Australian property market's great escape

Owen Wilson is the CEO of REA Group, which operates realestate.com.au among other real estate websites.

REA released its full-year report nearly two weeks ago, and the response from the market has been mostly positive, with its share price now above pre-COVID levels as most of Australia, apart from Victoria, has opened up.

Owen takes me through the year that has been in the property market, beginning with the strong recovery Australia saw at the start of the year, then the onset of COVID and how the company was forced to manage costs, to where we're at now with the Melbourne lockdowns.

He also provides an outlook on the Australian property market going forward and his thoughts that we're getting through the downturn better than first anticipated.

So here's Owen Wilson, the CEO of REA Group.

Table of contents
Property market pre-COVID
Impact of first COVID wave on property market
Increase in website visits
Asia operations and property market
Current environment & property buyer behaviour 
Impact of Melbourne's stage 4 lockdowns on property market
Rising value of industrial property
REA Group share price
Outlook for property market

Thanks for joining us, Owen, it's nearly two weeks since REA Group reported its full year results. But before we get into those, I just wanted to rewind back to the start of the year and pre-COVID. How were you viewing the Australian property market in those months leading into COVID?

We started the year with a fairly significant negative market for us. The Financial Services Royal Commission was really hurting the market and the banks had really reined in their lending and so buyers couldn't get finance and therefore they disappeared from the market, which took the sellers out of the market. We started the year with listings substantially down in the first quarter, particularly in Melbourne and Sydney. As we ended the new year the recovery was in full swing and the banks were starting to lend again and we saw listings tracking upwards as we entered March, for the first time in quite a while. Then of course COVID hit in the middle of March and we saw a substantial fall in listings in April and May.

It looked like that only deferred the activity because once the restrictions were lifted and the property market could get back operating normally, we saw a big bounce in listings in June and that's continued into July. And then of course, here in Melbourne, you know, we're seeing the impact of this latest lockdown.

What was the strategy you laid out with the onset of COVID in terms of managing costs and expectations, I guess, of how hard REA Group would be hit?

Well, in one way we were fortunate from the impact of the Royal Commission last year, that started to hurt around about Q4 of ‘19, and so we had embarked on a fairly aggressive cost reduction program as a result of what the Royal Commission was doing to our market. And we had a reorganisation in the first quarter of last year, and we were looking at all costs over the course of the year. So we were pretty pleased with the outcome that we managed to take 9 per cent out of our operating cost base for the full year and a full 21 per cent reduction in costs in Q4. Some of those cost reductions were temporary, just things like travel and entertainment, for example, are clearly not happening this market. That's almost down to zero, and other things were things we've tackled and renegotiated and reduced over the course of the year.

As you mentioned, it was mid-March when COVID really hit and the first round of lockdowns were put in place. How did that filter through to the real estate market in terms of property listings throughout April and May then REA Group financially?

Yeah, look, April and May were pretty bad. We had to pivot very quickly and brought in a lot of new products to the market to help the market continue to operate in that environment. Things like digital inspections, 3D walkthrough tours, the ability to book private inspections rather than the usual open for inspection arrangement. But the reality is it really knocked consumer confidence around and we saw huge drops, you know, kind of around about 30, 40 per cent in listings in April and May. And as I said, as soon as I was restrictions were lifted, the market did bounce back again in June.

With restrictions easing in June, you reported, as you said, a bit of a bounce back in residential listings. Was that still a lot lower than what you'd consider normal for that time period? Or was it actually quite a promising bounce back?

Well, it's a good question. It was probably lower than what you'd normally expect because we are comparing it to the prior period where we had, particularly in Q4, the impacts of the Royal Commission and the federal election. And you can recall the uncertainty around the result of that election as we went into it. That had a very negative impact on the property market, you know, we were looking at a potential change in government, potentially losing negative gearing, et cetera. But it did bounce back quite healthily. We had Sydney listings, for example, had bounced back and were up in the 40-50 per cent. In July, Melbourne was up 13 per cent, but it is still lower than what you'd expect in what I'd call, a normal year.

Australian residential revenue declined 4 per cent largely due to the lower listing volumes as you said in the report. You mentioned that was partially offset by price changes in what was described as an improved product mix. Could you elaborate on how you're able to compensate for that loss in revenue from the decrease in listings?

Yeah. Look, part of it was a price increase. We had a price increase take effect on 1 July last year. We also saw increased uptake in our premium products by customers, both on the rent side of the business, but also on the buy side. And so what we refer to as our depth penetration improved healthily year on year, which helped negate that listings environment.

And in Australia, your commercial and developer revenue fell 7 per cent, which you attributed to the 27 per cent reduction in new project commencements. How long are you anticipating this decline in new projects will continue, and are you expecting a sharp bounce back in the recovery?

Yeah, we rely very heavily on some of the external market forecasts. We use... for example, they are forecasting continued decline in new project commencements over the course of this financial year. It's interesting and it's a reasonably recent development, on the back, I think of some of the government's stimulus measures, we are seeing a lot of smaller new projects start to come to market. They don't yield as well, but it is an encouraging sign that we may see some recovery in that sector off a period of two to three years of declines following the construction boom around about 2014/2015.

And despite the lower listings where you actually seeing an increase in website visits across the board, because many people would have been stuck at home and browsing the internet?

That was probably the most pleasing thing of our year, was our continued record audience levels. In May, for example, you know, we got to almost 12 million Australians visited our site. That's 60 per cent of the Australian population came to our site in May. But it wasn't just people sitting at home in iso looking at property. It was genuine buyer interest because we saw a significant increase in buyer inquiry over that period as well. I think that that's partially due to the strong liquidity the banks have at the moment and they are out still lending. So the buyers are there, and that's continued right through June, July and into this month. Buyer inquiry, buyer activity that we can see on our site is stronger than it was this time last year.

Can we just look at your Asia operations, the report pointed to reductions in new development projects over there, as well as lower listing volumes, and I guess there's also the political unrest in Hong Kong, which has been a contributor. How have you seen that side of the business hold up in Asia?

Yeah. Look, it's been very mixed. If you take Hong Kong as an example, we've seen a profound impact on the business over there, both from the unrest that started in the first half, followed by COVID and now there's more unrest. What that's meant is the events part of our business, the property events, where developers come along and display their developments and you get a lot of people in. They're a very lucrative part of our business and we haven't been able to hold any of those in this financial year and can't see when they will return to the market as we sit here today. On the other hand, Malaysia was a fantastic market for us. You know, we grew revenue 20 per cent in the first half and that business was really travelling very well until COVID hit. We are encouraged though, and we’re very confident that momentum will return. Malaysia has done very well in managing the virus; their numbers are much better than ours, as an example. And so, you know, just talking to the people in KL this week, they're very confident the market will rebound pretty quickly there.

And just back to Australia, how are you seeing the current environment, you've got low interest rates and bank liquidity, how is that affecting property buyer's behaviour?

I think there's two things at play here. One is the banks have got very strong liquidity, particularly with the lending that they can get from the RBA at the moment as part of the stimulus that's going on. The banks are definitely out there to lend and I think there's a bit of a battle between them to try and gain a bit of market share while this is all going on. That's great for people who are looking to borrow. People can get finance. It still takes a bit longer than you'd like to get it approved and I think that's partially the banks working virtually. So the buyers are there. What I'm hearing from customers though, is, you know, that strong buyer inquiry, that strong interest is not being matched up with strong intent. I think a lot of the buyers are possibly out there hoping to get a bargain and that's just not eventuating at the moment. We're not seeing significant falls in property prices and I think that's partially because the buyers are there. It augers well for, I think, a strong spring, if we can beat this virus.

You briefly mentioned Melbourne before. How are you viewing the stage four lockdowns in Melbourne, particularly given the ban on physical inspections, as impacting the property market, particularly with regard to listings?

Yeah. It’s had a significant impact. It took a while for it to hit, you know, I think there were some listings that were in the pipeline that came through, but the reality is in a world where you can't physically inspect, you can't get the photography done on the house. You can't get the floor plans done, you know, it's almost impossible. And I think people have just decided it's not worth it. Everybody is going to hold off until the restrictions are lifted. We’re seeing listings running down around about the 80 per cent mark in Melbourne. I would expect that to drift lower as we get further into the lockdown. If we look at markets like New Zealand, you know, when they had their fairly hefty lockdown, we look at New York, they were all down sort of 80 to 90 per cent for the duration of the lockdown and then quickly rebounded after that.

Just for the sake of comparison, aside from Melbourne, are you saying the rest of Australia recovering well from its restrictions of the lockdowns then?

Yes. That's the really weird part about this, and I was looking at the listing numbers this morning, all the other capital cities are up in listings, which is fantastic. Most of the regional markets are up. If they’re not, it's because they might've had a stronger period this time last year. All in all, the market in the rest of the country is actually better than it was this time last year and so things have kind of got back to normal. It's really just wherever the restrictions are in place, as strictly as they are in Victoria, that's where the impact is being felt.

And we’ve seen a rise in the value of industrial property and warehousing space for logistics because it's becoming increasingly important for the boom in online shopping, for packing orders, things like that. Is this a trend you have noticed, and are you seeing any other trends occurring in the property market resulting from COVID?

Yeah, the attractiveness of industrial property, that's been something we've been calling for quite a while. Our chief economist has been saying it of all the commercial properties. She's been saying, that's one of the most attractive sectors for a while. And that's really showing out now in what's happening in this environment. More and more tenants are looking for more warehouse space. On the flip side, you're seeing a lot of retail businesses going to the wall at the moment and so we expect to see a lot of vacancies in retail. Longer term, you know, you're hearing stories of virtual working continue for most businesses, and so the demand for office space is bound to be lower. That's not a big segment for us, particularly the large CBD office buildings, but smaller office space, we expect to see more vacancies in that as well.

How will you be reacting to that from a business perspective? Will you be lowering your exposure to those office buildings? I know you mentioned it's not a big part of the business anyway, but is that something that you will act on?

Look, the parts of the market we play, that mid-market office, retail, industrial, et cetera, any vacancy is an opportunity for us to help connect a landlord and a tenant and so they create opportunities for us for more listings. So, you know, we'll be staying very close to our customers in that regard and making sure they come on our site, ideally at the premium end of our product range.

Just looking at the share price of REA Group, it's climbed a bit since you released that full year report and it's back above now almost pre-COVID levels. Do you think there's a feeling that the property market might escape this COVID situation in better shape than first anticipated?

I think that's absolutely the case. You know, there was a lot of doomsayers, particularly around April/May. People were talking about 20 per cent property price falls, 30 per cent property price falls. I just cannot see that happening and I think the key thing that's underpinning that is this is a health crisis, not a liquidity crisis. And so while the banks are still lending and while there are people in employment, you know, unemployment will go up, but there's a lot of people that have got jobs. We've got record low interest rates and strong signals from the RBA they will stay low for a very long time.

I think that that puts a floor under our market, and it's been very resilient, through so many adverse market situations. I think people underestimated just how resilient the property market will be. We hit a record share price today, you're seeing that in our share price. I think it's also, we're getting a tick for how we've managed our cost base. We've signalled to the market there'll be no increase in operating costs in the next financial year as well. And so, you know, I think that's reflecting in the share price as well.

Your full year report also mentioned that you've deferred price increases, which were due to come into effect from the 1st of July. Could you explain what they include and what will you need to see happen in the property market before you're comfortable introducing those price increases?

We definitely have to see a sustainable recovery in the market and not just the market, the situation with the virus. I think we all want to be confident that all geographies have got on top of the virus and we're not going to see further lockdowns. We'll play the long game with this. If we don't put a price increase in this financial year, I think we'll have created the circumstances and the goodwill with our customer base that we’ll be able to put through a larger increase next year than we otherwise would have. We’re pretty relaxed about it and what we don't want to do is do something that's just going to make life more difficult for vendors and customers in this environment.

Just finally, looking forward to the rest of this year, do you think there's still some way for the property market to fall? Are we passed the worst of it?

I think it all depends on a few things. One is consumer confidence and the economy. Obviously, that's an underlying driver of what people think about property and how they feel about property. But obviously, it depends on the virus. You know, if this stage four lockdown keeps going the way it's going in Victoria, these numbers keep falling and we can come out of it, in a similar sort of state to say New South Wales, as an example, then we shouldn't see substantial falls. It is dependent on those two things. The other part with the economy it'll depend on how quickly the government removes its stimulus, whether it phases out. What the bank do around the holidays, et cetera. I'm reasonably confident that, as I said, with the circumstances we've got, the property market will be resilient, I don't see big swings happening.

Good to chat Owen. Thanks very much for your time.

Thank you.

That was Owen Wilson, the CEO of REA Group.