including Britain and Australia, have a significant trend in going online. From the figures from Lianjia, every transaction indicates 10k PV, while Beijing amounts 20k PV, which largely exceeds the industrial average of around 3k PV. The parameters depict the fact that the first groups of users are generating relevant data, and further indicates the initiation of real estate online trade. Among the many sectors that are embracing the procedure of online digitalization, such that production, platforms and business services, we firmly believe that future dynamics are encoded within.
On the other hand, new developments in China today would be around the value of RMB 10 trillion per year, that is approximately 1 billion square meters of transaction deliveries. However, we see that very few developers would innovate on “efficient residences” to meet this new era and trend of mobile internet, such as to-go food.
Residences today, as we see it, has more glamorous front gates than ever before, but has, in fact, remained intact on its applications comparing to 10-20 years ago. In other words, those mediums today are gradually losing its capability through time, but of course, also creating new opportunities.
There is a building tech company in the States, Katerra, also funded by Softbank. I believe there would be more companies emerging in the fields of building technologies, such as BIM technology. Eventually, the fundamental medium information of real estate going entirely online will be realized. That is a significant phenomenon as we see today.
Relatively speaking, the product chain of real estate transactions is remarkably long. Just like those many industries with long product chains we see today, real estate transactions and renovations are very typical, with GMV size of about several trillion. However, within those businesses in the entire real estate transaction market, the one with the highest market cap is only valued at less than USD $10 billion. When it comes to renovation businesses, they would be much smaller and spread even further apart. What is behind all this? Looking at this scenario today, those relatively simple procedures in business trades have already been facilitated through the internet, what remained are the complex procedures. Where would the new value be created within those complex procedures? This is a matter worth looking into.
In our perspective, the most important question within the entire complex transactions arena would be the coordination of diverse roles. How do we create new roles and alternatively, eliminate old ones? How can we accomplish more valuable coordination between diverse roles, platforms, businesses, and consumers? How do we visualize all those data online? Those are the core changes we expect in the future. These changes have already taken place in the field of real estate transactions and have just sprouted in the renovation industry. Major strategic alterations are yet to be expected in future.
We see that some startups in both China and the U.S. are striving towards this goal. They are striving to pinpoint those diverse roles and create better coordination between them within those long product chains. In conclusion, I consider this to be an important directional change in real estate and its related industries.
4. Operating public spaces
Finally, I consider another major direction of the future lies in operating public spaces. We see that the commercial complex in cities is getting larger in dimension. A commercial complex has become a standardized core of the city. An enormous number of commercial units including dining, entertainment, fine arts, etc. would gather around these complexes. Moreover, as they experience even more diversity, they essentially become a public space of the city. Take shared-offices as an example, when compared with traditional offices, their fundamental difference lies in operating public spaces.
Two core factors would determine if a public space is being successfully operated. One being the operating public space itself, and the other being the management of its members. Consider Beijing, a city with 8 million migrant workers, most of whom are blue-collar. It is in fact a gigantic problem on how their living spaces are being addressed. We have been trying to tackle this problem by implementing all sorts of non-standardized residences, and in future, we expect this area may see all kinds of obstacles.
What is commonly discussed today is how the market can supply standardized residences with a monthly rental budget of RMB 1,000-1,500. We can see here a room specifically designed for the blue-collar citizens. The footage is tiny, sized merely at 8 square meters. A monthly rent of RMB 1,500 is still considered more than gracious even for this size. However, this is a hard fact, the reality of China today. If we deduct 1.2 square meters away from bed space from the 8 square meters of living space, what is left in space is very limited. However, we have still the public space at our disposal outside the room. It would be considered a significant change if we are able to manage these public spaces effectively and improve overall customer experience in these lower-end blue-collar residences. There is still plenty of room for improvement. Take our present-day community, for example, these communities we live in today have almost no public spaces. The problem remains to be solved on how to operate these public spaces.
To sum up, we hold the view that there are still magnificent ongoing changes taking place in the entire real estate industry today, and many more investments will be attracted to this industry as well. So I would be happy to provide each and every one of you some directional references.