The construction cranes hovering over the Beijing and Shanghai skylines have come to symbolize China’s high-flying real estate sector. But for all the staggering sums that have flooded into new urban properties, it’s easy to forget that China privatized its housing market less than two decades ago. This young market is still evolving—and like most adolescents, it is still experiencing growing pains.
Like many sectors of the Chinese economy, real estate is also in the early stages of going digital. This transformation will shape how deals get done in the future, and it will speed up development of the infrastructure, standards, and practices that are the hallmarks of a mature market.
The vast majority of US home buyers and tenants now use the Internet as their primary tool for finding properties, and a similar shift is underway in China. Websites such as SouFun.com use search engines to filter property listings by location, property size, and price range. Online platforms are helping developers and agents target consumers and close deals quickly, reducing their marketing and carrying costs.
Some companies have partnered with major search engines and portals to gain consumer insights. Vanke, one of China’s largest developers, began experimenting with location-based advertising last year, using the Tencent social ad platform Guangdiantong to push property ads to a targeted group of QQ (instant messaging) users in Shenzhen. Online real estate marketing is taking off, and the potential is enormous, considering that US developers now spend more than 60 percent of their advertising budgets online.
Local governments, too, are realizing the Internet’s power to match buyers and sellers quickly. They now have the ability to move land auctions online and conduct them in a more transparent way. Wuhan now gets 90 percent of its total local land auction revenue through digital transactions.
Taobao, China’s largest C2C e-tailing site, launched an auction platform for foreclosed properties in 2012. Courts register as “stores” and list seized and forfeited properties for sale, allowing buyers to bid on them within a set time frame. This approach reaches a much larger buyer base across the nation than local auctions. Among the early adopters are courts in Zhejiang province on the east coast. The conversion rate and the premium obtained through online auctions are 20 percent higher on average than those achieved through traditional methods.
Mortgage application and approval processes are moving online, which could save consumers time and money, as well as help banks become more efficient. Online real estate platforms have recognized the value of connecting users with these services and have begun to offer a selection of mortgage offers from different banks.
Developers looking for new revenue sources are introducing online property management and community service platforms that connect residents through social networks, forums, and chat groups, and manage regular administrative and maintenance work such as garbage removal and repairs. These platforms also offer value-added services such as housework, gardening, dry cleaning, and elder care.. But because this type of market links online information to a customer’s physical location, privacy protections will be crucial to whether or not this market can grow.
All these innovations are going to contribute to making the real estate sector that much more productive but the Internet may have an even greater impact by shifting actual demand, especially for commercial properties. The explosive growth of China’s e-tailing market has ratcheted up demand for state-of-the-art warehouses while squeezing retail development. Malls now attract fewer tenants, and there is downward pressure on rents. Shanghai’s K11 Art Mall and Beijing’s Parkview Green are adapting by dedicating more space for restaurants, entertainment, and even art shows at the expense of retail. Another big shift in demand is related to office buildings. As the Internet enables employees to work remotely without compromising efficiency, companies can take advantage of the trend to optimize office space and reduce associated costs.
The Chinese government has its own stake in integrating the Internet more fully into the real estate sector. It now has the ability to create a registration system that could set the stage for imposing property taxes for the first time. This would require a herculean effort to standardize paper-based transaction and title data—and it would no doubt rankle the growing urban middle class. But a national property tax could provide a reliable source of revenue to local governments. It could also prove to be a valuable tool for cooling off an overheated market.
I’m a Director in McKinsey’s Shanghai office and Director of the McKinsey Global Institute (MGI) in Asia. I also co-lead the Urban China Initiative (UCI), a thinktank devoted to transforming China’s urban future. Visit the UCI website here.