TWO recent scandals involving big real estate agencies from southern China are damaging the credibility of domestic property agencies and local experts are calling for more stringent regulations to ensure the healthy development of the sector.
In November, Jiang Fei, founder of Shenzhen-based Zhong Tian Real Estate, a well-known property agency which had as many as more than 150 branches and employed 2,000 people across China during its heyday at the beginning of 2006, vanished with some 40 million yuan (US$5.48 million), leaving clients, employees and suppliers in the lurch.
Just two months after the Zhong Tian scandal, Chuanghui, another Shenzhen-based real estate agency that claimed to be China's biggest property broker, was reported to have closed 1,000 of its 1,800 outlets since October because of a deteriorating market. The closure caused rowdy protests by both employees and customers amid deep concerns that the massive closures might be a prelude to the collapse of the firm.
"The Zhong Tian scandal has once again warned us that a third-party supervision bank account should be established for second-hand property transactions," said Sam Wei, an attorney with Co-effort Law Firm. "Related government departments, such as the local housing and land resources administration bureau or the local administration of industry and commerce, should introduce certain rules to ensure only qualified organizations and agencies will be allowed to supervise or have access to clients' capital."
As a matter of fact, the Ministry of Construction and People's Bank of China, the central bank, jointly issued a statement last January saying the country's real estate agencies will be required to set up a special-purpose bank account to deal with second-hand property transactions.
According to the statement, in the future, details such as when and how to make payment for a second-hand property deal should all be included in a trade contract, and all capital transactions should be conducted through the bank and no cash deal will be allowed.
The new requirement seeks to reduce disputes caused by ambiguous wording in the contract and also to crack down on unqualified property agencies which might misappropriate clients' money for other uses, industry people said.
At present, about 90 percent of second-hand property deals are sealed through property brokerage firms and buyers will suffer losses if the agencies collapsed or executives of the firms with access to the bank accounts disappeared with clients' money.
"The reason why some small-sized property agencies could be really dangerous for customers is that the entry barrier for such business is very low, requiring only a registered capital of 30,000 yuan, and they usually conduct their businesses without proper checks and discipline," Wei explained. "Whenever a loss is incurred, it is almost impossible for clients to retrieve their money."
Yin Kunhua, a professor at the Shanghai University of Finance and Economics who has been monitoring the industry for decades, also said bluntly that the small-sized and unprofessional real estate agencies have already become a problem for the industry.
"As far as I know, most of the city's large-sized and government-backed property brokerages have been implementing rather strict policies to ensure the safety of clients' money," Yin told Shanghai Daily in a phone interview. "Fortunately, the local government will start to demand full implementation of such policies across the city, as early as the first quarter of this year."
According to Yin, such third-party bank accounts have been on trial a long time ago in a limited number of agencies in Xuhui District.
Real estate brokerages have been increasing their presence very quickly during the past few years amid the country's property boom, which has then led to hidden risks as some of the expansions were abnormally fast.
In the most recent case of Chuanghui, the company opened more than 250 branches in Shanghai alone since its entry into the local market in the second half of 2007.
"That is really an amazing speed and I could hardly imagine how it managed to find so many branch offices across the city in such a short time," said Remy Chan with real estate services provider Jones Lang LaSalle.
Lin Fenghui, chairman of Chuanghui, admitted the company's expansion has been too rapid in recent years and it is suffering from cash flow problems.
So far, all of Chuanghui's offices in Guangzhou, Foshan, Zhongshan and Dongguan have been closed while dozens more in Zhuhai and Huizhou suffered the same fate, with only about one third of its branches still in operation in Shenzhen, its headquarters, according to local media reports.
The central government's tightening credit controls over second and multi-home mortgages have begun to bite in China's real estate market with transaction volumes falling considerably.
In September, the central bank and the China Banking Regulatory Commission announced that mortgage holders who apply for another home loan are required to make a downpayment of at least 40 percent and pay a 10-percent premium on interest rates and the requirement on third or fourth mortgage will be stricter.
The requirement on first mortgage, meanwhile, remains unchanged - up to 30 percent downpayment and a 15-percent interest discount.