Under the Spotlight AUS: REA Group (REA)

REA Group ($REA) is proof you don’t need to buy bricks and mortar to make money in the property market. The owner of realestate.com.au has blitzed the returns of most property investments over the past 25 years by connecting buyers, sellers and agents around the nation’s obsession with real estate.

From its 1999 IPO at 50c a share to $210, REA has used its data and big investments in tech to become the dominant property platform in a $10.7 trillion housing market.

Prime location

The power of REA’s platform ultimately lies in its ability to attract a massive number of eyeballs to property listings. The latest full year results underscored this by reporting 127.2 million average monthly visits to realestate.com.au on all platforms. This was 97.3 million more than its nearest competitor, Domain Group ($DHG), in the second half of the financial year. REA’s app reported 60m total average monthly visits – 5.3 times more than Domain. 

Ongoing investment in technology allows REA to deliver AI-generated homepages with personalised recommendations, as well as prompts to encourage potential buyers to take the next step. REA also has the tech to streamline the sales process for agents.

Why does this matter? Listings growth is the big driver of REA’s revenues, and having a platform that can potentially get your house sold more quickly is key to attracting new listings to realestate.com.au.

Tale of two cities

REA Group CEO Owen Wilson will be watching the Sydney and Melbourne real estate markets closer than an eager first-time home buyer. The growth of listings in those capitals – 21% and 22% respectively – is what shouldered a 7% overall increase in residential buy listings in FY24.

The problem for REA is that FY24 sets a high bar for FY25. It’s unlikely that either of Australia’s two biggest residential markets will deliver an encore performance this financial year, especially as interest rates look set to remain higher for longer.  

That said, the outlook for residential property is still viewed as strong due to low unemployment and high immigration. Sellers are also confident in demand, with houses for sale sitting on the site for a shorter period than the six-year average.

Pricing power

Not relying on listings growth to match FY24, REA will pull the pricing lever to ensure its top line continues to grow. 

The $27b company’s ‘residential buy yield growth’ is a combination of listing growth and average prices received across its varying pricing tiers. This metric is forecast to be driven by a 10% increase in pricing for Premiere+, a digital marketing tool that quickens sales by boosting properties in search results and streamlining the selling process. 

Analysts see FY25 revenue rising to around $1.6 billion from $1.45b in FY24.

Margins will be protected by keeping operating cost growth to high single digits. This must be achieved while spending more on tech to maintain its edge and draw more visitors, and then reinvesting cash in the business.  

Hard maths

REA is priced like it’s the best house on the best street. At 54 times forecast FY25 earnings, it trades at a Point Piper-sized premium to Domain Group’s 35x. Comparisons to the U.S.-listed Zillow ($Z) which trades at 32x, the UK’s Rightmove (21x) and Germany’s Scout24 (26x) also make REA’s valuation look very luxe. 

REA has been a solid performer for many years. But rich multiples require it to continue executing its strategy of investing in data and tech. This is what can strengthen its products and positioning in order to drive cash flows for more reinvestment. If this formula keeps delivering, the company might remain the number one address for selling and buying homes in Australia.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.