Nov 9, 2021
[Transcript provided to Seeking Alpha by the company]
Operator
Hello, ladies and gentlemen. Thank you for standing by for KE Holdings Incorporated’s Third Quarter 2021 Earnings Conference Call.
At this time all participants are in a listen-only mode. Also, today’s conference is being recorded.
I will now turn the call over to your host, Mr. Matthew Zhao, IR Director of the Company.
Please go ahead, Matthew.
Matthew Zhao
Thank you, operator. Good evening and good morning everyone.
Welcome to KE Holdings Inc or Beike’s, third quarter 2021 earnings conference call. The company’s financial and operating results were published in the press release earlier today and are posted on the company’s IR website, www.investors.ke.com.
On today’s call we have Mr. Stanley Yongdong Peng, our Co-Founder, Chairman and Chief Executive Officer; and Mr.
Tao Xu, our Executive Director and Chief Financial Officer. Mr.
Peng will provide an overview of our strategy and business development. Mr.
Xu will provide additional details on the company’s financial results. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applied to this call as we will make forward-looking statements.
Please also note that Beike’s earnings press release and this conference call including discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to the Company’s press release, which contains a reconciliation of the audited non-GAAP measures to comparable GAAP measures.
Lastly, unless otherwise stated all figures mentioned during this conference call are in Renminbi. With that, I will now turn the call over to our Chairman and CEO, Mr.
Stanley Peng. Please go ahead, sir.
Stanley Yongdong Peng
Thank you, Matthew. Hello everyone and thank you for joining us today on our third quarter 2021 earnings conference call.
Before I go into more details that I need first provide a better future view of our industry. During the past quarter, the entire housing transactions and services industry, including ourselves faced a series of challenges.
At the new and existing home and land market is to be honest substantial corrections, transaction throughs, marketing making a historical color. The industry laterally made difficult but the correct adjustments not only in its economic growth driven by high leverage, not sustainable, but it will also negatively affects people’s lives and to creates systematic risks without correction, creating the developers business model that will be based on high turnover, high leverage and a high housing price.
Our national policy, though our housing is not either for living nor for speculation, that it encourages both housing purchase and the renting will become a castle in the sky. If the housing transactions and services industry blindly use pen in scale, without offerings, some professional services, it will be unable to ensure service quality, nor adequately protect our consumer rights and an efficient housing market will be impossible when we talk about to the license, even if it is difficult.
We are referring to an instance where there is an opportunity to undertake daunting tasks with a week payoff in the short time, but a real crew to generate great value in the long-term as the participants of our industry in need of reform. And under guidance of the Chinese government’s policy to correct market instability and create more equitable housing circumstances is the biggest duty to show that our responsibilities for the great goods, rather than installing and serving our business needs.
We firmly believe China’s housing industry is facing crucial development opportunities are promising era for existing homes and a better leverage is coming up upon us at an accelerated pace. With that backdrop in mind, let’s talk about the industry and the overall performance of our company in more detail.
A series of policies such as purchase restrictions, loan quarter limits, sales restrictions, reference process, financing limitation, payment restrictions and recent alerts from several developers have also dragged down market sentiments. The results have been a significant downtrend in the existing home transaction market in first tier cities and most second tier cities.
GTV of existing home sales market declined 41.6% year-over-year, while GTV of new home sales market declined 14.1% year-over-year in Q3 during the sharp market downturn. The ecosystem of the brokerage industry was worst quickly.
The total number of brokerage rate agents on our platform shrunk and the broker registers faced severe challenges. In Q3, the number of stores on our platform with a trailing 12-months GTV is exceeding the line of RMB15 milling to come 3.3% quarter-over-quarter accounting for 33.7% of total stores.
Our mission is to promote admirable service and joyful living in China. We have come to a point where our corporate culture, organization capabilities and our two decades of successful operations play a pivotal role as we move ahead.
We have a strong team of senior manager taking charge of divisions, provisional and city levels. These dedicated leaders averaged more than 10 years in digital services at Beike, that see industry developments at their personal responsibility with their seasonality and the broad determination.
We are confident we can navigate the tough market cycle and come out even stronger. During the third quarter, we implemented a range of measures to ensure stable operations and a sufficient income for high quality store owners and agents withdrawing to inspire owners and agents to make the right choices, provide quality services in the face of challenges and deliver on their commitment to take care of customers against interferences.
We believe the key is the focus and the collaboration. First, we have absolutely promoted our agent specialization strategy increasing productivity through remaining focus.
Second, we are diverting small resources to new home sales and rental centers. Third, we further encouraged cross-brand, cross-store collaboration and cooperate among existing and new home sales and rentals.
We are also promote John efforts between new and a seasoned agents as well as we turn the functional teams and the business teams together. We keep our feet on the ground and then carry on.
During third quarter, the number of stores on our perform increased 2% quarter-over-quarter to 53,946, and only 1.7% of stores on our platform closed due to the market correction. We also facilitate some store merges to improve productivity, otherwise low efficiency stores based on a target diagnostics and it dropped some non-cooperative stores from our platform.
This also demonstrates that there is increasing stickiness among connected stores on our platform. And a growing number of stores outside of our ACN have jointly asked for support during the down cycle.
29% of new stores that have joined our ACN network in Q3 were from external, Fang jiang hu stores, compared with 22% in Q2. The number of agents on our platform was 457 at the end of Q3, 6% lower than the per year quarter end.
The decline was a result of increasing agent attrition resulting from that market correction. For the most part, this has been the industry normal, but also due to our initiatives in some cities to improve overall agent quality.
As we implemented various mitigating measures in Q3, the agent attrition rate in Beijing and Shanghai remain lower at 3.9% better than the four – 4.7% we saw during the same period last year. Despite these broad challenges our collaborative spirits continue to be the foundation of our business.
In Q3 transactions on our platform completed through cross-store collaborations and the proportion of existing home listings contributed, by not only in those connected stores, both remain stable at 76% and 85.5% respectively. Moving to our quarterly performance and the measures we have taken with each of our lines.
With respect to existing home transaction services, according to Baker Research Institute nationwide GTV for existing home sales decline, 41.6% year-over-year in Q3. GTV for our existing home transaction was RMB830.7 billion with a year-over-year decrease of 34.3%.
Specifically, GTV for our existing home sales decreased by 36.8% year-over-year, demonstrating virtually resilience of our business in the downcycle. Function allocation as the foundation of our ACN division of labor brings focus, focus brings professionalism and competitiveness and the cooperation bonds these all together.
To this end, we ask you our agent specialization strategy, overall setting well 1000 stores in Q3 covering over 300,000. Agent consumption completed collaboratively pass specialized agents on our platform accounted for 29.6% of the total transactions in Q3, up from 14.4% in Q2.
We are also making strides in digital empowerment. We launched the Xiaobei existing home sales training camp, which is an online standardized and intelligent system for the vocational training.
The Xiaobei training camp simulates the interactions between agents and customers in VR and offline property assurance and provides performance evaluations leveraging our AI capabilities. We can identify best practice in the process as well as each agent who were recognized for target training.
In Q3 more than 125 agents took Xiaobei existing home sales training in more modem, 1.2 meetings, natural sessions. In the future, as we accumulate more data in existing home sales services, Xiaobei training camp can be used for broader vocational training fields, such as new home sales and a home renovation services.
Turning to new home transactions, as we mentioned, the degree of correction in the new home market in Q3, you can see our expectations. According to the National Bureau of Statistics GTV or probably sales decreased by 14.1% year-over-year.
In Q3 our new home transact GTV was RMB410 billion, down RMB2.5 billion year-over-year, performing much better than the broader markets. The overall, industry continued to trend downwards from July to September, leading to further pressure on sales through.
On the other hand, brokerage penetration bottomed out in Q3 as developers become more reliant on brokerage channels to accelerate sales, to preserve liquidity. This in turn benefited those new home sales channels that provide quality services, protect the interests of consumers and a whole strong agent mobilization capabilities.
We can see this by looking at the increase in a number of new home projects for sale on our platform, which rose 13% from June to September. While our platform has been well-recognized by developers, we continue adhering to high standards for project cooperation and performing end-to-end risk control, to ensure timely and healthy payment collections.
In our new home business, we have prioritized timely payment collections over scale and expansion or any other metrics. In our view permanent launch in commission rates we strictly implemented end-to-end risk management and control system, which enables response mayors with 24 hours after our risk warring is tripped.
We do not expect to have significant risk in our new home business. We operate in a high, independent, efficient, and have never reliant on resources, endowments or relationships for our growth.
Our confidence comes from the sound our or excellent stores and the agents on our platform and a strong customer definition they have gained by performing high quality services. We are also far ahead in digitalization and in rich online concept for our new home business to provide consumer objective, neutral, personalized online contents that are narrows information gate.
We are encouraging occupational generated content or OGC. We are building an open platform to enable those professionals to supply comprehensive commentaries also narratives and empower customers with more information – informed decision-making capabilities.
This will further enhance the platform generated content such as our Housing Dictionary. At the end of Q3, our Housing Dictionary had achieved 100% coverage of the targeted new home distance on the market.
Notably in Q3 we create China’s biggest database describing on favorable factors of new home projects. This lays the groundwork for bigger to bridge the information gap and to provide truly reliable and useful new home content.
Where we will never stop our persist pursue of top-quality services. The only market corrections, we believe it is more important than ever to emphasize the governance of new home business conducts.
At the end of Q3 our Five Don'ts commitment to developers, have covered all developers in 66 cities 11,109 new home projects in total. But mid-October, we identified a total of 47 misconducts and a provider nearly RMB2 million in compensation to developers, fulfilling our commitments to them.
Moving to emerging services. In Q3, we steadily progressed home renovation business, including self-operated Beiwoo and Shengdu, which we are in the process of acquisition.
Beiwoo completed the renovation of 1,127 home units in Q3, up 35% quarter-over-quarter. While the contracted sales of Shengdu also increased more than 35% year-over-year by the end of Q3.
Regarding its operations, Beiwoo achieved breakthroughs in empowering both service providers and customers in Q3. For service providers, Craftsmen Academy, the industry first full services on a casual training base opened in September.
It aims to cultivate renovation professionals across industry chain, nurturing designers, foreman, workers and more. The focus is on general and professional competencies and leadership.
In September 394 foreman took part in the training. Long plagued by the shortage of high-quality service providers, industry infrastructure such as Craftsmen Academy is designed to upgrade renovation services standards and help industry practitioners achieve personal growth.
Meanwhile, we upgrade our home SaaS system to manage and empower both foremen and workers. This upgrade allows even the construction process to be standardized, modularized, assessed, distributed and managed to the finest granularity.
Labor and materials are centrally deployed by the platform, with an accurate, controllable budgeting process. For customers, Beiwoo launched its 10 heart-to-heart service commitments in September to address the renovation industry's key pain points for customers.
Our pledge includes double compensation for malicious increase beyond the scope of the contract, double refund for under the table charges, triple compensation for using fake materials. Compensation for delays and six others covering areas of budgeting, materials, construction, timelines and services.
In summary, in this round of productions we are accelerating our thinking on the additional value we can create for society and our social responsibility we should take. The answer has become increasingly clear.
In China, people's yearning for a better life is reflecting in their desire to live and work with joy. [Foreign Language] To facilitate joyful living, we hope to provide a rich variety of high quality and affordable housing services and products for those who need… [Technical Difficulty]
Stanley Yongdong Peng
...including the fresh college graduates, low income groups, new urban citizens. Therefore, we are devoting more talent and resources to innovations and our rental services and regeneration of old residential communities.
To facilitate work that is rewarding and fulfilling with the government's support of vocational education, we have established a multi-layered training and education system for housing services providers. This includes the Original Force Academy for brokerage brand owners, Huaqiao Academy, for store owners and Beike Brokerage Academy for agents as well as Craftsmen Academy for renovation services providers as we mentioned earlier.
Our goal is to have more home related service providers with a path for long-term career development and cultivate more high-quality professionals and technical experts for the industry. All-in-all, despite the short-term impact on our business and the industry that emerged during the market downturn, the overall trend in the housing market remains healthy.
Lastly, the regulatory authorities have responded multiple times to market concerns. Consumers' reasonable funding needs are gradually being met.
Meanwhile, by the accelerated introduction of a property tax pilot program, we believe that a long-term regulatory mechanism can be quickly formed. In turn, we see this promoting the emergence of a new age of existing homes and the quality services sooner than we expected.
The real estate sector in major developed countries accounts for approximately 10% to 12% of a country's GDP. Housing investment market makes up only about 5% and the rest comprises a broader array of housing services.
In contrast, the real estate sector contributes to merely 7% of China's GDP. This housing investment makes up the majority of China's real estate sector.
This indicates massive potential for our domestic housing service industry. If the past five years has been a golden age of real estate developments, then the next five years will be the age of joyful living, characterized by quality housing services.
Short-term fluctuation imposed on long-term secure trends are simply noise. We follow our inner compass and will persist to become the leading comprehensive home services providers for the 300 million families in China.
With that, I would like to turn the call over to our CFO, Tao Xu for a closer review of our third quarter financials. Thank you.
Tao Xu
Thank you, Stanley. Thank you everyone for joining us.
I would like to provide a brief overview for our third quarter of 2021 financial results. As we guided in the second quarter's call, in past several months we saw a deep, sharp drop of the overall property market, including live auction, new home market and the existing home market, amid unprecedented crackdown on speculation with an array of quoting measures from credit tightening to [Audio Dip] home price being rolled out.
This factor adversely impacts our operational and financial result in Q3. We are experiencing a sharp market downturn.
We still want to emphasize our three fundamental beliefs towards this industry. First, housing is one of the largest and the most complex industries in China and a prime candidate for the digital disruption.
Second, Beike is and will continue to be indispensable to transaction and can be empowered to thrive. The third, professional and thoughtful services build customer trust and transcend market stakeholders.
We are confident that our continued support in maintaining the best cost service, by providing – by supporting our agents and further upgrading the infrastructure in housing transaction and services will help us grow through these cycles and further improve our service quality, efficiency and business scale. We maintain our long-term view in pursuing our mission to transform the housing transaction and services industry in China by leveraging our people, better insights, technology and platform.
Turning to our financial details in Q3. Our net revenue was RMB18.1 billion in Q3, compared to RMB28.5 billion in the same period of last year.
Exceeding the both higher end of our guidance on the Street consensus. The year-over-year decrease was a primarily attributable to the decline in total GTV of 28.9% to RMB830.7 billion in Q3 form RMB1.05 trillion in the same period of 2020.
In particular, our net revenues from existing home transaction services were RMB6.1 billion in the Q3, compared to RMB8.8 billion in the same period of 2020, primarily due to a 34.3% decrease in GTV of existing home transactions to RMB378.2 billion in Q3 from RMB576.1 billion in the same period of 2020, led by a slow-down of the existing home market, which was affected by a series of market-cooling measures especially loan quarter limits in Q3. Our net revenues from emerging and other services was RMB610 million in Q3 from RMB625 million in the same period of 2020, primarily due to a decrease of net revenues for financial services around the existing home transaction services, which was partially offset by a 29.4% increase of net revenues from the renovation services.
Cost of revenues was RMB15.3 billion in Q3, compared to RMB16.2 billion in the same period of 2020. Gross profit was RMB2.8 billion in Q3, compared to RMB4.4 billion in the same period of last year.
Gross margin was 15.2% in Q3, compared to 21.3% in the same period of 2020. The decrease in gross margin was mainly due to a lower contribution margin of existing home transactions led by the decreased net revenues from existing home transactions and the relatively flat fixed compensation costs for Lianjia agents.
Operating expenses were RMB5.1 billion in Q3, compared to RMB4.5 billion in the same period of 2020. General and administrative expenses were RMB2,412 million in Q3, compared to RMB2,649 million in the same period of 2020, mainly due to the decrease in share-based compensation expenses, which was partially offset by the increase of personnel costs and bad debt provision.
Sales and marketing expenses were RMB1,202 million in Q3, compared to RMB1,026 million in the same period of 2020, mainly due to the increase of headcount in business development personnel. Research and development expenses were RMB1,043 million in Q3, compared to RMB789 million in the same period of 2020, mainly due to the increase of headcount in experienced research and development personnel.
In addition, we’ve recognized revenue impairment of goodwill of RMB397 million in Q3, compared to nil in the same period of 2020 based on MAU longer-term view of our – of outlook of the business of a process. We conduct a comprehensive risk assessment and assets evaluation, and that made us sufficiently in terms of provisional targeting.
Loss from operations was RMB2.3 billion in Q3, compared to loss of RMB81 million in the same period of 2020. Operating margin was negative 12.7% in Q3, compared to negative 0.4% in the same period of 2020, primarily due to one, a relatively lower gross margin in Q3, compared to the same period of 2020.
Two, the increase of the percentage of total operating expenses as net revenues in Q3, primarily due to the decreased net revenues along with the relatively flat recurring operating expenses, and additional impairment of goodwill as well as severance provision of RMB250 million incurred in Q3, compared to the same period of 2020. Excluding non-GAAP items, our adjusted loss from operations was RMB1,435 million in Q3, compared to adjusted income from operations RMB1,740 million in the same period of 2020.
Adjusted operating margin was negative 7.9% in Q3, compared to 8.5% in the same period of 2020. Adjusted EBITDA was negative RMB550 million in Q3, compared to RMB2,248 million in the same period of 2020.
Net loss was RMB1,766 million in Q3, compared to net income RMB75 million in the same period of 2020. Excluding non-GAAP items, our adjusted net loss was RMB888 million in Q3, compared to adjusted net income RMB1,858 million in the same period of 2020.
Net loss attributable to KE Holdings Inc.’ s ordinary shareholders was RMB1,765 million in Q3, compared to RMB271 million in the same period of 2020.
Adjusted net loss attributable to KE Holdings Inc. was RMB887 million in Q3, compared to adjusted net income attributable to KE Holdings Inc.
RMB1,857 million in the same period of 2020. Diluted net loss per ADS attributable to KE Holdings Inc.’
s ordinary shareholders was RMB1.5 in Q3, compared to RMB0.33 in the same period of 2020. Adjusted diluted net loss per ADS attributable to KE Holdings Inc.’
s ordinary shareholders was RMB0.75 in Q3, compared to adjusted diluted net income per ADS attributable to KE Holdings Inc.’ s ordinary shareholders RMB1.38 in the same period of 2020.
As of September 30, 2021, the combined balance of the our cash, cash equivalents, restricted cash and short-term investments amounted to RMB52.7 billion or US$8.2 billion. Additionally, as of September 30, 2021, the balance of our long-term cash items includes into long-term investments amounting to RMB15.9 billion or US$2.5 billion.
As we mentioned at the beginning, although there have been some problems in the housing market the risks, which brought significant negative impact to our business into run. But there’s also a transports take moments and looking work, focus more on the sense of our business and the refi our maintenance, and that just builds the resources more effectively.
Change the way for us, I would say opportunity and allocate for the long ride. Our business of experience going through numerous challenges.
So to give us the capability to remain stable against the market volatilities, while – in face of market downturn, we closely observe market trends at the timely adjust our business strategy to ensure the rapid presentation of sorts adjustments. Our initiative increased the more focused on efficiency, cost momentum to post synergy and allocate the resources more efficient oriented and the risk of root.
There are some errors in this three aspect to you shows a comes back operation of the new normal. For example, we introduced the new operation metrics, including the number of active store and active agents are prideful to better with our business for price.
We were attached with importance on our accounts receivable collection by building a comprehensive risk control mechanism to closely monitor the developers – changes. In the quarter, we have books better provision for all remaining receivables read to every branch and the several other developers, whereas in popular opinion, in order to reflect their recent privacy quality changes.
Turning to Q4 guidance, according to Beike Research Institute nationwide the GTV of existing home sales market, that is by two fold over 47.4% year-over-year in the fourth quarter. Meanwhile, nationwide, the GTV of new home transaction market is – 28.1% year-over-year in fourth quarter.
Based on the above that the region, looking forward to the fourth quarter of 2021, we expect our net revenues be between RMB14.5 billion and RMB15.5 billion, representing a decrease of approximately 31.6% to 36% from the same quarter of 2020. This guidance reflects a potential impact of recent the property market related policies and measures and the company’s current and preliminary view of the business and the market condition, which is subject to change.
Over the course of this year, despite many challenges we have encountered, we have continuing to weather temporalis just has to provoke or us to force ourselves nightlights and noise is sparing every individual in our organization to fight, fight, fight the never ever give up. We will never give you well enough back down and then never stop doing what we know is right.
We’re falling in barriers the post change as strong with the instance, the housing or leaving unfortunately condition, while there’s a long-term favorable environment for the industry, where we are thinking to our past, with the full commitment to serve our clients better. Well, confident that where they resilient and the how our value recognize, does this, what we have been doing not perfectly by the way on our week.
That’ll conclude our prepared remarks. We would like now to open the call for questions.
Operator, please go ahead.
Operator
Thank you. [Operator Instructions] Thank you.
And the first question we have is from Liping Zhao from CICC. Your line is now open.
Liping Zhao
[Foreign Language] I’ll translate for myself. I have two questions here.
Firstly, we have seen marginal improvements in terms of falling housing mortgage rates recently. What do we think of these positive signs?
And can we expect the real estate market to bottom out regulation-wise in the near-term? Speaking of transactions, when will we see a rebound in terms of transaction volume?
And secondly, investors are concerned about the state-owned property leasing system, which are regarded by some as replacements for third-party brokerage platform. What do you think of the government’s attitudes towards the mutual positioning of real estate brokers?
Thank you.
Stanley Yongdong Peng
Let me address your question. Regarding your first question, the decisions and deployment on the long-term mechanism of real estate market are accurate and effective.
We have witnessed the largest-ever regulatory package in terms of quantity and types of policies, including restrictions on property purchase, loan, sale, pricing, land auction, irrational price cuts, financing and payment, as well as the potential property tax. Accordingly, the property market across China quickly froze in Q3.
The existing home sales market dropped 41.6% year-over-year in GTV, on par with our guidance in last earning release call. The decline of the new home market was larger than our previous expectations, down around 14.1% year-over-year.
The downturn in Q3 was across the board rather than just one single segment, showing a chain effect from the credit tightening to the cooling-off of existing home sales, and then to the new home sales and land markets where the price cuts in turn further weighed on existing home sales expectations. And the expectations and behaviors of market participants resonated, led to a pattern of credit crunch, impeded transactions, and downward revision of expectations In particular, Specifically, transaction volume of existing home sales market continued to drop month-on-month in Q3 to a long-term historical low, with some cities to a 10-year record low.
Housing prices fell widely, and our Home Buyer’s Enthusiasm Index has fallen to a low level since 2019. The largest impact comes from the sharp fluctuations in loan origination paces.
As the first year adopting the housing loan concentration management, we saw a mismatch between credit supply and market pace. The average loan origination cycle continued to extend in Q3, 77% longer than the same period last year.
A large number of downstream transactions have also been affected. Meanwhile, a total of 14 cities introduced the existing home reference price policy.
Down payment requirement for house purchase were raised, while residents’ expectations on property prices and the overall market sentiment have been significantly dampened. On the other hand, new home sales in China also dropped sharply in Q3, from July to September, the new home area sold in China decreased by 9.5%, 17.6% and 15.8% yoy respectively.
Market in September was the worst one in seven years. The new home sales market and the existing home sales market are highly correlated.
Around 40% new home buyers come from improvement demand of existing home owners, the extended loan cycle and the wait-and-see sentiment for existing home sales market affected the purchase plan for new homes. The new home price falling and the heightened risk in certain developers further deepened the wait-and-see sentiment among buyers, led to new home sales market cooled down promptly.
As to New home channel sales market, In Q3, a season during which “cash is king”, developers were motivating sales channel more widely to accelerate sell-through, leading to an increased penetration rate for channel sales. However, risks in new home sales channels were also mounting up.
Developers squeezed their suppliers for working capital, resulting in the delayed payment of accounts due to some industry chain suppliers. Looking forward to the incoming policies and regulations.
In short term, policy issuances are expected to peak-off, and the market enters a period to digest previous market curbs, and we believe it is less likely for further policy tightening up. In terms of housing price, according to Beike Research Institute, as the end of this September, housing price dropped 1.5% on average from the highs this year, with some cities capping on price cut; In terms of deleveraging to improve financial health: in 2020, 40% of the 100 listed developers successfully lowered their risk grades vs.
2019. In Q3 2021, residential housing leverage reported an 9-year low.
In October, our Vice Premier of the State Council Liu He, stated that the reasonable capital demand in real estate industry is being met and China will stick to an unchanged path towards healthy development. Other financial regulators also responded to market concerns.
Given the effective regulation results and the falling transaction volume and prices, we foresee a significantly lower frequency of policy tightening ahead in Q4 vs Q3, with the pace of real estate credit supply be stabilized, which may bring some marginal changes to the market. But policy impact on the market sentiment will last for a considerable period of time.
From the long-term perspective, amid China’s economic upgrade from a high-speed growth model to a growth and sustainability balanced one, we still see an all-round tightening of real estate financial policies. The acceleration of pilot property tax reform signals the advancement of long-term mechanism, and unchanged pursuits of de-leveraging and de-risking both at resident and developer ends, despite the inevitable short term pains.
With that, we expect to see a healthier and more orderly real estate market in the future. Based on our observations above, the downward pressure on the existing and new home markets will continue beyond Q3.
Looking to Q4 2021, GTV of existing home sales market is estimated to further decline, down nearly 50% yoy and nearly 25% qoq; GTV of new home market will drop by 20% yoy. For 2022, GTV is expected to drop by more than 10% for existing home sales market and slightly for new home sales markets.
The absolute GTV levels for existing and new home markets are expected to bottom out in Q1 2022. In 2H2022, as the market fully prices in regulatory policies and stabilizes, rigid demand will come in and a natural market recovery process could start.
Therefore, we reiterate our position to the market was: don’t underestimate the power of policies to correct market deviations, and don’t underestimate the supporting power of market supply-demand dynamics. Regarding the new home sales market, faced by the mounting short-term debt repayment pressure, developers will push themselves to promote sales and collect cash.
From the long-term perspective, as developers shift from financing-driven to operation-driven in a sales-focused approach, they will face higher requirements on product development and targeted sales. Given the increasing divergence across cities, developers’ increasingly customized sales strategy and comprehensive usage of sales channels should be a clear long-term trend, namely, an increasing penetration rate of new home sales channels will come in as a clear long-term trend.
It also presents more opportunities for Beike to pursue full-cycle partnership with developers. In short, the unprecedented policy regulation and rapid market cooling-off in 2021 brought a profound market correction.
Over a longer horizon, the market is not as bad as what we perceive at this moment. In terms of annual volume, the market-wide transaction volume this year will still post a growth vs.
last year, while the policies such as existing home reference prices have not changed the long-term supply and demand dynamics, and the mismatch between land, credit supply and home purchase should gradually improve. From the long-term perspective, market fluctuations are normal.
As the long-term mechanism being in place, either an overheated or overcooled market will normalize to the pivot of supply-demand balance. Regarding your second question, we would like to say at the central government level, a “well-established administrative information system” is a crucial step to standardize real estate market orders.
A robust real estate transaction administrative system can help governments to effectively collect property listing and transaction data, take effective decisions and regulatory actions, and avoid wide swings in market due to potentially lagged policies. Also, it can help governments to address the issues of fake property listings and vicious competition haunting the industry, thus contributing to better performance of the service providers and benefiting those committed to quality services like Beike.
As a consistent advocator and beneficiary of regulated and collaborative market, Beike firmly supports governments to upgrade E-administrative systems, and is working with government departments in Beijing, Nanjing and several cities. At the local government level, local real estate E-administrative systems dated back to 2012.
Since then, real estate E-administrative systems with similar functions have been established in 9 cities including Beijing, Shanghai, Chengdu and Xiamen, according to currently available statistics. From the purposes of the systems, firstly, governments have no intention to directly intervene in transactions, and are in a better position to govern market through well-regulated commercial institutions to navigate through various transactions.
Transaction process involves significant risks, which can be shouldered by commercial players for governments. On the contrary, direct engagement in transactions by associations of governments requires significant commitment of talent and financial resources, including formulation of rules, R&D and continuous system maintenance and iteration, and is also exposed to risks in transaction process.
Secondly, governments are digitalizing livelihood services, including social security, housing, vehicles, healthcare modules. A property listing module has been included in local E-administrative systems of Hangzhou and Shenzhen, which is introduced as a part of normal local e-administrative system upgrades.
Thirdly, there have been “hand-in-hand” transactions without intermediaries across the country. Taking Hangzhou for instance, from 2019 to September 2021, on average 20% transaction volume comes from “hand-in-hand” type of brokerage-free transactions, mostly between family and friends.
Through upgrades, the E-administrative systems in place can steer these transactions into a more convenient and safe process. In terms of outcome, the deliverables of a complex information or transaction system depend on the level of improvement of consumer experience and transaction efficiency, as well as the talent and financial resources committed and the operational experience accumulated over time.
Beike’s proven track record across the cities that have deployed online E-administrative information systems for years also demonstrates that a standardized market actually contributes to the rise of quality agents – a standardized marketplace with authentic property listings has the most direct impact on those who attract traffic flows through fake listings, and those who rely on malicious competition and unethical order/customer stealing to parasitize on a quality service-minded platform. We believe that along with upgrades of E-administrative systems and further market standardization, inefficient supply will be further squeezed out, thus benefiting quality service providers.
And for Hangzhou, brokerage-free transactions tend to remain stable in terms of absolute volume, as most of them are not affected by changes in market conditions, like the transfers between family members. We reasonably foresee the upgrade of the government’s online existing home listing system has an insignificant impact of local transactions, like Woaiwojia and Beike brands.
And for Shenzhen, based on what we know,functions of Shenzhen Real Estate Information System mainly includes: 1) only with a QR code generated for a property firstly listed on the government information system can the property owner publishes the listing on other websites. In this way, it ensures that fake property listings frequently seen on other platforms can be further dispelled; this is good for Beike, bad for that so-called “amazing website”.
2) the property owner is required to engage an exclusive sell-side agent within a given period of time. This transformation against the multiple listing agent model in the industry helps to solve the problems of unethical order stealing and low-quality, low-price competition that have been plaguing the industry.
The system is designed to purify the industry environment and standardize the home transaction market. Now on Beike’s platform, consumers are accessible to more home listings and agent information, while agents can seek efficient collaboration supported by the platform’s rules and infrastructure.
Beike’s core platform value and operational capability are benefiting from the launched administrative system.
Liping Zhao
Thank you. That’s very clear.
Operator
Thank you. We have the next question from the line of Miranda Zhuang from Bank of America.
Your line is now open.
Miranda Zhuang
Thank you. [Foreign Language] Thanks management for sharing and for taking my questions.
Can you pls elaborate more on progress of home renovation business and other new initiatives? Thanks.
Stanley Yongdong Peng
Yes. Let me quickly translate.
So this is Stanley, let me quickly address your question. So firstly, the whole renovation decoration business is very similar.
Like the housing transaction business, meaning the overall industry size are very big but overall the user experience extremely are worse. So we do believe in this industry.
We have a lot of opportunities we can continue leverage what we have accumulated in the past 2 decades. So for the home decoration business, we do have a couple of takes in terms of the overall outlook.
Firstly, the overall China customers will continue more focus on the quality. We do believe it will be the fundamental because If you look at the recent policy trend, definitely that the golden times for the new homes pretty much has been passed.
So the next era definitely will be that the people with more focus on the joyful living. So we do believe the opportunities will be arising from this kind of transition period.
Secondly, we do believe the scientific management will continue help us and also help the industry to upgrade, especially followed by some of the other initiatives for example like more digitalization we do believe we can restructure and continue our practice above of those kind of scientific management into the home decoration and the renovation business. And thirdly, is about the value about the service providers in the home decoration the renovation business, if you look at the overall the conditions for the service providers in the home decoration and renovation industries, it is still relatively low.
So, by doing the continuously training as well as upgrade for those kind of professionals, we do believe it will be help us to continue to help those kind of service providers to further improve their professional career as well as the whole professionalism for the whole industry. So in summary, we do believe that home decoration and renovation business, it's not a naturally so called a “fast” industry.
It means we continue to dedicate doing the things difficult but right. That means we will have a lot of challenges as well as difficulties we will be facing, but we do believe our faith as well as our opportunities as well as a method we have been accumulated in the past two decades, we will bring that continuous value into this industry.
And meanwhile from the quatitative side, I think some people is talking about the difficulties for the home decoration business whether it could be surpass like a RMB1 billion revenue in one city and whether a company could achieve would like a RMB10 billion of the revenues overall. So we do believe.
I mean, definitely there will be some of the new players emerging from that industry, and to reach of those kind of RMB10 billion revenue milestones in the foreseeable future, and definitely Beike also we have a lot of opportunity to achieve that as well. [Foreign Language] So in summary, as I mentioned before.
So we do continue to focus on the three parts of our efforts for us. So firstly, how we can, arounding of the home services we can further improve as SOP management as well as by upgrading the whole service procedures by the continuously digitalization.
Secondly, the scientific management will be our key focus as well, by doing this we can continuously improve the efficiency for the whole industry. Our third part and most of importantly is how we can continue to bring the value to the service providers into the home decoration of renovation services and continue improve their professionalism, as well as improve their dignity for the work.
So, all in all as I mentioned, generally speaking in terms of our home renovation and operation services will continue to focus on how we can further improve the overall customers user experience, we do believe that's a very tough campaign for us, but we have the trust, as well as a confidence we can continue bring our mission into we reality, which means the service provider with dignity as well as joyful living ultimately. Thank you.
[Foreign Language]
Stanley Yongdong Peng
This is Stanley. I also want to give you additional colors in terms of the previous question regarding to the so called the E-government administrative systems rumor.
What we do believe is definitely there is always a bigger problem underneath of the smaller platforms. So in order to better to see what the intention behind of the government.
We need to look at the policy trend in China. If we look at the general, the policies in China.
Definitely there are two major parts, one is housing is for living in, not for speculation and the other one is encouraging of both of the housing purchase and a renting. Right.
So based on those two of the fundamental policies as well as add on the recent new trends such as a pilot program for the property tax, we do believe during that kind of stability of the policy trend, Beike’s value will continue shining since we can provide a very comprehensive solutions and which is quite in line in those kinds of policies trend going forward. And meanwhile we do believe our, as we mentioned before, so our fundamental orientation for our business is also quite in line with two of the policies direction.
So any of those kind of assumptions, we do believe some of the rumors will be definitely fade away in the market. And as far as we can continue to hold and adhere to the policy, continue improve the efficiency as well as improve the user experience, we do believe Beike’s value will continue shining, that will continue to bring the value into the whole industry.
Thank you. [Foreign Language]
Operator
Thank you. We have the next question from John Lam from UBS.
You may proceed with your question.
John Lam
Thank you. [Foreign Language] I have two questions, the first question is mainly on the property tax.
How the property tax affect the buyers and also the sellers sentiment and also their purchase behavior, and also not so if management hear anything regarding on the implementation details of the property tax. Second, is regarding on the competitive landscape.
So, first on the one hand we have seen Centaline have massively lay off people, about 7,000 people and also the senior management also left the company. But at the same time a major online news media company Toutiao they also announced to enter into the property agency sector, so how the management feel the over the agency competitive landscape.
Thank you.
Tao Xu
Thank you, John. Let me address your first question regarding the property tax recently as indicating as see published by President, on the journal “Qiu Shi”, China should strengthen the regulation and adjustment over the high-income class, proactively and prudently promote legislation and reform on property tax, and ensure effective implementation of a pilot program.
We believe that the government will definitely and duly expand the scope of pilot property tax to more cities. In October, as resolved at the meeting of National People’s Congress, the State Council is authorized to carry out a pilot property tax reform in certain regions.
Property tax, as a new local tax package, will play its fundamental role to narrow the gap between the rich and the poor. Considering the requirements on “proactively and prudently” promoting the legislative reform on property tax, coupled with the current market correction since late September amid falling existing home sales volume and prices as well as the mounting risks in developers, we see a current focus on stabilizing expectations and preventing an overcooled market.
As expected, the scope of pilot property tax will extend to more cities, applicable to all existing residences than incremental. Nevertheless, the focus should be on multiple residences or residences with a high total value or high unit prices, fully considering affordability of households to ensure basic living needs while attaching importance to tuning the wealth gap among households to better achieve the goal of common prosperity.
The introduction of property tax will have a significant short-term impact on the market. Some owners of multiple residences may sell part of their properties, leading to higher market supply and hence wait-and-see sentiment among buyers in the short term.
However, from the long-term perspective, transaction volume is predicated on housing supply and demand fundamentals. The rational launch of property tax, by laying a solid foundation for effective common prosperity, will contribute to stable long-term market expectations and prices.
Only in such a scenario with stabilized prices, rationalized market and smoothened fluctuations in the long run can rigid demand be further unleashed, resulting in higher home turnover rate, better affordability and roofs for everyone and hence a potential growth in transaction volume. Regarding the current market situation for Bytedance and Centaline.
Let me talk about Bytedance first. For companies like Bytedance with cross-industry traffic advantages, it is a natural impulse for them to try to monetize their traffic in different areas.
We believe that both investment community and fully understand that, in an industry with low-frequency, high-value transactions and long decision-making process, the value provided by the online traffic model is relatively limited and cannot truly meet consumers' demand for information. Without a thorough understanding of consumers and the industry, even traffic advantages are difficult to convert to transactions.
To integrate an online model with an offline-model, one cannot resort to short-termism, such as unfair competition and capital based disorderly expansion, including setting low commission rate, high rebates, unrealistic binding valuation promises, is definitely false proposition, which will not sustain and could cause anti-trust violations. In the past and last year, mega internet companies entered the industry with high profiles, all walked away later with the rationale disapproved.
Tmall Haofang, Fangchebao are a good showcases. In this industry, there must be more than one business model and more than one company that can be successful, although for us there is only a one-way road to success.
We believe in the value of taking good care of the consumers; We believe in the value of sharing successful experience and infrastructure to the industry, to empower and enhance industry efficiency; We believe in the value of protecting the interests of service providers, paying commission timely; We believe in the value of improving the industry code of conduct, and help developers and all participants to work with a sense of security and fairness; We believe in the value of our hundreds of thousands of excellent service providers, who have been serving the communities for many years and established this unique moat in home services; We believe in the value of time. This is what we have been doing, not perfectly, but we are on our way.
Last but not least, if ByteDance still decides to move to offline transactions, especially under the current market momentum, we believe they will have their lessons learnt from the market and players who truly understands this industry like BEKE. For Centaline Property, we cannot comment on market players’ decision an behaviour, but I’d like to say, the key and high-quality service providers represent the most valuable assets of the industry.
During the period of downturn, Beike will firmly support the retention of key and high-quality service providers through our compensation and benefits system, team culture and organizational capabilities, and business strategies developed over the years. Meanwhile, Beike’s ACN's commission mechanism and network effect allow each agent to have much more opportunities to participate in transactions and secure more stable income than those on other platforms by enabling collaboration and shared success.
As a result, the overall turnover rate of agents and the percentage of store closures on the platform are significantly lower than the industry average. We are more resilient in the downturn and have the ability to outperform when the market recovers.
As the market is in the doldrums, the industry's production capacity is shrinking and the performance of stores on Beike's platform also have some impact. In the third quarter, the number of stores below the minimum sustainable level of turnover (RMB50 mm), the so called brealine, on the platform continued to rise, and the percentage of stores above such level decreased from 37% in the second quarter to 33.7% in the third quarter.
Though we don't know the overall turnover rate of the industry, we can imagine how depressed the industry is. In the down cycle, the trend of "huddling together to keep warm" in the industry is more evident.
We noticed that the cooling of the market prompted more stores and agents who were reluctant to join the platform to finally join Beike platform. The number of brands connected to Beike's platform exceeded 300 in the third quarter.
The percentage of newly added stores from external new home sales channels increased greatly from 22% in the second quarter to 29% in third quarter. The percentage of stores closed due to poor management was only 1.7% in Q3, compared with 1.1% in the second quarter, indicating no large-scale store closures.
Most third-party store owners choose to stay on the platform in the down cycle, and operate conservatively by dismissing inefficient personnel, and some by merging stores. The percentage of stores merging on the platform increased from 0.8% in the second quarter to 1.4% in the third quarter.
In the third quarter our number of connected agents decreased. The turnover rate of agents on the platform increased.
In the third quarter, the overall turnover rate of agents on the platform was 8.8%, compared with 8.0% in the previous quarter. The turnover rate of Lianjie in Beijing and Shanghai remained stable, While the turnover rate of non-Lianjia agents increased by ~1% QoQ and remained flat compared with that in 2020Q3.
The average turnover rate of the industry is 15% on normal days and will get worse in a downturn cycle. The turnover rate of agents on Beike's platform is still considerably lower than the industry average.
Based on our judgment on the market, the industry's production capacity will continue to shrink, and it is expected that the turnover of agents will bottom out in 2022Q1. Consequently, we’d like to say the turnover rate of poorly performed store and agents increased significantly, in line with market trend, but outperformed the market conditions.
Okay. Thank you, John.
John Lam
Thank you, Tao Xu
Operator
Thank you. We are now approaching the end of the conference call.
I will now turn the call over to your speaker host today, Mr. Matthew Zhao for closing remarks.
Matthew Zhao
Thank you all for being here. Thank you once again for joining us today.
If you have further questions, please feel free to contact the Beike’s investor relation team through the contact information provided on our website. This concludes today’s call and we look forward to speaking with you again next quarter.
Thank you and goodbye. Thank you.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating.
You may now all disconnect.