(Bloomberg) -- Zuo Hui is on a mission to bring transparency to China’s murky property market, where buyers must navigate fake listings and sometimes fraud.
To pull this off, his KE Holdings Inc. uses a national chain of physical real estate offices that has been around for almost two decades, paired with a two-year-old digital platform that helps match buyers and sellers with artificial intelligence algorithms.
Building and running the site, known as Beike, or “seashells” in Chinese, is expensive -- the company as a whole spent 1.6 billion yuan ($241 million) on research and development last year and another 8.4 billion yuan on general and administrative costs, and is yet to make a profit. To Zuo, it’s worth it.
“The most difficult part is that doing the ‘right’ thing often comes with short-term sacrifices in economic interest,” the KE founder and chairman wrote in the company’s initial public offering prospectus this year. “Initial challenges pave the way for long-term success.”
So far it has worked out. KE sales surged 80% to 46 billion yuan last year from 2017, and it has become China’s largest platform for housing transactions and services -- no small feat for a market whose real estate brokerage services are a $1.6 trillion affair forecast to almost double by 2024.
Its backers include some of the most high-profile firms in Asia -- SoftBank Group Corp., Hillhouse Capital Group and Tencent Holdings Ltd. -- and its shares have more than tripled since a New York listing in August. That’s pushed Zuo’s fortune to $20.5 billion, making him one of the 100 richest people on the Bloomberg Billionaires Index.
“Doing business in real estate takes a lot of time, effort and know-how,” said Feng Linyan, a senior analyst with EqualOcean. “Unlike consumer-tech industries where you can subsidize the product until you have dominated the market, real estate relies on a real knowledge of how agents and buyers operate. This is where KE builds its own moat, or barrier to entry that will be hard for other tech companies to challenge.”
KE’s success though comes at a tough time as China’s government focuses on two areas central to its growth.
Beijing this week unveiled regulations to root out monopolistic practices in the internet industry -- a switch from a mostly hands-off approach -- designed to reduce the power of China’s most powerful private-sector firms. KE shares have fallen 8% over the past three days as investors scramble to assess their tech holdings.
Several local governments have also sought to rein in house prices and reduce leverage even as China’s real estate market has suffered. An index tracking the nation’s property companies has dropped 4.3% this year, and China Evergrande Group, the world’s most-indebted developer, only narrowly avoided a credit crunch recently.
Another threat is competition. E-House (China) Enterprise Holdings Ltd., a Hong Kong-listed property firm, said in August it will increase its cooperation with Alibaba Group Holding Ltd., which could heighten the rivalry between KE and one of China’s most powerful tech giants. And that’s only one of the many similar platforms with comparable business models that are around.
KE didn’t respond to requests for comment.
Zuo has been playing the long game. Originally from Shaanxi province, he graduated with a bachelor’s degree from Beijing University of Chemical Technology in 1992 before getting into sales and establishing an insurance business, where he made his first fortune, according to local media.
He then founded Beijing Lianjia Real Estate Brokerage Co. in 2001, when China’s property market was still relatively young, and started Ziroom in 2011 to offer long-term apartment rentals. In 2018, he incorporated KE and launched Beike, the online platform that’s now the firm’s claim to fame.
Beike uses artificial intelligence and big data to improve its service and provide market insights, according to its website. As of June, the company boasted 226 million homes on its platform and 39 million monthly active users on mobiles. The platform also draws in others by allowing decorators, renovators and financial institutions to connect with buyers, creating an ecosystem of property and related offerings.
Some KE executives have also won big. Chief Executive Officer Peng Yongdong, who joined from International Business Machines Corp. in 2010, owns a stake worth $2.6 billion. Executive Director Shan Yigang, who came to KE in 2007 after co-founding another property brokerage, has a $1.1 billion holding in the firm. Co-Chief Operating Officer Xu Wangang started at the company in 2015 to take care of China’s western regions and now has a stake valued at $1.3 billion.
Tencent first invested in KE in 2018 and now holds 12% of the company, a stake valued at $9.5 billion. The two also have a partnership together that gives KE access to Tencent’s ad resources and cloud services. SoftBank owns 9.3% of the property firm, while Hillhouse has 5.2%.
China’s real estate market is anticipated to keep growing “substantially” even if at a more stable rate, and Beike’s platform is well positioned to benefit from a shift to services, according to Maggie Hu, assistant professor at the business school of the Chinese University of Hong Kong.
“The quick gain in the stock price shows investors are confident about the prospects of the company,” she said. “One important reason is they believe in its business strategy and the real estate agency services offered by the platform will generate strong revenue in the future.”
(Adds 16th paragraph, updates wealth and stock figures)
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