Realestate.com (REA:ASX) is the kind of business we like. It’s a price maker, not a price taker. We believe it will continue to perform well as the property market matures.
On Friday, in its half yearly financial stability report, the RBA warned property market investors about “a marked future oversupply in apartments in some geographic areas”.
Additionally, Chris Richardson from Deloitte Access Economics warned today in the Australian Financial Review that “There’s an increasing risk that it [property] becomes the worst investment in the next few decades. That might happen fast or slow. But every policy maker should pray that it happens slow.”
Counterintuitively, we believe in a maturing property market, REA group stands to improve its competitive and financial position.
Our thesis on REA Group has been well articulated in previous posts and in simple terms we expect;
1) REA to retain its number one spot in domestic real estate listings,
2) the number of listings to increase as the property market matures,
3) the proportion of higher margin ‘Depth’ or feature ads to increase as vendors compete more aggressively to highlight their property, and
4) the price of depth ads to increase (REA already increased the price of depth ads by 10-15% on July 1 this year).
The combination of the above factors produces a growth-on-growth-on-growth profile for revenues and margins.
“Paid depth listings on realestate.com.au last week (Week 42) were 82,510, an increase of 3,261 listings (4.1%) on the same week a year ago. While the volume of depth listings still continues to grow week by week, the annualised YOY weekly growth rate continues to decline. Due to the surge in depth listings in late 2015, and the well-reported dearth of overall listings this year, it may get progressively tougher to beat prior-year comparisons.
Over the past six weeks depth listings were on average 5.0% higher than a year ago. The YTD growth rate in volumes is above that assumed in Morgans’ forecasts for depth advertising revenues in FY17.”
“Highlight listings were 55,265, slightly above the same time last year. More expensive Premiere listings totalled 27,245, 13.2% higher than the same week last year. Due to rising numbers of All Premiere subscriptions, Premiere ads now represent 8.8% of all residential listings on REA, up from 7.3% in PCP.”
“REA depth ad prices increased by 10-15% from July 1, with the largest increases in Premiere prices. So far the price rise does not appear to have had a material negative impact on volumes.”
Ivor’s final point above is important. As you know we favour businesses with competitive advantages and the most valuable of these is the ability to raise prices, in the face of excess supply, without a detrimental impact on unit sales volume. With over 80 websites in Australia offering vendors the opportunity to list their homes – and many of these offering to do so for free (excess supply) – it’s fascinating that REA can raise prices and maintain share and growth.