Yesterday Fairfax Media (ASX: FXJ) announced it would separately report its high-performing Domain online real estate business in its 2016 final results (due on 10 August). This will increase transparency although it wasn’t hard to tell that Domain was Fairfax’s best business before yesterday’s announcement (see Fairfax’s prime real estate).
News Corporation’s (ASX: NWS) best business is the separately listed REA Group (ASX: REA), of which it owns 62%. REA Group, one of Australia’s 10 best businesses, owns www.realestate.com.au, the leading online real estate website.
Both REA Group and Domain are wonderful businesses. They require little capital to operate, they have pricing power, and earnings are growing strongly. In 2016, REA Group and Domain will produce growth in earnings before interest, tax, depreciation and amortisation of around 20% and 40% respectively. Domain is growing faster because it’s coming off a lower base.
Based on our analysis of each company, REA Group and Domain account for about 40% and 60% of the total values of News Corporation and Fairfax Media respectively. So it’s not surprising that these businesses are the subject of considerable management – and sharemarket – attention.
With my analyst/shareholder hat on, that’s fine by me. Management should focus on its best businesses – they’re what should generate the highest returns over the long term.
With my media consumer/concerned citizen hat on, though, I’m a little worried. Through their online businesses, Fairfax and News Corporation now have a vested interest in a strong market for real estate listings.
Might they cheerlead for the current property market buoyancy (bubble?) to continue? It’s possible to argue they already are. Yesterday Fairfax published another one of those articles encouraging us superficial Sydneysiders to peer enviously into our neighbours’ backyards.
When (if?) the Reserve Bank cuts the cash rate to 1.5% at 2.30pm today, look out for the articles telling you how much you’ll save on your mortgage. It’s in the media’s interest to push the property angle of any story because real estate is a massive part of their business.
My question is: where will this end?
Perhaps the media might start suppressing stories that could impinge on the profitability of their online real estate listings businesses. At the moment Fairfax Media is still reporting various ‘bad news’ stories about the likely decline in apartment building, and how banks are cracking down on lending to overseas and off-the-plan buyers.
But the property market is driven at least partly by confidence, and Fairfax’s and News’s interests are both served by a buoyant outlook. Remember this when you read their ‘news’, as the inherent conflict of interest will only become harder to disguise.