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Property prices down…REA up?!

15082019_REA

Property prices down…REA up?!

Over the last four years property prices in Australia peaked and reversed, homes listed for sale have plummeted and the share price of REA Group, Australia’s online property classified portal, has… MORE THAN DOUBLED! Sounds strange perhaps, so I have included the chart from Bloomberg below.

REA Group share price performance over the last four years

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Source: Bloomberg

Home prices in Australia’s capital cities rose to a peak at the end of 2017 and have been declining ever since. At the time REA’s share price was trading in the $60s and there was concern that it would fall as the value of homes fell, especially in Sydney and Melbourne. But this thinking missed the point that REA makes money from the number of properties listed for sale, not their value.

Home prices across Australia’s capital cities

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Unfortunately, as the property market heated up less houses were being listed for sale either in anticipation of still higher prices to come or because it was just too easy to sell without advertising. The number of homes listed for sale has been declining year after year and worsened again in 2019. The number of homes listed for sale is now at a multi-decade low.

Number of homes listed for sale across Australia’s capital cities

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So, what on earth has driven REA’s stock price to 20 per cent-plus compound average annual gains for so many years?

REA’s revenues and earnings from FY2016 to FY2019

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Over the four years from financial year 2016 to 2019, REA’s earnings have grown by more than 50 per cent from $342 million to more than half a billion dollars. This stellar performance in profitability has come about as revenues have themselves grown from less than $600 million to almost $900 million.

REA’s growth has come despite a poor macro backdrop of weak and declining listings. Instead management has been able to push prices up and attract vendors to purchase higher-valued ads. This was demonstrated yet again at REA’s full year 2019 results last week.

Management confirmed another of double-digit percentage price increases and showed the mix towards high value ad continues to increase, with further increases guaranteed as more agents have already contractually committed to premiere ads for the years ahead.

REA’s increasing mix of higher valued ads

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REA has shown it can keep growing even in a declining market environment (how many other companies can say that?!). With the benefit of a turn in the listings environment, maybe later this year, or maybe next, we look forward to an acceleration in growth and more years of strong share price appreciation for our clients.

The Montgomery Global Funds and Montaka own shares in REA Group. This article was prepared 15 August 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 Group you should seek financial advice.

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Christopher is a Portfolio Manager for the Montaka funds and the Montgomery Global funds. He joined MGIM at establishment in 2015.

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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6 Comments

  1. I guess the interesting thing relates to how much more it costs REA to offer the premium service or is the real-estaet agent who does most of the work or is there some deal between the two?

    Also, I wonder if REA drops its fee the longer the place is on the market – I think this would be a good strategy as its good for the seller to relax and take their time selling rather than worry too much about weekly costs.

    • Thanks John. It doesn’t cost REA anything more, it’s just a post up on their website. The agent does their work separately. There are no weekly costs, the ad is charged up front and lasts for a period of time. It may be extended at a discount but that’s not common.

  2. Good article Christopher, 2 questions.

    1) How much is the average seller paying per week at normal and premium options?

    2) what is the potential for REA to act as a portal for providing home loans?

    • Thanks John. Sellers pay to post an ad which can last from 30 to 45 days or more. For the average house this costs around $800 on average, but varies widely by location, agent and type of ad. Premium options might be double, triple or more than standard listings. REA already offers home loans through brokers from a range of lenders.

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