-Amit Nath
Often cited as the densest year of technological innovation of all time, 1995 stands out for several reasons; The launch of the world’s first internet-enabled marketplaces (Craigslist and eBay), the start of online dating (Match.com), the first fully digital, animated feature film (Pixar’s Toy Story) and of course, a humble “bookseller” was born (Amazon.com). While lesser-known, 1995 was also the year the greatest internet startup in antipodean history was founded, REA Group.
Just like the great tech tales of Silicon Valley, our Aussie protagonist, REA Group, was started in a garage (1995), IPO’d just before the dotcom bust (1999) and lost ~90% of its value shortly thereafter (2001). However, just before complete failure, it was dealt a dose of good fortune, with Rupert Murdoch and his global media empire, News Corporation stepping in and providing a much-needed capital injection. News Corp. took 44% of REA Group (realestate.com.au at the time) in exchange for A$2 million in cash plus A$8 million worth TV and print advertising, giving REA Group a total equity valuation of A$23 million. Fast forward twenty years to today and News Corp. owns 61% of REA Group, which has a market capitalization of A$21 billion, or 910 times the valuation Murdoch paid in 2001. For comparison, a purchase of Amazon stock at its low point after the dotcom bust would have returned 510 times the initial investment today, or less than two-thirds of what REA Group has delivered (excluding dividends), which earns it a place among the greatest internet start-ups of all time.
Aside from being a multi-decade compounder for shareholders, REA Group holds one of the most privileged positions in real estate sector in the world. Real estate markets tend to be highly localized, with the comparable property radius only extending to surrounding neighborhoods, creating fragmented, non-uniform supply dynamics, which are highly supportive for an online marketplace like REA Group and can aggregate that supply more uniformly. In addition to this, the Australian market is unique, in that it is impossible to function as a real estate agent (or broker) without a subscription to REA Group’s professional tools and access to its property listing portal, which as we will discuss, is entrenched with buyers and renters in the Australian market.
Through its flagship portal (realestate.com.au) REA Group has become “the destination” for real estate in the Australian market with ~65% of Australia’s adult population (12 million people) checking property listings, real estate news, and home prices on the site every month. Additionally, REA Group continues to increase its lead over the number two player (Domain Holdings), reaching 6 million more Australians and attracting over three times the monthly visitors of its closest peer, a gap which continues to widen.
REA Group is Australia’s #1 Property Portal
Source: REA Group
Adjacent to its privileged position with Australian real estate customers, REA Group also has an indispensable relationship with real estate agents. To effectively operate in the Australian market, a real estate agent has very few choices outside of subscribing to REA Group’s agent administration tools to find clients, build an online profile and market their listings. This has translated into extremely strong and durable pricing power for REA Group. While the official strategy is to support agents and remain in their servitude forevermore, one cannot help but observe the increasingly potent value-added services it offers property buyers, sellers and renters, slowly disintermediating agents in the value chain, which is the natural progression of a genuine two-sided marketplace like the one REA Group oversees. As REA Group continues to reduce friction costs of buying, selling, and renting properties for customers, it is likely to capture a larger share of transaction economics over time.
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. 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 therefore to capture a larger share of transaction economics over time. Similar to other internet enabled marketplaces that have served perform functions, such as Amazon, eBay or Uber.
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 (a.k.a. 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 scale (network effects).
REA Group’s Property Flywheel
Source: REA Group
In terms of its structure, REA Group’s business is 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
Source: MGI
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 significant runway, including the leading property portal in Malaysia, and 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 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. We are very grateful for the trust you have placed in Montaka to protect and grow your wealth, alongside our own wealth, and believe REA Group will continue to be a wonderful investment over the long term.
Montaka owns shares in REA group.
Amit Nath is a Senior Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.
