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Are you ahead of the game?

MACQUARIE RELATIONSHIP BANKING REAL ESTATE AGENCY BENCHMARKING SURVEY EXECUTIVE SUMMARY NOVEMBER 2007


Contents

Introduction

2

Sales

3

Property management

5

Agency revenue

7

Offices

9

Staff and salaries

11

Challenges to growth and culture

13

Summary

15

About this report The following executive summary is intended to provide a high level overview of key findings from the Macquarie Relationship Banking Real Estate Agency Survey, undertaken by Enterprise Economics Pty Ltd, during August 2007. It highlights the intentions and views of the 301 Real Estate agencies around Australia that participated in the study and contains analysis of all data that was collected. The survey reports on areas such as sales performance, property management issues and expectations, agency revenue, advertising, office structure, salaries and staffing, and finally, growth and culture. Reporting categories Results from participating Real Estate agencies have been reported by: – Size of agency – State location Size of agency The following terms have been used to describe agencies by size: – Small agency

Less than 10 staff

– Medium-sized agency

10-19 staff

– Large agency

More than 20 staff

Macquarie’s Comment: Throughout this report, you will find commentary from Macquarie Relationship Banking’s expert Real Estate team. These comments are based on Macquarie’s market knowledge and general expert interpretation of the findings in this report, prepared by Enterprise Economics. Note: Throughout this report, we have highlighted benchmarks by state location for New South Wales, Victoria, Queensland and Western Australia only. Due to the small number of survey respondents for South Australia, Northern Territory, ACT and Tasmania, these states and territories are represented in the benchmarks by size of business and the national average.


Real Estate Agency Benchmarking Survey 2007 2

Introduction

Performance benchmarking is a powerful business management tool that can assist with building the value and profitability of your business. Benchmarking data allows you, the business owner, to critically assess how your real estate agency is performing against those of your peers. It highlights both the strengths of your business and potential improvement strategies. Armed with this knowledge you can then introduce initiatives that ensure your business is efficient, profitable and employing industry-best techniques. With the assistance of independent research firm Enterprise Economics, Macquarie Relationship Banking surveyed 301 Real Estate agencies around Australia this year in an effort to uncover the key trends, issues and challenges that lie ahead for the Australian Real Estate industry and reveal the national agency benchmarks. Some important key issues were raised in this year’s survey findings. Growth is a major focus for most businesses surveyed, with 90% wanting to buy and/or grow their rent roll. With only 3% of agencies wanting to sell, it’s all a question of supply and demand. The increasing use in technology is also a highlight with 42% of agencies reporting that more than half of their sales enquiries are extracted from the internet. When it comes to staff and culture, the greatest challenge facing most agencies is staff recruitment and retention, coupled with selling skills being highlighted as the greatest training need. Given the significance of this research, we would like to thank the various Real Estate Institutes and franchise groups around Australia that encouraged their members, offices and staff to participate in this survey. We are extremely grateful for your support. There are many businesses dedicated to staying ahead of the game. We trust you will find the information contained within our 2007 Real Estate Agency Benchmarking Report a valuable resource and encourage your participation in future surveys. For more information, please contact your Macquarie Relationship Manager who will be more than happy to assist you in gaining a better understanding of the findings.

Jason Roach Head of Real Estate Macquarie Relationship Banking

Nick Dowling Head of Real Estate Macquarie Relationship Banking


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1. Sales

This section examines the sales indicators and provides analysis on agency sales, average commission rate charged, and days-on-market. 1.1 Average agency sales in the past year 450 400

392

350 300 248

250 206

200

144

150 100

151

141

85 64

50 0

NSW

VIC

QLD

WA

<10 staff

10-19 staff

>20 staff

National

The average agency completed 151 sales in the last year. From our survey, on average an Australian real estate agency completes 151 property sales per year, with the largest number being 1950 sales completed in one agency amongst those surveyed. – Western Australian agencies had the highest average sales with 248 sold per annum. – Victorian agencies came in second highest with an average of 206 properties sold per annum. – New South Wales had the lowest number of properties sold each year, averaging only 85 per annum. Not surprisingly, size mattered when it came to the average of annual sales. – Small agencies settled an average of just 64 sales per annum. – Mid-sized agencies settled an average of 141 sales per annum. – Large agencies settled an average of 392 sales per annum. The survey data highlights the following relationship: the agencies making the most sales are also those that pay higher than average commissions to their agents, have higher than average properties under management and charge their clients higher than average commission rates.


Real Estate Agency Benchmarking Survey 2007 4

1.2 Average commission rate charged to vendors on sale of property 3.5% 3.0% 2.5%

2.9% 2.6% 2.4%

2.4%

2.4%

2.3%

2.4%

<10 staff

10-19 staff

>20 staff

National

2.2%

2.0% 1.5% 1.0% 0.5% 0%

NSW

VIC

QLD

WA

On average, an agency charges 2.40% commission. Average commission rates across Australia sit at 2.4% amongst the agencies surveyed. Nationally, minimum commission rates were reported as 1.5% and the maximum was 5.5%. – Western Australia had the highest average commissions at 2.9% (range of 1.9% to 5.5%). – Queensland had the second highest at an average of 2.6% (ranging between 2.0% and 3.0%). – Victoria reported the lowest commission rate at only 2.2% (range of 1.5% to 3.8%). – New South Wales was right on the national average of 2.4% (range of 1.5%-3.6%). Agency size was not a key determinant of commission, with very little variance across the spectrum (averages only ranged from 2.3% to 2.4%), however, it was smaller agencies that reported bigger maximums than the larger agencies.


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2. Property management

This section examines the property management expectations of the agencies surveyed and recurring property management income as a percentage of total expenses. 2.1 Expectations of property management business in the future 60% 54%

50% 40% 30%

27%

20% 10%

9% 5%

3%

Buy

Sell

1%

1%

0%

Grow

Leave as is

No rent roll

Buy and grow

Buy, grow and sell

90% of agencies want to buy and/or grow their rent roll. The majority of agencies surveyed are keen to grow their rent book organically, with 54% seeing this as their future strategy for their property management business. A further 27% were keen to both buy a rent roll and grow their property management operations, while 9% sought to just buy additional properties under management. Itâ&#x20AC;&#x2122;s all a question of supply and demand. With the vast majority looking to buy or grow their rent roll organically, the market for existing property management businesses is also going to become far more competitive. The survey reveals that larger businesses appreciate and embrace the annuity income that a strong rent roll brings (together with its frustrations and challenges). It could be said that larger, more sophisticated businesses have the infrastructure to accommodate a rent roll and the relative passive income it provides.


Real Estate Agency Benchmarking Survey 2007 6

2.2 As a percentage, by how much does your recurring property management income cover your total expenses (excl. sales staff commission)?

Agency response (%)

30 25

24%

23%

22%

20 15 11%

10

10%

10%

>80%

No rent roll

5 0

0-20%

21-40%

41-60%

61-80%

Property management coverage 47% of agencies surveyed are covering 40% or less of their total expenses (excluding commissions) from their recurring property management income. By comparison, 21% of agencies are actually managing to cover more than 60% of their total expenses from the recurring property management income. – A total of 50% of New South Wales and 45% of Queensland agencies were able to cover at least 40% of their expenses with their property management income. – Only 20% of Western Australian agencies could cover the same extent of their costs. Large agencies gained a substantial benefit from the income from their rent roll. – Only 39% of small agencies and 43% of medium agencies covered more than 40% of their recurring expenses off their rent roll. – 57% of large agencies were able to cover this amount. The majority of agents report that less than 50% of costs are covered by recurring income, thereby placing a high reliance on sales to break-even and generate profit. Given this reliance, it is important for an agency to know how many sales it needs to break-even and manage activity towards that key target. Also, it is important to manage upward the percentage of costs that recurring income covers. The result of this strategy is a lower number of sales needed to generate profit and the added benefit of building an asset (i.e. a rent roll). In our opinion, businesses with 40% and less of their income being covered by property management income are sales focussed and those with 60%+ are property management focussed (revenue wise). Larger agencies generally sit in the range of 40-60% of their expenses covered by their property management businesses. This makes them balanced and well structured. It also backs up the concept of the emerging “super office” structure (less agency offices with more staff at each site). In the contemporary real estate industry environment, if you want to grow a successful agency, you need a large rent roll.


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3. Agency Revenue

This section explores the main source of agency revenue now and the forecast for three years time, as well as sources that contribute to sales enquiries. 3.1 Estimating main source of agency revenue now and in three years time 100% 80% 60%

61%

64%

70% 68%

74% 72%

67% 67%

66% 68%

67% 65%

67% 68%

67% 66%

WA

<10 staff

10-19 staff

>20 staff

National

40% 20% 0%

NSW

VIC

QLD

Now In 3 years

Nationally, agency sales currently accounts for 67% of revenue, and is expected to remain relatively stable in 3 years time. Only 15% of agencies had less than 50% of their revenue reliant on agency sales. Small agencies were less likely than large agencies to rely on agency sales for 50% or more of their total revenue (80% of small agencies compared to 91% of large agencies), showing that small agencies currently enjoyed a more diversified revenue stream. In three years time, 89% of agencies expect that they will be relying on agency sales for 50% or more of their revenue. This represents a 4% increase over the current position. Notably, 10% less of the agencies surveyed reported that they will be relying on agency sales which account for 90% or more of their revenue. Small agencies expect that their reliance on agency sales revenue will actually increase in the coming three years, with 11% expecting to have 50% or more of their revenue derived from this source. Medium-sized agencies were the only group to reduce their reliance on agency sales with a 2% decrease in those relying on it for 50% or more of their income.


Real Estate Agency Benchmarking Survey 2007 8

3.2 Percentage of sales enquiries by Internet, print, referral, walk-by and other sources

Other 11%

Walk by 9%

Referral 13%

Internet 40%

Print 27%

40% of sales enquiries are extracted from the internet. On average across the nation, agencies report that 40% of their sales enquiries come from the internet - the strongest of all sources surveyed. Walk-by enquiry was relatively low at 9% but print advertising still generated more than a quarter of all enquiries. With 40% of agency sales enquiries reported from the internet, there is an increasing opportunity here for real estate businesses to embrace e-commerce technologies throughout their business - not just as a sales tool, but also to minimise cost.


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4. Offices

The following highlights agency views on belonging to, and the likelihood of joining, a franchise. 4.1 If not part of a franchise already, likelihood of joining in the next three years 100% 89%

80% 60% 40% 20% 7%

4%

0%

Yes

No

Undecided

89% of the non-franchised agencies surveyed indicated that they had no plans to join a franchise in the next 3 years. While 70% of those surveyed belonged to a franchise network, the remainder seem more than content to stay independent. – 100% of Western Australian agencies who were not already part of a franchise indicated they also have no intention of joining in the next three years. – In Queensland, 24% of agencies were undecided about becoming part of a franchise. – 6% of both Victorian and Queensland agencies said that they would join a franchise in the next three years. – Small agencies were the most likely to be indecisive about joining a franchise in the next three years, with 10% reporting that they were uncertain. – Non-franchised large agencies were the most certain about not joining a franchise (95% saying no). As independent agencies grow in size, so does the resolve not to be part of a franchise. Smaller agencies are more open to questions about joining a franchise, but with less than 1 in 10 willing to even contemplate joining one in the next three years, it seems most minds are already made up.


Real Estate Agency Benchmarking Survey 2007 10

4.2 Rating the value of being part of a franchise 40% 35%

34% 30%

30% 25%

23%

20% 15% 10%

8% 5%

5% 0%

Value very highly

Value quite highly

Indifferent

Value quite poorly

Value very poorly

64% of agencies surveyed reported positive attitudes towards being part of a franchise. – 34% of agencies surveyed report they value being part of a franchise very highly. – Only 13% of agencies nationally reported a negative attitude. – 44% and 46% of Victorian and Queensland agencies respectively reported that they valued being part of a franchise very highly. – 23% of Western Australian agencies and 11% of New South Wales agencies reported they value being part of a franchise very poor. – Mid-sized agencies were the most likely to rate being part of a franchise poorly (19%).


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5. Staff and salaries

This section explores the average commission split with staff and sales revenue spent on salaries. 5.1 What is your average commission split with sales staff? 50% 40%

47% 39%

46%

46% 42%

40%

38%

37%

30% 20% 10% 0%

NSW

VIC

QLD

WA

<10 staff

10-19 staff

>20 staff

National

The typical commission split with sales staff is 40%. Commissions varied markedly across the states; – Victorian agencies offered the lowest commission splits, at an average of 37%. – New South Wales agents offered an average of 39%. – Queensland and Western Australian agents earned a larger share of the commission, with agencies reporting average commission splits of 47% and 46% respectively. Size of agency also played a part in the commissions paid to their staff – – 38% for small agencies – 42% for mid-sized agencies – Up to 46% for the larger businesses. In Western Australia and Queensland, the commission splits are higher and so are average commissions. Agencies in Queensland and Western Australia are getting more and giving more away to their agents. The cost of sales support and other less tangible items, including marketing and brand presence varies between states and needs to be factored into any remuneration and commission structure.


Real Estate Agency Benchmarking Survey 2007 12

5.2 Estimating total sales revenue spent on salaries as a percentage 35% 30%

29%

25%

24%

20%

18% 15%

15% 10%

10%

5%

4%

0%

10–20%

21–30%

31–40%

41–50%

51–60%

>60%

31-40% of their total sales revenue is spent on salaries. For a typical agency, 31-40% of their total sales revenue is spent on salaries. This was the case for 29% of agencies surveyed. For a further 24%, they spent 41-50% of their revenue on salaries. – Western Australian agencies operated a diverse spectrum of salary bands, with 25% paying only 10-20% of their total revenue on salaries and 31% paying 51-60%. – Queensland was as likely as Western Australia to have less than 30% of their revenue spent on salaries (38% of agencies). – Small agencies were the most likely to be spending less than 30% of their revenue on salaries (30%), while large agencies were the most likely to be spending over half of their revenue on salaries (25%). This is another key determinant of profitability. In larger agencies it appears that salary costs tend to rise as a percentage of total sales revenue. We believe that this is attributable to a number of factors. Firstly, large agencies tend to have higher overhead salary costs – despite any economies of scale that they may achieve – as they tend to employ management and administrative staff to support their sales and property management efforts. They are also able to offer larger base salaries. Small agencies also tend to be more focussed on commission based remuneration. This allows a small agency to better cope with the ebbs and flows of business cycles. Salaries are the other significant influence over profitability - i.e. those businesses that collect their vendor-paid advertising upfront and manage their salaries expense tend to out-perform market profitability. Macquarie's internal analysis, which is consistent with these survey findings, shows that agencies producing the highest levels of profit have average staff salary levels of 29% of total revenue.


13 Macquarie Relationship Banking

6. Challenges to growth and culture This section explores the staff and culture issues facing agencies, such as their greatest business challenge and training need within their office. 6.1 Ranking the greatest challenge facing your business 50% 40%

41%

30% 20%

16%

13%

10%

9%

6%

4%

4%

3%

4%

Correct structure/ protection of ownership

Other

0% Staff Improving/ Commission Profitability recruitment maintaining discounting and retention team culture

Marketing

Balancing Financing role between your selling agent growth and principal

The greatest challenge facing most agencies is staff recruitment and retention. 41% of all agencies surveyed reported staff recruitment and retention to be their biggest issue. For 16% of agencies, balancing the role between being a selling agent and a principal is their greatest challenge. This was a significant challenge for Western Australian respondents, with 38% reporting this to be a concern. Profitability was the greatest concern for 13% of agencies. More than half of responses to this question are linked to people based issues â&#x20AC;&#x201C; specifically staff retention and team culture. In the current job market, with virtually full employment (unemployment is at 4.20%), this becomes an enormous challenge for all real estate agencies. When you couple this with the fact that such a high percentage of respondents to this survey indicated a desire to grow, it is a reminder that growth will always be limited without sufficient resourcing. Agencies will have to focus much more strongly on the broader issues of human resources management and look to broader methods of retaining and growing staff other than simple remuneration-based incentives.


Real Estate Agency Benchmarking Survey 2007 14

6.2 Greatest training need for the office 40 37%

35 30 25 20

18%

18%

15 12%

10

9% 6%

5 0

Selling skills

Administration Communication skills skills

Advertising/ marketing skills

General management skills

Other

Selling skills is the greatest training need. â&#x20AC;&#x201C; 37% of all responding agencies reported selling skills to be their most pressing training need. â&#x20AC;&#x201C; Communications skills was the training need focus for 18% of agencies and general management skills was the training need for the same percentage. Looking at selling skills alone, there are the myriad skills needed separately to gain a listing, attract an offer, or to push a property to auction. On the property management side, these same selling skills can include winning a property under management. Macquarie is committed to doing more research into these individual aspects.


15 Macquarie Relationship Banking

Summary

Agencies need to prepare for the future Real Estate agencies face interesting challenges into the future with the issues of more web-based business, recruiting and managing staff, determining the profitability of their business and what will be their steady and new revenue streams while maintaining costs. The good news is that franchise businesses remain popular and profitable and the industry has a positive outlook. Sales The average agency completes 151 property sales per year charging an average of 2.4% commission. The larger agencies sell up to six and a half times more than the smaller agencies per annum. Just over half of agencies (53%) reported that the typical property spends 29-56 days on the market. Clearance rates depend upon the state of market more so than the size of the agency. Private treaty sales (41) are far more popular than auction listings (14) by almost three to one on average for agencies across Australia. Property Management It's all a question of supply and demand. 90% of businesses surveyed want to buy and/or grow their rent roll, whilst only 3% want to sell. With the vast majority looking to buy or grow their rent roll organically, the market for existing property management business is also going to become far more competitive. Staffing issues, such as recruitment and retention could also prove to be a stumbling block in the future for agencies wishing to grow their business. Just under half of agencies surveyed (47%) are covering less than 40% of their total expenses (excluding commissions) by recurring income, thereby placing a high reliance on sales to break-even and generate profit.

Agency Revenue For the typical agency sales account for 70% of agency revenue with smaller agencies becoming more reliant on this form of revenue in the next three years. Property management generally accounts for 20-29% of revenue. What may cause issues for agencies in the future is the growth of sales and rent rolls, while undertaking new activities such as finance broking and ensuring costs remain in control while trying to continue to grow revenue. With 40% of agencies now extracting their sales enquiries from the internet, there is an increasing opportunity here for real estate businesses to embrace e-commerce technologies and keep updated with Generation Y. Also, with 80% of sales being vendor paid for twothirds of agencies, only of which 20% is paid upfront, agencies need to be aware of the potential cash flow difficulties that can arise from this situation. Vendors may change agents leaving the possibility of an unrecoverable cost to the agency if a property has not been sold. Offices A very high proportion (89%) of the non-franchised agencies surveyed indicated that they had no plans to join a franchise in the next three years. Equally interesting is that 95% of all agencies surveyed reported that if they are currently part of a franchise, they will stay in that franchise for at least the next three years. While 64% of agencies surveyed reported positive attitudes towards being part of a franchise, 23% were indifferent.


Real Estate Agency Benchmarking Survey 2007 16

Staff and salaries

Conclusion

Typically, agency staff numbers are split along the lines of 42% sales, 13% sales support, 25% property management and 20% clerical. Economies of scale benefits are obvious to larger agencies allowing the bigger agencies to employ more high-performing sales people. Though the average commission split with sales staff is 40% this does vary from state to state and also dependent on the size of the agency with the larger agencies paying bigger commissions.

The future for real estate agencies will see less offices with more staff, technologically savvy, potentially bigger and forced to react quicker to market demands than ever before. Economies of scale, staff management and training, as well as cost controls, will continue to become increasingly imperative in the future.

Almost half of agents (47%) earn between $50,000 and $100,000 per year with the average top sales person earning $304,091 in gross commission. Between 31-40% of total sales revenue is spent on salaries. It is apparent that the bigger agencies pay out the highest with over 35% of agents in the larger agencies earning in excess of $150,000. Challenges to growth and culture The greatest challenge that most agencies face is staff recruitment and retention, with 41% of agencies recording this as their biggest issue. Agencies will have to focus on the broader issues of human resources management and widening their methods of recruiting and retaining staff on the usual remuneration-based incentives. Just over one-third (37%) of agencies reported that selling skills is the greatest training need for agencies, which poses the question of agencies extending their management skills to incorporate sales people and property managers.


17 Macquarie Relationship Banking

Acknowledgements

Macquarie Relationship Banking would like to thank the following Real Estate Institutes and franchise groups around Australia for their support of this project: – Barry Plant – Biggin & Scott – Century 21 – Coldwell Banker – Elders – First National – Harcourts – Hocking Stuart – Laing+Simmons – MPRE Harcourts – Nelson Alexander – PRD Nationwide – Raine & Horne – Real Estate Institute of New South Wales – Real Estate Institute of Queensland – Real Estate Institute of Victoria – Real Estate Institute of Western Australia – RealWay Property Consultants – Richardson & Wrench – Starr Partners – Stockdale & Leggo


Real Estate Agency Benchmarking Survey 2007 18

Contact us

For more information about the Survey findings or Macquarie Relationship Banking's services, please contact: Brisbane Jodie McElwaine

07 3233 5215

Gold Coast Mark Parry

07 5509 1401

Newcastle Steve Smith

02 4960 4005

Sydney Jason Roach

02 8232 4489

Western Sydney Stuart Campbell 02 8820 8102 South Australia Con Voultsios

08 8203 0378

Victoria Nick Dowling

03 9635 8194

Western Australia Grant Robson 08 9224 0674


The information has been prepared by Macquarie Bank Limited ABN 46 008 583 542 ("Macquarie") for general information purposes only, without taking into account any potential investors' personal objectives, financial situation or needs. The information is current at 5 November 2007. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. All potential investors should obtain financial, legal and taxation advice before making any decision about whether to acquire that particular financial product. Statistics and information has been sourced from the Macquarie Relationship Banking Real Estate Agency Benchmarking Survey, August 2007, conducted by Enterprise Economics Pty Ltd. Past performance is not a reliable indicator of future performance. Whilst we have taken all reasonable care in relation to the accuracy of contents of this document, no warranty as to accuracy or correctness is given nor should one be implied. Š Copyright is reserved throughout. Neither this document nor any of its contents may be used for any purposes without the prior consent of Macquarie. 1107 Macquarie Bank Limited ABN 46 008 583 542

2007 Real Estate Benchmarking Survey  

Report on the Australian Real Estate industry

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