How to cash in on the property downturn without buying a home
Key statistics: ASX: REA
Closing share price 14.08.18: $89.160
52-week high: $93.700
52-week low: $65.010
Most recent dividend: 62c
Annual dividend yield: 1.24%
If you read the reports on the Australian housing market, it seems every main indicator has turned down: auction clearance rates, credit availability and home prices themselves.
But there is one statistic that is up: total home listings.
While more homes available for sale may provide additional competition for those looking to sell, it does, however, bode well for a business that is rewarded by helping a growing number of vendors - a business like REA Group.
REA's revenues have little to do with real estate prices and everything to do with listings volume and advertising yields (pricing and mix shift).
A booming property markets sees many properties sold without being advertised by agents, resulting in fewer ads. This has been experienced since 2010. (Keep in mind REA's revenues and EBITDA have grown at double digits in this period despite falling national listings.)
But a "pausing" property market, such as the one we are experiencing now, could reasonably be expected to lead to:
- Rising listings (it's tougher to sell, so advertising is necessary).
- Higher yields (featuring a property is required to capture the attention of hesitant and fewer buyers so more agents should sign up to the premier packages).
- Sellers may need to try with a couple of agents to get their property sold (re-advertising).
Provided (and if) such conditions transpire, it is tantamount to growth, on growth, on growth, and revenues and EBITDA can exceed expectations.
In the longer term, the annual spend on residential real estate marketing in Australia is about $7.5 billion.
Of that about 85% goes to agents. With the greatest of respect to agents, we don't believe they bring 85% of the value to a residential real estate transaction.
With total revenue of $805 million (not all of it from Australia), REA collects between 9% and 10% of all Australian residential real estate marketing spend.
We would argue that REA brings something more than 10% of the value to a transaction. Over the medium term, we would expect the share of the marketing pie to shift in favour of REA.
Based on REA's full-year results, despite lower listings volumes year on year there has been an excellent response from agents to the subscription renewal campaign, which is expected to lead to a meaningful rise in depth ads (Premiere and Highlight) over the 2019 financial year.
The company said it expects an increase in Premiere and Highlight volumes and a continuation of the favourable mix shift.