The rise and rise and rise and rise of property portals

by Alistair Helm in


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The announcement last month of the acquisition of Zoopla the #2 property portal in the UK by Silver Lake Partners, the US private equity firm for £2,200 million (NZ$4,180 million) was a clear statement as to the confidence the financial markets and their investors have in the business models of digital real estate marketing.

Zoopla is not the leading UK digital property portal. That accolade goes to Rightmove which according to its own stats has 70% of the UK total audience for property searches. Zoopla was only launched in 2008. At that time Rightmove had been in operation for 8 years and had gone public two years earlier. Rightmove in 2008 was generating over £50m in revenue.

Zoopla though was never one to daunted and was ever ambitious, lead by the charismatic and driven CEO Alex Chesterman. Through the first 6 years, the business grew through acquisition of other real estate websites and property publications building a formidable position as the #2 player leading to the IPO in 2004.

The IPO valued the company at £990 million, half the then value of Rightmove. In a savvy move Zoopla offered real estate agent customers the opportunity to buy shares at a 20% discount; a smart move to side step a challenging move by a new industry owned start up OnTheMarket which required loyal agents to sign up to only one of the other commercial portals to try and break the duopoly. Those agents who did and hung on to their IPO shares will likely see a return of 177% in 4 years.

This stellar rise and exit for Zoopla is not an exception in the market of property portals. I thought it would be interesting to do some analysis of the key players around the world to see just how valuable these businesses have become over the years. Many of the leading portals have been in operation now for close on 20 years.

Restricting this review to the UK, Australia, USA and New Zealand is not truly reflective of the global market that sees many massively successful operators – the likes of Seloger in France, Scout 24 in Germany, Zap VivaReal in Brazil to name but a few; however I have observed and researched extensively these key businesses over the years, so feel comfortable commenting on their performance and strategy.

 

3 Leading Property Portals - NZ$30 billion in value

The top 3 portals in my opinion globally are the REA Group, operator of Realestate.com.au in Australia (and other countries), Rightmove in the UK and Zillow in the USA. Together these three businesses have a collective market value currently of over NZ$30 billion. Five years ago those same 3 portals had a market value of just NZ$11 billion. I have for reference included New Zealand’s own Trade Me for reasons that will become obvious as I proceed.

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This scale of growth is spectacular. What is even more spectacular is the relative rise in the market value of these companies measured against their own domestic market index. I have simply indexed the growth in share price to the index at June each year.

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The performance of the REA Group is stunning, eclipsing the performing the ASX market by close on 4 times over the past 6 years. Zillow doubling the Nasdaq index performance and Rightmove outpaced the FTSE 100 by more than double. Sadly though our own NZ digital portal of Trade Me with a broader portfolio than just property has not attained such stellar growth and has fallen behind the NZX index over the same period achieving just half of the market index growth over the past 6 years.

 

Australian international benchmark

The REA Group is now not just an Australia real estate digital portal it has operations in Asia and now the US. This latter move driven by its largest single shareholder News Corporation (owns 60% of REA Group) which acquired the #2 property portal in the USA (Move.com) in partnership with REA in 2014.  However in terms of profitability at EBIDTA level the performance of REA relies almost entirely on the profits of Realestate.com.au, and they keep rising year-on-year with revenue growth in the last financial year of 16% - this is a 20 year old company that added A$92m of incremental revenue last financial year to total A$671m.

REA Group though are not alone in carving out a global powerhouse performance to better all comers, they are actually part of a triumvirate of Australian digital behemoths – REA Group, Seek and CarSales – each are the global benchmark for their category of property, jobs and motors. By no small coincidence the 3 core classified platforms of our own Trade Me.

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Just like the REA Group, Seek and CarSales have significantly outpaced the ASX market index over the past 6 years, close to doubling the ASX for CarSales and higher for Seek.

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Financial Indexing of Portals

Some further financial indexing provides valuable insight into the relative performance of these global leading portals for property and other classifieds.

In terms of absolute market value the comparison is staggering. REA Group still remains the most valuable property portal keeping Zillow at bay, and a significant 50% more valuable than its jobs portal partner and 3 times the value of the auto portal.

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The inclusion of Trade Me Property is purely as a means to compare the property operation of Trade Me with its peers in other countries. I have purely used the % representation of property revenue as a surrogate for value representation. Sure I know full well that a digital business based on a 4.7 million population of NZ is never comparable with the population of Australia, UK or US; I'll come back to that benchmark shortly.

When it comes to true grunt, any financial expert will tell you that value is only a reflection of profit and this is where the appeal of digital portals comes to light. The EBIDTA margin of these portals is impressive … if you turn a blind eye to Zillow.

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Rightmove is the king of money making – for ever £1 it receives as revenue it spend just £0.27 on running the business allowing it to reinvest 73 pence. Trade Me shows its might just as effectively, with a very impressive 58% EBIDTA margin, ahead of REA and its Australian counterparts whose 31% and 45% are still worthily impressive margins.

This metric of margin is critical in comparing digital portals. The very appeal of digital businesses is scale. The simple principle being that the core cost of a digital platform should cost no more to service for a million users than for 10 million or 100 million. That is why digital businesses can generate such EBIDTA margins. However this is where things get interesting. Why is it that Rightmove serving a UK market of 66 million people can achieve 73% EBIDTA margins whereas Zillow serving a 326 million population can barely scrape 1% margin? Equally how can Trade Me serving a domestic only market of 4.7 million hope to deliver 58% margin?

The answers to these two questions are complex and not directly related. The US market is nothing like Australia, UK or NZ when it comes to property marketing, there is no such thing as paid for subscriptions for listings or vendor paid marketing; leaving Zillow to monetise agent advertising and client leads.

As for Trade Me the very impressive performance of 58% margin may possibly be part of the reason that its market value has not attained the stellar rise of its peers, as a function of stifled ambition and lacking investment courage?

The final metric I will provide is the relative performance of these portals on a per head of population basis.

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Here we see the same stellar performance of REA extracting a market value which equates to over $500 per person in Australia. Trade Me as a group delivers an impressive $406 per person in NZ,  but the truer comparative metric is the equivalent market value of the property sector (based on share of revenue) delivering a market value of just one tenth that of REA. Having said that the surprise is the relative performance of Rightmove at $130 per person in the UK. This potentially portends to the view that the upside for Rightmove is still significant, although the danger is made in assuming the UK real estate marketing landscape is similar to Australia which it is not.

The overriding clarity that these data points highlight is the enormously successful digital property portal businesses that have been developed globally over the last decade, but more significant is the powerhouse operations of digital portals across the Tasman over the same period. What can we as NZ’ers somehow learn from this and more importantly what can Trade Me learn to help it chart a more dynamic path to growth as a true NZ icon in the digital portal space?


How vulnerable is the $100+bn property portal industry worldwide?

by Alistair Helm in ,


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In less than 25 years, a whole new industry has been created. Property Portals, these digital platforms that span the globe, aggregate property listings that serve as the primary advertising for the real estate industry. To the consumer this industry provides the most convenient method for searching properties for sale or rent, whether residential, commercial or industrial. Hundreds of millions of consumers every day.

In aggregate this industry of publicly traded and private companies approaches a collective market cap of something like $100+ billion across every corner of the globe.

The largest of the players would be Zillow with a market cap just nudging $10bn as it begins to eke out a decent (adjusted) EBIDTA which rose to 22% from just 2% the year prior on revenues of $1.1bn. This profitability however looks paltry as compared to the profit powerhouse of Rightmove in the UK which consistently exceeds 70% EBIDTA margins on revenues of $340m which is why it supports a market cap of $5bn.

The list goes on through the likes of the REA Group, ImmobilienScout24, VivaReal, Schibsted and many hundreds of others (including in NZ Trade Me and Realestate.co.nz). Suffice to say this business model of aggregating listings of real estate companies for consumer search supported by premium advertising and listings subscriptions makes for a very lucrative business, one that the incumbents will defend through constant innovation, as well as acquisition. However no industry is ever safe from disruption, especially digital platforms.

Whilst I don’t contend that the demise of these property portals is imminent, I do foresee a risk. A risk every bit as real as the global newspaper industry which became the victims of the property portal success as through the 90’s into the new century their real estate advertising goldmine, began to crumble and today has all but disappeared.

So what is this risk and where will it likely come from?

To understand the risk you need to simply look at the portals’ role. They are an aggregator of both sides of the market in which they operate. They aggregated advertised listings and they aggregate a consumer audience. Their global success has been the ‘winner takes all’ model as the aggregation of the largest audience (although in most countries there is a #1 and a #2 leaving the rest in their wake), audience advantage guarantees dominance in listings, so begets the audience.

But stop for a minute and reflect as to the future of search, after all this is what a property portal is, a search engine. The technology revolution for search is voice. The improvements of the past couple of years has been incredible and the next few years will take us forward beyond our current estimation. The reason why, is the accelerated adoption of ‘home’ devices. The Amazon Echo, The Google Home and the Apple HomePod. For a moment ignore the latter and concentrate on the first two. They are the global powerhouses of search and artificial intelligence, coupled with the global reach that would surpass the local audience of any property portal.

So imagine a future state. You’re on the couch and with your Google Home you ask “Hey Google – what properties might I like to see this weekend” – the screen of your choice (TV/ Tablet / Glasses) then starts to display homes for sale open this weekend.

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Let’s look at the mechanics of this scenario. Google Home is paired to your Google account so it knows so much about you – where you live, where you work, where the kids go to school, how far you drive on weekday and weekends, where your relative lives and your friends. Google knows what your style preferences are and what you have bought in the past few years to renovate or decorate your home, it also knows details of your finances and likely as not your mortgage.

So when you ask Google to show you what properties you would want to see this weekend, you don’t need Zillow / Rightmove / REA as intermediaries or their ‘simple’ search filters – location / beds / price.

Google has the listings inventory of every real estate company in every country, they have collated it for years in search logs. They have deep attribute knowledge of every house that has been advertised for over 15 years at least; they also every house’s estimated valuation. It knows the level of your interest in types of houses and more important the best match of you to your future house. So Google will deliver a portfolio that is personalised to a very fine degree for your review. However it will never stop learning leveraging its vast AI capability to do this. Every comment you make when you see a property in this portfolio will be a key signal to adapt the portfolio to better meet your needs by style, condition, location and attributes. Every comment is also a signal which helps other Google customers who benefits from your comments. Should a new property hit the market via the local agency that is the perfect match, it will add this to the morning update it provides before you leave the house in the morning, and schedule a catch up with the local agent optimising you and your partners diaries.

This capability is real and achievable not just by Google but also by Amazon as they have a significant advantage in consumer engagement in a retail sense and richer installed base of Echos. Already more than 1 in 10 US homes has a voice activated home device and that number will only accelerate this year.

What is the goldmine for these two behemoths?   Well Amazon for one, has made that clear just this week – they are after the mortgage market. Real estate is at its heart actually just a vehicle for the far more lucrative finance industry as the largest consumer asset base globally. As for Google, well as an advertising company I think they can come up with ways to monetise the connection between the agent and the buyer that will boost Google’s stock by a healthy $100bn or more!

How do property portals defend against this future threat?

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The smart ones recognise it and are heading down ancillary market routes. Zillow has been after mortgage origination for years, they have recently tested the iBuyer market, but I think the larger bet which has been on their radar for a number of years signalled by their Premier Agent platform is to become Zillow Realty as a broker of scale supporting hundreds of thousands of agents with an infrastructure to allow them to be truly independent contractors with no franchise aside from the Zillow brand. Interestingly Zoopla in the UK has already started earning more revenue from their uSwitch business than the portal space, they can see that the business model of a property portal may just have been an opportunistic industry that is surpassed by the next tech revolution.

Interestingly for those that have the memory of the early internet period there will be a familiar ring to the word portal, after all there was a time in the late 90’s when the river of gold of the early web day flowed from everywhere to Yahoo. Every pre-dot com start up gave up huge equity and most of their revenue to Yahoo to be the access point for their category of product or service as everything for the consumer started at Yahoo – how that once invincible portal has deflated over the past 20 years to a shadow of its former self, valued in ’98 at over $110bn and recently selling to Verizon for $4.5bn. An object lesson for today’s property portals perhaps?


Technology empowered real estate solutions - the low price operators

by Alistair Helm in ,


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My recent article questioning (and answering) why real estate agents had not been killed off, as the internet has disinter-mediated so many other businesses; was published on the NBR website and generated a number of interesting comments. Amongst the more predictable with a focus on private sales vs agents, this comment grabbed my attention:

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The article I wrote, specifically focused on the role of the agent, and how this component of the real estate process continues to be successful, and in my judgement will be so in the foreseeable future. There will be challengers within this industry. In fact there have been challengers in the past, and so I thought it worth examining some of these technology empowered aspiring challengers, so as to more fully answer this comment, and thereby provide a broader picture of the new more digitally focused real estate landscape internationally.

Researching many operations across the main markets of the UK, US and Australia / New Zealand, has highlighted what I think are three key categories of challengers to the (traditional) real estate process. These are what I call 1. The low price operators / 2. The true innovators / 3. The opportunists

Given the number of models to examine, I propose to separate this analysis into 3 separate articles. I'll start here with the first being the low price operators.

Low Price Operators

The commenter in the NBR, cited two UK based real estate operations - Yopa and Purple Bricks. These are but two of what are many operators in the UK market offering an online focused / fixed fee solution. Most charge around £800 for what they claim is a simple, and far more efficient model than traditional estate agents. Take your pick.

The UK top 10 online estate agents as reviewed by The House Shop - click to read full article

The UK top 10 online estate agents as reviewed by The House Shop - click to read full article

The key thing as ever in examining overseas models is context. The UK real estate market is very different to both the New Zealand and Australian. Firstly there is no equivalent of the Real Estate Authority legislating and overseeing the licensing of agents. More significantly though is the fact that the UK industry is what I judge to be 'low touch' service offering; meaning that as a vendor you engage a local real estate office to market your property (rather than a specific agent). They advertise the property online on the leading portals and handle enquiries and schedule viewing, but largely don't physically leave their office, as you the vendor, will host the interested buyer. The UK process is by comparison to NZ highly protracted (at least in England and Wales - Scotland is very different) in that an offer to buy is not legally binding until the settlement day and as a consequence often up to a third of all "sales" never settle and fall over in the final days and weeks leading up to settlement.

For this 'low touch' service real estate offices typically charge from 1% to 1.5% of the sale price and agents are largely employees of offices. For this reason the online service of the likes of Purple Bricks, emoov, easy property and Yopa are not that far removed from the traditional model. Instead of calling in at a local office, you sign up online and the service provider advertises the property and receives the enquiries and schedules with you the viewings. All this for around eight hundred pounds, compared to an estate agent charging say 1.5% of the average sale price of £225,000 amounting to just over £3,000.

The thing is, most of these operations have been around a while - especially emoov and easy property. It was not until Purple Bricks started to talk about a stock market listing just over 2 years ago and at the same time, investment funds started investigating real estate as a new sector to find a home for large amounts of cheap money, did media pick up on the potential of these startups; and as we all know, where investment money flows, so marketing budgets explode and consumer awareness grows. However as reported by TwentyCI a UK based property data company, whilst these online estate agents have grown year-on-year in absolute terms they barely amount to 6% of the total market. By comparison the NZ private selling market is c. 12%. Added to this is the fact that Purple Bricks (now a listed PLC) and others have recently in the UK tripped-up over a lack of transparency around the fees charged which are not refundable if the property does not sell, as well as finance charges for the deferment of the fees, creating a flood of media coverage likely to impact their growth.

Returning to the comment in the NBR, as to the notion that Savills investment in Yopa is a sign of the burgeoning of this sector in the UK - I would judge it is simply a smart each-way bet by Savills to see if the segment does challenge the incumbents. As for LJ Hooker in Australia, I judge that they got a little too enthused or better put, 'carried away' on the belief that they needed to launch a low price service and that is why they launched Settl which based on the information at the time was due to launch in the second half of 2016, however as yet no service is available - possibly LJ Hooker have got cold feet.

As to any Artificial Intelligence (AI) integration which some of these online agencies purport to offer. They are largely leveraging automated valuation models (AVM) and a rudimentary buyer / seller matching AI which as anyone who understands the principle of a two-sided market place, is only effective when you achieve scale on both sides of the market and none of these operators have anything like enough scale. The smarter use of AI in my view as an example in the UK was the acquisition by Rightmove (the UK's leading property portal) of predictive analytics company The Outside View in 2016, this company's smarts will leverage Rightmove's massive scale advantage of close on twenty years of data to undertake deep AI analytics to be the best at predicting the future sellers in the market thereby powering agent tools as a new business for Rightmove.

Moving away from the UK, Purple Bricks launched in Australia last year and now offer a service through local property experts (who have to be licensed) and who are a point of contact with the consumer through the process for which a fee of $6,000 (VIC / NSW) is charged. A US entry for Purple Bricks is currently underway. Interestingly the recent UK issues of transparency around the liability of consumers to pay the fees even if they don't sell, has now plagued the Australian operation with a $20,000 fine in Queensland as a solution to the avoidance of possible court action after alleged possible breaches of the Australian Consumer Law and the Property Occupations Act.

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New Zealand is not alone and has low price models - 200Square currently has a fixed fee of $4,500 and Tall Poppy have a fixed fee - well actually a sliding fixed fee: $500,000 property price: $12,000 / $1m price: $20,000 / $2m price: $30,000. There are also many operations in NZ charging 1% - most of these price based competitors have been round for many years and of course you may remember the 2007 flash of "The Joneses" with their "flat fee.. not fat fee" of $8,000.

Regardless of whether these various operations are labelled as online estate agents or fixed fee operations, they all stand behind one positioning strategy - they are low priced operators. As any marketing or MBA course will tell you, being the lowest price player in the market is not a sustainable place to build a long term business. A low cost operator now that is a sustainable platform for sure, but these are not low cost operators. The true low cost operation in this industry is the traditional business (as far as in the NZ model) because traditional real estate franchise groups don't employ salespeople, they are made up of local teams of independent commission-only contractors. Low price operations have by their very presence always to be looking over their shoulder to new competitors trying to undercut them, instead of building long term value in their brand and reputation.

Technology has the ability to drive out cost and improve efficiency, but when it comes to the real estate process as outlined in detail in my earlier article, efficiency through technology comes at a cost to the customer, largely that cost is in the loss of a trusted individual deeply engaged in the process end-to-end. For the low price operators such individuals tend to focus on being a pure lister (in the case of Purple Bricks) or a generic customer service answering contact points in the case of the other online agents.

Next article will focus on The True Innovators and finally I will examine The Opportunists