Here's proof property has peaked

The residential property market has peaked – at least in Sydney.

How do I know? Well, it's not by poring over sale prices, auction clearance rates or activity levels. Nor has it anything to do with Morgan Stanley's claim that the boom is over.

In fact, the peak has been signalled by one simple indicator.

Many share investors forget that initial public offerings are sales of shares. And sellers – having owned their businesses for many years – almost always choose the timing that suits them.

So it's noteworthy that two real estate agencies plan to float on the ASX over the next few months. When avowed property market people decide to sell their businesses to sharemarket people, it's the sharemarket people who should worry.

With property prices having soared in Sydney and Melbourne over recent years – and transaction volumes having risen, too – many real estate agencies will have been producing record profits.

The first real estate agency to float on the ASX will probably be McGrath Estate Agents. The prospectus isn't available yet but the float is rumoured to be priced at about $200 million.

The second is LJ Hooker, which is apparently seeking pre-float funding. Any listing is not expected to take place until 2016.

Rising risk

What's particularly interesting is that the vendors of these businesses appear to be structuring them in a way that will maximise their returns from the sale, making the businesses riskier for buyers.

Traditionally, many agencies operated as franchisors, with the franchisees taking much of the cyclical risk.

However, McGrath, for example, has recently bought out its largest franchisee. This means the company will be more exposed to any cyclical downturn in commissions than before. LJ Hooker has flagged it will buy out some of its franchisees, too.

McGrath is also reportedly planning to expand into Victoria this year. Presumably this helps with marketing the company's 'growth potential' but expansion into new territories brings risk. McGrath Estate Agents' future business will look very different to its past.

Cyclical businesses floating right before downturns has a precedent. Numerous stockbroking firms, for example, listed in 2007.

Buy stockbrokers? Lousy investments

Wilson HTM (now Wilson Group) (ASX: WIG), Bell Financial Group (ASX: BFG) and Austock Group (ASX: ACK) all floated within six months of each other, with the last broker hitting the ASX in December 2007.

The All Ordinaries peaked at 6873 only one month before, and hasn't hit that level since.

The listed brokers have been terrible investments over that period.

The best performer, Wilson Group, which incidentally sold its broking business this year, still sits almost 50 per cent below its issue price.

Who knows whether the listed real estate agencies will suffer the same fate? However, if there's one thing the owners of very cyclical businesses understand, it's that the good times don't last forever.

It's often said that "no one rings a bell at the top of the market". I disagree. When it comes to the residential property market, the bells from McGrath and LJ Hooker are ringing loud and clear. It's over.

Disclosure: The author owns shares in Wilson Group. This is not a recommendation.