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How REA benefits from a weakening property market

How REA benefits from a weakening property market

With this weakening property market comes a decrease in auction clearance rates, credit availability and home prices. So how does REA Group (ASX:REA) benefit from this?  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 earnings before interest, taxes, depreciation, and amortization (EBITDA) have grown at double digits in this period despite falling national listings).

A ‘pausing’ property market however, such as the one we are experiencing now, could reasonably be expected to lead to:

1) Rising listings (it’s tougher to sell, so advertising is necessary)

2) Higher yields (featuring a property is required to capture hesitant and fewer buyers’ attention so more agents should sign up to the Premier packages)

3) Sellers may need to try with a couple of agents to get their property sold (re-advertising).

Provided (If) such conditions transpire, it is tantamount to growth, on growth, on growth, and revenues and EBITDA can exceed expectations.

Longer term, the annual spend on residential real estate marketing in Australia is about A$7.5 billion. Of that about 85 per cent goes to agents. With the greatest of respect to agents, we don’t believe they bring 85 per cent of the value to a residential real estate transaction. With total revenue of A$805 million (not all of it from Oz), REA collects between 9 per cent and 10 per cent of all Australian residential real estate marketing spend. We would argue that REA brings something more than 10 per cent 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 guided to lead to a meaningful rise in depth ads (Premiere and Highlight) over the 2019 financial year.

The company stated that it expects an increase in Premiere and Highlight volumes and a continuation of the favourable mix shift.

The Montgomery Fund and Montgomery Global Funds own shares in REA. This article was prepared 22 August 2018 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade REA you should seek financial advice.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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