Spark of growth lifts property industry hopes

After three difficult years, the real estate agents industry stabilised in 2010-11, in line with improvements in domestic economic and financial conditions and growth in residential property prices in much of Australia.

Growth in the demand for commercial (i.e. retail, office and industrial) property strengthened property investment. However, this was offset by weakening residential demand since the beginning of 2011. As a result, IBISWorld estimates that revenue for the real estate agents industry will increase by about 0.9% in 2011-12, to reach $9.0 billion.

The growth in 2010-11 followed three years of declines. Over the past five years, industry revenue fell by 1.1% per annum due to reduced demand for properties from investors, commercial businesses and homeowners. Deteriorating economic conditions, rising debt levels and tighter access to finance directly affected property investment.

Growth in industry revenue from 2011-12 is likely to stem from increasing commercial property, which accounts only for a minority of revenue. IBISWorld expects that improvements to economic and financial conditions and steady population growth through 2016-17 will drive domestic property investment. Residential and property sales and leasing volumes are forecast to diverge, with residential demand decreasing temporarily. As a result, industry revenue is expected to grow by 1.6% per annum over the next five years, to total $9.8 billion in 2016-17.

Industry outlook

IBISWorld forecasts that industry revenue will increase by 1.6% per annum over the next five years, to total $9.8 billion in 2016-17. The industry is expected to slow in the short term as consumer sentiment creates an even more cautious environment.

The carbon tax is expected to dampen consumer sentiment and disposable income in the next five years, with it expected to lead to an increase in inflation of 0.7%, according to Treasury.

Nonetheless, improvements across a range of economic, financial and demographic conditions will drive demand over the medium-term and will bring the industry out of a minor slump quite easily.

In the bigger picture, the ongoing transformation of the Chinese economy is a major driver of the Australian market, bringing export earnings, foreign investment and taxation revenue, which directly and indirectly bolster domestic real estate conditions.

The residential market

Residential property market conditions will influence industry growth significantly over the next five years. The residential property market is expected to experience growth and reallocation in investment activity due to rising interest rates and government restrictions on housing supply, which will lower housing affordability and raise rental prospects.

Improvements in the domestic economy, such as employment conditions, income levels, recovering confidence from the resources industries and the recovery of the Brisbane market from flooding, are expected to strengthen both foreign and local investor confidence and encourage property investment.

Urban growth boundaries, high-density development planning approval processes, stamp duty costs and housing supply, all administered by state governments, will be major determinants for residential real estate in the next five years.

Although, currently, real incomes are outpacing increases in housing prices, persistently increasing urbanisation and slow expansion from governments will lead to strain in relation to housing affordability. The NSW Government is moving to address this problem by releasing 10,000 new housing blocks over the next four years.

Steady population growth is also expected to stimulate market investment activity over the next five years. When combined with a decrease in the average household size, this will lead to a rise in the number of households in Australia. Data released by the ABS indicates that the average household size is expected to decline from 2.6 people in 2001, to 2.5 people by 2016. The growth in population, combined with reduced household sizes, will lead to increased demand for residential housing, which will drive sales and leasing volumes.

The commercial market

The strengthening commercial property market is expected to assist industry growth. The industrial and office markets are expected to experience a steadier level of demand for property space from 2011-12 due to improving economic, demographic and financial conditions that are anticipated to encourage property investment.

The retail market stabilised in 2009-10 and improvements to employment conditions and income levels through 2016-17 are expected to lead to growth in retail sales volumes. This increase will lead to growth in demand for property space and drive sales and leasing volumes as a result.

The industrial market is expected to reach a more stable level of property investment, as a steadier demand for property space returns to the market. Growth in the demand for industrial products is likely to be driven by the China-based commodity boom and improvements in the domestic economy and business conditions. This growth will encourage expenditure on industrial products and strengthen manufacturing production, import volumes and inventory levels. As a result, IBISWorld expects that demand for industrial property will increase through 2016-17, leading to growth in property sales and leases.

The impact of technology

Although real estate agents are becoming more proactive in the use of technology to carry out their work, there remains a long way to go.

Online property portals, such as realestate.com.au and domain.com.au, will entrench their position as the agents’ front window of the 21st century, listing hundreds of thousands of properties for sale or lease. Improving technology will increase the popularity of virtual tours of properties through the internet and new applications will be developed to take advantage of the rapid uptake of smartphones by customers. Agencies will dedicate a greater percentage of their advertising and marketing budgets to online initiatives in the next few years, as they move from traditional media channels.

In this vein, REA Group, owner of real estate advertising website realestate.com.au, has angered the industry greatly by raising advertising costs, using its data towards free property valuations and approaching vendors directly to up-sell advertisements. These moves by REA Group affect the industry due to its dominant share (about 70%) of real estate online advertising.

Furthermore, REA Group is not the only website engaging in such behaviour. As a result, the job of the real estate agent is being undermined, and this is expected to lead to a more competitive market. The moves by REA Group have attracted the ACCC, which is currently investigating industry claims. Some property franchises have responded by either undermining the valuation data through entering false sales prices or withholding advertisements from the website entirely.

This new environment will require agents to reassess their business models in order to guarantee their need in selling and managing property. Websites are evolving, with real estate information aggregator Onthehouse.com.au launched recently, making information for vendors and buyers much easier to access. Already some new business models have arisen in response, such as Refund Real Estate, which aims to share sale commissions with vendors, buyers and the agent to help guarantee that buyers are satisfied with the real estate agency’s service.

Agent-assisted companies like BuyMyPlace and PropertyNow have also popped up, serving a more advisory role to property vendors in sales or leasing as opposed to taking on the services completely, at a fraction of the cost. Established companies in the United States are known for directly contacting consumers to place ads, cutting out the real estate agent in the process.

Key success factors

IBISWorld identifies 250 key success factors for a business. The most important for this industry are:

• Aggressive marketing/franchising – given the high level of competition: A significant amount of time and effort should be devoted to marketing and promotional activities. It is also important to develop a referral base and centres of influence.
• Management of portfolio: The effective management of assets and tenants enables agencies to maintain a continuous leasing revenue stream.
• Having contacts within key markets: For commercial real estate agencies, it is important to establish strong relationships with institutional and private investors, banks and international real estate agencies.
• Market research and understanding: Property research activities can bolster revenue from sales and property management.
• Proximity to key markets:The position of the agency office is important; it should be close to the customers it intends to serve.
• Access to highly skilled workforce:Performance of staff should be regularly assessed. Low performers should be cautioned and/or re-trained or quickly replaced by new sales staff.

To purchase IBISWorld’s full industry report on Real Estate Agents in Australia click here.