As the former CEO and MD of the REA Group, former Chairman of the iProperty Group and being a serial investor in the online real estate industry, I often undertake strategic and operational consulting work for property portals around the world. Recently, one of the questions i have been frequently asked is how does the REA Group compare with Zillow and Trulia in the US.
The initial premiss is that Zillow and Trulia operate in the US and therefore as the US is nearly 20x the size of Australia and the REA Group is valued at US$5 billion (yes billion), then Trulia and Zillow have the potential to be worth significantly more than they are today. For this to hold true, the underlying fundamentals of both real estate markets and property portal markets would have to be very similar.
This series of articles looks at the similarities and differences between the US and Australian markets and provides a view on whether there is significant share price upside for investors in Zillow and Trulia.
The first place to look is how the Australian and US real estate markets operate.
US Real Estate Market
The US runs an MLS (multi listing service) type structure. This means that when I engage a real estate agent to sell my home, the agent up loads the listing to a local MLS data base so that other agents can see the information. This information is uploaded using a standard format and stored centrally.
If I a buying a home, I engage an agent to act on my behalf and they then search the MLS for homes that match my criteria and then organise for me to inspect the home.
The house seller agrees to pay a commission of 5 - 6% on the sale of the property and this commission is then split between the buyers agent and the sellers agent.
In the US, it is all about the agent and the agent's brand rather than the broker and the broker's brand. Quite often broker's will work with a large number of agents.
Australian Real Estate Market
The Australian market operates quite differently.
If I am selling a house, I sign up a real estate agent and negotiate a commission of around 2%. The selling agent is then responsible for the marketing and showing of the house. Quite often, the selling agent will negotiate (on top of the 2%) a marketing package for the house that is paid for by the home seller. This often includes print advertising, sign boards and online marketing. This is paid whether or not the house is actually sold.
There is no buy side to the equation. A buyer's agent is almost unheard of and a buyer does engage one, they have to pay for it on top of the sale price. No agent in the right mind wants to share 2% commission!
Therefore if i am buying a house, i have to consult websites such as realestate.com.au (owned by the REA Group) or domain. I might even look at the traditional print media. However, if the selling agent has not advertised the home where i am looking, I will not see it.
In the Australian market the office (think of it as a broker) is more important that the agent and therefore the office brand is what is promoted rather than the agent's brand.
Driving Different Behaviours
The above structures drive different behaviours at the agent / broker / office level.
In the Australian market, where the agent often doesn't pay for the marketing out of his own pocket, agents are incented to get the seller to spend as much as they can on marketing the house. A $10,000 marketing campaign is not unheard of. Not only does this marketing spend promote the house but also the agent's brand. This is paid whether or not the house is sold. This means that there is still significant money going into the print industry (event though it doesn't really deliver the results and, from a value for money perspective, is massively over priced) as well as online.
In the US however, there is much less incentive to market property as the main advertising vehicle is the MLS. Therefore any other marketing on top of this is more about vanity than really marketing of the property. It is often about helping the agent to promote themselves to find the next buy or seller. As the agent is spending the money out of their own pocket, the media industry has to work much harder in extracting that money and traditional media, as we have seen, have been the big losers.
Tomorrow we will look at the property portal industry structure and what the above means for the potential for portals to make good operational returns (think EBITDA profit) and therefore deliver capital gains for the investors.
Simon is the founder of Property Portal Watch and will be a speaker at the Property Portal Watch Conference in New York on the 13th and 14th of January. This conference brings together the leaders of Property Portals from around the world to discuss the key issues facing their businesses. We already have attendees from businesses such as Immoscout24, Move.com and Foreclosure.com. Register before the 15th December and pay only US$349 for the 1.5 day conference.