Recent Deutsche Bank research suggests REA Group's move towards premium pricing for longer listing times with its Premier All model exposes it to revenue shortfall as the Australian property market experiences downturn.
According to the real estate classifieds equity report, Australian data collected since the start of 2008 shows during times of a property market downturn, there is a clear decline in new listing volumes and a corresponding uplift in new listings when the market recovers.
However the same figures reveal total listings show the opposite relationship with housing price growth, with an increase in total listings during a downturn and a decrease when the housing market picks up.
Such movements can be explained, the report says, by the fact that time to sell increases during times of weak demand resulting in an increase to the total listings on market. Meanwhile time to sell decreases when the market heats up.
While the residential property market in Australia has seen an upward trend since 2012, primarily driven by the capital cities, Deutche Bank says the recent slowdown in the house price growth rate, for Sydney in particular, has lead to a corresponding slowdown in listing volumes on leading sites including Realestate.com.au and Domain.com.au.
Given the transition over recent years for each of REA Group and Domain Digital towards listing or depth as the primary source of revenues, with listing revenues comprising 74 per cent of REA's domestic revenues in 1H16, the Deutsche report warns of a potential impact on leading property classifieds sites.
"Historically, the fact that total listings increase during times of a property market downturn has provided a level of protection for the real estate classifieds, with re-listings of properties which didn’t sell during the initial campaign compensating for the decline in new listings," the report states.
"However, recent moves towards a more premium pricing model have somewhat reduced this protection – under the Premiere All model, REA has increases the listing length from 30 to 45 days, which means that the number of re-listings will be reduced, particularly if the time on market does not exceed 45 days.
"For Domain, we understand that the listing length has remained unchanged at 30 days, so they may benefit from re-listings to a greater extent."
"Nonetheless, we believe that the trend towards increasing the listing length (generally in return for a higher price) reduces the level of protection, and leaving the property classifieds more exposed to a downturn.
"Our preference in the sector remains for FXJ (through Domain) given it will likely continue to benefit from increasing penetration of the market."
FXJ – SOTP-based Price Target of $1.00/share. Key downside risks include cost-out programs falling short of expectations, lower than expected growth in digital and Domain and worse than expected deterioration of the advertising market.
REA – DCF-based Price Target is $52.30/share. Key inputs: Beta 1.2; WACC 11.3%; TGR 3.5%. Key downside risks are increased competition and a severe property market downturn. Key upside risks are greater than expected growth in new listings, faster than expected monetization of mobile/display advertising; and earnings accretive acquisitions.
Download the complete report: http://pull.db-gmresearch.com/p/129-822B/34450052/0900b8c08aff5c32.pdf
Separately Deutsche bank notes a trading update from McGrath Limited points to low volumes in Sydney market.
The update states listed real estate agency McGrath Limited (MEA) has referenced “an unforeseen low volume of listings and sales in the first half of April, particularly in the North and North Western suburbs of Sydney”. With current conditions remaining challenging, MEA has adjusted its expectations for sales volumes for 4Q16.
Deutsche bank says the listings weakness flagged by MEA is generally consistent with Sydney new listing volumes with the latest data showing that new listings in the Sydney market were down 11.0 per cent in the 4 weeks to 17 April.
"We note that the market listings data doesn’t show any significant step down in the growth rate for April, with Sydney new listings also down 9.4 per cent in March," the update says.
"However, given the easy comps in the pcp, the continued decline in April does point to relatively low absolute volumes.
The rest of the Australian capital cities are providing some offset for the real estate classifieds, with Melbourne new listings up 3.1 per cent in the 4 weeks to 17 April and the combined capital cities only down 2.4 per cent over the period.
These trends are broadly consistent with March data (Melbourne +1.1%; Capital Cities -0.9%).
"Nonetheless, given the significance of the Sydney market, we continue to forecast a lower revenue growth rate in 2H16 relative to 1H both for REA’s domestic operations (19.7 per cent vs 22.4 per cent in 1H) and for Domain.com.au (29 per cent vs 38 per cent in 1H)," Deutsche Bank predicts.