Why this is an undervalued long-term winner
As we discussed in Part-I of this series, REA Group holds the most privileged position of any company in Australian real estate.
While officially it is solely focused on helping real estate agents do their job better, rather than replacing them in the value chain, one cannot help but be somewhat skeptical of the official narrative.
This wire was written by Amit Nath, Senior Research Analyst at Montaka Global Investments.
Given the natural progression of a genuine two-sided marketplace like REA Group, it is likely to continue reducing friction costs of buying, selling, and renting properties for customers and it is likely to capture a larger share of transaction economics over time, similar to other internet-enabled marketplaces that have served perform functions (e.g. Amazon, eBay, Uber, etc).
To put some numbers around the potential opportunity for REA Group, broker commissions in Australia are currently 1.0-2.5% of the sale price of a property, while advertising costs are only 0.2-0.4%. To the extent REA Group continues to migrate towards a clearinghouse function, providing increasing value to customers, we would expect this gap to close and deliver an order of magnitude increase in the earnings potential for the business.
Additionally, COVID-19 has accelerated and reinforced the central role REA Group plays in the Australian property market and the online future of the industry by accelerating the introduction of products and services that are years ahead of their time (virtual tours, online auctions, payment on sale, etc).
Furthermore, there are 1.8 million active users logged in to REA Group’s portal which is growing rapidly, translating into significant data advantages and increasingly attachable insights on buyers, sellers, and renters.
This drives a more enjoyable and seamless property experience for customers through a virtuous loop (aka flywheel) in which REA connects consumers of property with providers of property, aggregating both supply and demand, reducing frictions, increasing choice and delivering superior value, with benefits compounding as both supply and demand scales (network effects).
REA Group’s Property Flywheel
Source: REA Group
In terms of its structure, REA Group’s segmented Residential and Commercial real-estate make up ~67% and ~15% of total revenues respectively (~82% combined), with each segment consisting of agent subscriptions (~7% of segment) and property listing fees on the platform (~93% of segment).
Additionally, with 115 million average monthly visits to its website, REA Group has a significant advertising platform along with a unique set of data insights on the property market, which it sells, these businesses are largely contained within the Media and Data segment (~10% of total revenue).
Given its unique view into the Australian property market, REA Group has started to deepen its role in transactions. To date, this has largely been through the provision of Financial Services and taken the form of mortgage broking.
In fact, this focus is set to increase with the recent acquisition of leading Australian mortgage broker, Mortgage Choice for A$244mm (March 2021), this segment currently contributes ~3% of total revenues however will likely become more significant over time.
REA Group Revenues (LTM December 2020): A$810 million
Finally, REA Group has several strategic interests (“real options”) in some of the largest and fastest-growing property markets in the world, particularly in Asia.
While the businesses within this portfolio are at an early stage, they address large populations and have a significant runway, including the leading property portal in Malaysia, prominent portals in India, China, Indonesia, Hong Kong, Thailand, and Singapore.
In addition to the Asian investments, REA Group owns a 20% interest in Move (realtor.com), one of the leading property portals in the United States, which rounds out a global footprint spanning three continents.
Global Footprint Spanning Three Continents
Source: REA Group
At Montaka Global Investments, we believe in owning the long-term winners in attractive markets, while they remain undervalued, we firmly believe REA Group comfortably fits within this criteria.
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Montaka owns shares in REA group.
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Christopher is a co-founder and portfolio manager at Montaka Global Investments. Before establishing Montaka in 2015, Christopher has worked with LFG, the Lowy family's private investment firm, One East Partners and Goldman Sachs.