Inside the world’s most valuable proptech company
Following its massively successful IPO in New York, Beike Zhaofang is now the world’s most valuable proptech company — but can it sustain its lead?
Beike Zhaofang, the Beijing-based online real estate platform, hit the New York Stock Exchange on Aug. 13 with a gargantuan “pop” as they say on Wall Street — despite all tensions between the United States and China.
Through its parent company KE Holdings, the Chinese housing intermediary backed by SoftBank sold 106 million shares at $20 each during its initial public offering, while first-day trading opened 75 percent above the offer price and would end the day up 87 percent.
This made for an even bigger splash than Twitter saw on its first day of trading in 2013, and marked the largest first-day pop for a billion-dollar IPO in the U.S. this century, according to investment adviser Renaissance Capital.
After two months of trading, Beike’s stock price has continued to soar, and the firm’s market capitalization stands at $75 billion as of mid-October, making it the world’s most valuable real estate tech company. By comparison, CoStar’s market cap is about $35 billion.
Despite the Trump administration’s trade war and attempted crackdown on WeChat and TikTok, as well as increased scrutiny of some U.S.-listed Chinese companies, Beike and many others have continued to raise capital in the states without incident, netting Wall Street banks hefty fees in the process.
Beike’s impressive stock performance is a clear indication that investors are buying into its vision — one driven by the growth potential of China’s housing market coupled with ambitions to reinvent the country’s still underdeveloped and somewhat chaotic brokerage landscape.
Representatives for Beike and KE Holdings did not respond to requests for comment.
Beike’s “successful debut reaffirms the advantages of listing in the US, the world’s deepest capital markets,” Renaissance Capital wrote about the firm’s IPO, “particularly for large and fast-growing Chinese issuers.”
With 2.1 trillion renminbi (more than $300 billion) worth of deals completed in 2019, Beike is now China’s second-largest internet online marketplace — just behind industry leader Alibaba Group.
And the e-commerce giant founded by Jack Ma is quickly emerging as one of Beike’s most serious competitors.
Last month, Alibaba launched Tmall Haofang, which means “good home” in Chinese, a real estate channel within its popular cross-border B2C platform Tmall. Alibaba partnered with the publicly traded Chinese real estate agency and big data provider E-House.
In August, Alibaba had invested $107 million in E-House, upping its stake in the 20-year old company from 2 to 8 percent.
In China, the infrastructure for the housing transactions and services market had been significantly underdeveloped.
This move was seen as opening up another phase in Alibaba’s long-running competition with WeChat owner Tencent, Beike’s largest outside shareholder with a 12 percent stake.
At a time when the pandemic and geopolitical tensions have made cross-border business all the more complicated, observers note that China’s domestic real estate market presents a safer growth opportunity for the country’s tech giants.
“Alibaba and Tencent are huge in scale, and they must continue to get involved in new businesses to fill the gap and maintain high-speed growth,” Meng Shen, a director at boutique Beijing investment bank Chanson & Co., told the trade publication Mingtiandi.
The idea of tech giants like Google and Amazon going head-to-head in a market dominated by firms like Zillow, Douglas Elliman, Redfin and Realogy would certainly seem far-fetched in the U.S.
But the brokerage landscape in China is very different.
“In China, the infrastructure for the housing transactions and services market had been significantly underdeveloped,” Beike notes in its IPO prospectus. “For example, the lack of an industry-wide listing inventory similar to the Multiple Listing Service in the United States makes it challenging for housing customers and agents to easily access reliable and authentic property listings.”
The absence of a framework for exclusive listings in China has led to a fragmented market with low productivity and high agent turnover, while fake or duplicate listings are still widespread, according to the online brokerage platform.
But the opportunity in the market is also huge, with the country’s urban population expected to grow by another 150 million people in the next decade, according to a report by China Insights Industry Consultancy (CIC) that Beike cites extensively.
For now, Beike still has the upper hand over competitors like Tmall on several fronts, said Robert Cowell, an analyst with Shanghai-based equity research firm 86Research.
“Beike is the market leader in terms of customer experience, data utilization, and software for brokerage operations,” Cowell said.
Beike Zhaofang — which means “seashell house-hunting” — started as Lianjia, a more traditional residential brokerage founded in Beijing in 2001 with just 37 employees. Lianja is now one of several brokerages on Beike’s platform that handle both sales and rentals.
As of June, Lianjia had about 7,700 brokerage offices and more than 134,000 agents across 29 cities in China. Beike as a whole, meanwhile, has 260 real estate brands, more than 42,000 stores, and over 456,000 agents in 103 cities, according to its prospectus.
The company’s founder, Zuo Hui, had arrived in China’s capital from the northwestern province of Shaanxi to study computer science at a local university, and spent a decade struggling to make his way in insurance marketing before getting into the real estate business.
Zuo also brought with him first-hand experiences with some of the problems that some renters and first-time buyers face in China’s housing market.
“I graduated university in 1992 and bought my first apartment in 2004,” he said at a panel in 2017. “In the 12 years in between, I rented ten different apartments, and I know what it’s like to get scammed big-time.”
By 2009, Lianjia had become the largest real estate brokerage in Beijing, according to the CIC report.
Zuo’s next move was to take his business online.
In 2008, the company created its Housing Dictionary, a database of verified listings that grew to 226 million properties in more than 300 cities by 2020. In 2010, Zuo brought in Peng Yongdong, a senior consultant of strategy and evolution at IBM, to serve as the brokerage’s vice general manager.
Peng is now Beike’s CEO, while Zuo serves as its chairman.
A new “playing field”
Starting in 2014, Lianjia began expanding beyond its home base in Beijing and buying up competitors across the country.
The brokerage also began attracting investor interest around this time. Tencent made its first investment in the company in 2016, and international venture capital players like Softbank’s Vision Fund, Sequoia Capital and Gaw Capital participated in subsequent funding rounds.
By 2018, Lianjia had established a presence in 29 cities across China and the company made its next big move by expanding its services into an open platform, Beike, and reorganizing its corporate structure under a new holding company, KE.
“As the brokerage industry is still developing in China, consumers look to brokerage brands as a powerful signal of service quality,” 86Research’s Cowell said. “As such, Beike’s main [first-party] brand, Lianjia, has been able to consolidate over 15 percent share of China’s existing home market.”
The expanded platform, according to Zuo, would enable brokers to collaborate on transactions with the goal of improving service quality, similar to an MLS in the states. In particular, Beike’s Agent Cooperation Network would serve to “foster a culture of transparency, collaboration and shared success” in the industry, he noted.
But some competitors were skeptical.
Since Lianjia would be going head to head with other brokerages on a platform it controlled, critics argued that the company was trying to be “both player and referee.” A group of major brokerages formed an “anti-Beike alliance,” vowing to resist its unconventional and anti-competitive tactics.
Zuo rejected these claims, and responded by expanding on the analogy.
“We’re building a playing field, in the hope that more and more people will come play ball, and the rules get better and better,” he told local media in 2018.
A year later, Century 21’s Chinese franchise defected from the anti-Beike alliance, delivering the platform a major win. The move signaled to brokers across the country that the material benefits of joining Beike could outweigh concerns about unfair competition.
“This influx of new connected brokerages is helping Beike to consolidate [market] share in large cities and expand into lower tier cities,” Cowell noted.
At the same time, other challenges were mounting on a global scale as Trump’s trade war with China rattled financial markets.
Just a week before Beike’s blockbuster IPO, the Trump administration put forward a plan that would require all U.S.-listed Chinese companies to comply with financial audits by U.S. regulators, or be forced to delist.
Similar legislation had passed both houses of congress earlier this year with bipartisan support, and California Democratic representative Brad Sherman emphasized to the Wall Street Journal that “This is not an anti-China provision. This is an investor-protection provision.”
In the light of recent debacles like that of the former Nasdaq-listed Luckin Coffee — a one-time Starbucks competitor that was revealed this spring to have fabricated more than $300 million in sales — concerns over Chinese firms’ accounting practices do have some basis.
And as the White House has put pressure on apps like TikTok and WeChat over national security concerns, these moves have become another point of contention in deteriorating relations between the two countries.
Some Chinese companies have already started to back off.
This summer, 58.com, “the Craigslist of China” and the owner of Beike competitor Anjuke, finalized an $8.7 billion deal to go private and delist from the NYSE. Alibaba established a secondary listing in Hong Kong last fall in part as insurance against U.S. delisting measures, and its fintech subsidiary, Ant Financial, is foregoing the U.S. altogether with a dual listing in Shanghai and Hong Kong.
Geopolitical rhetoric aside, however, nearly as many Chinese firms — more than 100 — have listed in the U.S. during Trump’s four years in office as Barack Obama’s eight years in Washington, according to data from research firm Dealogic. Seven Chinese firms have launched IPOs in the U.S. in the third quarter alone, including two electric vehicle makers and two education companies, according to Renaissance Capital.
Unlike companies with transnational business interests like TikTok and Tencent, the fact that Beike’s business is contained within China’s borders may have helped shield it from global uncertainty.
But the firm acknowledges that could change.
“If we plan to expand our business internationally in the future,” Beike’s prospectus notes, “any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demand for our products and services, impact our competitive position, or prevent us from being able to conduct business in certain countries.”