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Going once: Revenue is stabilising as property demand strengthens after the downturn

IBISWorld Industry Report L7720

Real Estate Agents in Australia March 2012

Craig Shulman

2 About this Industry

14 Major Markets

28 Revenue Volatility

2

Industry Definition

15 International Trade

28 Regulation & Policy

2

Main Activities

16 Business Locations

29 Industry Assistance

2

Similar Industries

2

Additional Resources

18 Competitive Landscape

31 Key Statistics

18 Market Share Concentration

31 Industry Data

18 Key Success Factors

31 Annual Change

18 Cost Structure Benchmarks

31 Key Ratios

3 Industry at a Glance 4 Industry Performance

19 Basis of Competition

4

Executive Summary

20 Barriers to Entry

4

Key External Drivers

20 Industry Globalisation

5

Current Performance

7

Industry Outlook

10 Industry Life Cycle

32 Jargon & Glossary

21 Major Companies 21 LJ Hooker Limited 22 Ray White (Real Estate) Pty Ltd

12 Products & Markets 12 Supply Chain

26 Operating Conditions

12 Products & Services

26 Capital Intensity

13 Demand Determinants

27 Technology & Systems

www.ibisworld.com.au | (03) 9655 3881 | info@ibisworld.com


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About this Industry Industry Definition

Industry operators value, purchase, sell (by auction or private treaty), manage or rent real estate properties.

Main Activities

The primary activities of this industry are Conveyancing (other than by qualified legal practitioners) Real estate agency, auctioning, body corporate management and brokering Real estate management Real estate title transfers (other than by qualified legal practitioners) Timeshare apartment managing Title searching Valuing of real estate

The major products and services in this industry are Non-residential leasing Non-residential property management Non-residential sales Residential leasing Residential property management Residential sales

Similar Industries

L7841 Legal Services in Australia Firms in this industry include qualified legal practitioners that provide real estate transfer services.

Additional Resources

For additional information on this industry www.ipd.com Investment Property Databank www.pc.gov.au Productivity Commission www.rebonline.com.au Real Estate Business www.reiaustralia.com.au Real Estate Institute of Australia www.reutersrealestate.com Thomson Reuters Real Estate


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Industry at a Glance Real Estate Agents in 2011-12

Key Statistics Snapshot

Revenue

Annual Growth 07-12

Annual Growth 12-17

Profit

Wages

Businesses

$9.0bn

-1.1%

1.6% 33,503

$631.6m $4.0bn

Housing affordability

Revenue vs. employment growth

Market Share

LJ Hooker Limited 5.6%

15

240

10

200

5

Index

% change

Ray White (Real Estate) Pty Ltd 4.3%

0 −5

120

−10 −15

Year 04

160

06

08

Revenue

10

12

14

16

18

80

Year 01

03

05

07

09

11

13

15

Employment SOURCE: WWW.IBISWORLD.COM.AU

p. 21

Business locations

Key External Drivers

2,024

Housing affordability

3,210

Residential housing loan rates

SA

558 402 184 TAS ACT

NT

12,611

WA

NSW

Residential investment property loan approvals Residential property yields Competition from direct private property sales

6,778 VIC

p. 4

9,480 QLD

Industry Structure

Life Cycle Stage Revenue Volatility Capital Intensity

SOURCE: WWW.IBISWORLD.COM.AU SOURCE: WWW.IBISWORLD.COM.AU

Mature

Regulation Level

Heavy

Low

Technology Change

Low

Barriers to Entry

Low

Industry Globalisation

Low

Competition Level

High

Industry Assistance

None

Concentration Level

Low

For additional statistics and time series see the appendix on page 31

Medium


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Industry Performance

Executive Summary   |   Key External Drivers   |   Current Performance Industry Outlook   |   Life Cycle Stage Executive Summary

After three difficult years, the Real Estate Agents industry stabilised in 2010-11, in line with improvements in domestic economic and financial conditions and growth in residential property prices in much of Australia. Growth in the demand for commercial (i.e. retail, office and industrial) property strengthened property investment. However, this was offset by weakening residential demand since the beginning of 2011. As a result, IBISWorld estimates that revenue for the Real Estate Agents industry will increase by about 0.9% in 2011-12, to reach $9.02 billion. The growth in 2010-11 followed three years of declines. Over the past five years, industry revenue fell by 1.1% per annum due to reduced demand for properties

from investors, commercial businesses and home owners. Deteriorating economic conditions, rising debt levels and tighter access to finance directly affected property investment. Growth in industry revenue from 2011-12 is likely to stem from increasing commercial property, which accounts only for a minority of revenue. IBISWorld expects that improvements to economic and financial conditions and steady population growth through 2016-17 will drive domestic property investment. Residential and property sales and leasing volumes are forecast to diverge, with residential demand decreasing temporarily. As a result, industry revenue is expected to grow by 1.6% per annum over the next five years, to total $9.77 billion in 2016-17.

Key External Drivers

Housing affordability The level of housing affordability affects the ability of people to purchase their own home, which can affect the volume of residential sales and rental transactions.

economic activity, hurting business and consumer demand for property. In addition, rising interest rates reduce the viability of property development.

Residential housing loan rates Rising interest rates negatively affect property prices, which causes potential property vendors to defer selling. Rising interest rates also negatively affect

Residential investment property loan approvals Loan approvals for investment property are an indicator of investment demand for property.

Residential housing loan rates

250

10

200

9

Percentage

Index

Housing affordability

150 100 50

Year 01

8 6

03

05

07

09

11

13

15

5

Year 03

05

07

09

11

13

15

17

SOURCE: WWW.IBISWORLD.COM.AU


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Industry Performance

Key External Drivers continued

Residential property yields Investors compare investment returns and risks between asset classes and therefore if yields in one asset class (e.g. property) move against another class (e.g. shares) this may see a redirection of investment between asset classes.

Competition from direct private property sales Rising demand for direct sales or leasing (i.e. without an agent) creates competition and can adversely affect revenue and sales activity in the Real Estate Agents industry.

Current Performance

Over the five years through 2011-12, IBISWorld estimates that revenue for the Real Estate Agents industry decreased by 1.1% per annum, from $9.55 billion to $9.02 billion. This decline can largely be attributed to the effects of the global financial crisis, which led to a reduction in the demand for real estate, particularly in the residential sector. The industry is expected to meander somewhat in 2011-12 with a growth rate of 0.9%. A short recovery will be impeded by increasing consumer caution and inflation despite a strong economy. Profit levels have suffered as well, since property prices have failed to fall in line with consumer sentiment and has thus led to reducing industry profit margins on sales in order to make properties more appealing. The global financial crisis directly affected the Real Estate Agents industry. In 2007-08 and 2008-09, the industry experienced a sharp decline in demand for residential and commercial property due to deteriorating economic conditions, rising debt levels and reduced access to finance. These conditions stifled property

investment and agency sales volumes, thereby affecting industry revenue. A drop in the number of people obtaining financing to purchase homes also affected the industry. Finance commitments for buying houses decreased by about 17% between 2007 and 2008. In 2009-10, the Real Estate Agents industry began to stabilise after improvements to a range of economic and financial conditions. The industry has since experienced a return in demand for residential and commercial properties from investors, commercial businesses and home owners. This strengthened investment levels, sales and leasing volumes across the majority of real estate segments. This industry returned to growth in 2010-11 as emerging signs of weakness in the residential property market were offset by better conditions in the office and industrial property markets. However, consumer sentiment has lowered in the midst of international economic uncertainty, reducing interest in property purchases.

Greater pressure for agents

As interest wanes in property, agents are having to pull out all the stops to attract potential buyer interest. Most notable is the fact that vendors have succeeded in pressuring vendors to reduce their commissions, and as a result are reducing the profitability of the industry as a whole. Furthermore, the industry has been undergoing a bit of a shakeout of employees. Since most real estate agents in the industry over the past five years

were in the industry for less than five years, their lack of experience in a more competitive and sales-resistant market, only more experienced and thus better employees have stuck around. Over the past five years, employee numbers have decreased at an average rate of 1.4%, or just over 5,000 people. Competition for these skilled agents has also emerged between agencies, as agencies with greater support services look more enticing but


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Industry Performance

are nonetheless more expensive to run. This emptying out of the industry has brought up questions of whether these employees were trained well enough in the

The residential market

Residential sales have consistently made up the majority of revenue in the industry. Consequently, the market’s stagnation since the global financial crisis has had flow-on effects to the Real Estate Agents industry. Efforts have been made to reinvigorate the market. The Commonwealth Government’s introduction of the First Home Owner Grant stimulated housing investment between October 2008 and December 2009. The scheme’s direct result was growth in home sales, which helped strengthen industry revenue. According to the Australian Bureau of Statistics (ABS), the proportion of first-time owners financing homes increased from 19% in October 2008 to a high of 28.5% in May 2009. The lowering of interest rates and the boost to the First Home Owner Grant also helped the Real Estate Agents industry. The Reserve Bank of Australia began lowering interest rates in 2008 to prevent the economy from heading into a recession. The cash rate was reduced to as low as 3.0% in April 2009, though it has since risen to 4.75%. When compared with a cash rate of 7.25% in March 2008, the rate is still relatively low and has encouraged housing investment from both companies and individual investors, thus driving dwelling transactions. During 2009-10, the residential market responded positively to improvements in the national economy, which strengthened industry-wide revenue streams. The demand for residential property returned with a general reduction in unemployment rates and improved consumer confidence. At the same time, property investment was driven by easier access

first place, and thus calls have emerged as to whether the training programs that are available to potential agents are of a sufficient standard.

Industry revenue 8 4

% change

Greater pressure for agents continued

0 −4 −8 −12

Year 04

06

08

10

12

14

16

18

SOURCE: WWW.IBISWORLD.COM.AU

to capital and a recovery in company and investor balance sheets. This growth in housing investment bolstered sales volumes, which increased by about 19.9% nationally between March 2009 and 2010, consolidating agency revenue streams. Residential property made a positive start at the beginning of 2011, but the prospect of higher interest rates, slower population growth and tight lending in conjunction with increased real expenditure on property and natural disasters in eastern Australia caused a slowdown in demand. Auction clearance rates dropped from a 68% average in 2010 to 46% during the first quarter of 2011. The number of housing finance commitments has trended down from a peak in mid-2010, prompting banks to voluntarily lower interest rates. In May 2011, finance to owner-occupiers remained near an 11-year low, despite a healthy economy. Investment by real estate agents in rental properties has dropped significantly. The market saw a rise in rental supply over the first half of 2011, raising competition and forcing


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Industry Performance

The residential market continued

rental prices down. In the search for domestic investors, agents have partnered with financial service firms and turned towards self-

managed superannuation funds (SMSFs) to pick up the slack, based on a surge of over 30% in real estate investment by SMSFs since the global financial crisis.

The commercial market

While the residential market accounts for the majority of industry revenue, the commercial market also is a significant source of revenue. However, since fund managers and other financial institutions who own many commercial properties can organise direct deals with buyers, the industry’s services are not as influential in the industry. Currently, foreign investment is driving the commercial market’s recovery, bringing positive news to office, industrial and rural markets. Retail property rents and prices are also slowly starting to rise. Healthy economic conditions including strong market transparency, healthy GDP growth, market stability and geographical proximity to emerging markets are attracting more foreign and local investment. The Real Estate Agents industry responded positively to growth in the commercial property market in 2009-10, but this only became apparent in the second half of the year. The retail property market began to stabilise as demand for retail space returned to the market. Improvements to a range of economic and financial conditions increased consumer and business confidence. At the same time, historically low interest rates and the flow-on effect of the emergency stimulus package led to

steady growth in retail sales (3.4% year on year). The growth in retail sales strengthened the demand for retail space and property investment over the year, adding to industry revenue. The industrial property market also rebounded, which helped stabilise the industry somewhat in 2009-10. The growth in downstream demand for industrial products as a result of improved economic, demographic and financial conditions led to a rise in manufacturing activity and import volumes. This subsequently increased industry-wide inventory levels and led to growth in demand for industrial space. The value of industrial sales activity rose by about 20% over the year. The strong exchange rate caused greater import volumes spurring industrial activity, particularly on the east coast. The office market grew overall in 2009-10. A contraction in leasing through the first half of 2009-10 affected the office market, and only just began to move into the recovery phase in early 2010-11. Investment volumes remained low, although sales volumes picked up during the year (by 19% in Sydney and 18% in Brisbane). Growth in sales volumes resulted from improvements in white-collar employment and recovery in the financial sector; this growth was from a relatively low base.

Industry Outlook

IBISWorld forecasts that industry revenue will increase by 1.6% per annum over the next five years, to total $9.8 billion in 2016-17. The industry is expected to slow in the short term as consumer sentiment creates an even more cautious environment. Nonetheless, improvements across a range of economic, financial and

demographic conditions will drive demand over the medium term and will bring the industry out of a minor slump quite easily. In the bigger picture, the ongoing transformation of the Chinese economy is a major driver of the Australian market, bringing export earnings, foreign investment and taxation revenue, which directly and


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Industry Performance

Industry Outlook continued

indirectly bolster domestic real estate conditions. Profit levels will be eased by the return of stronger consumer sentiment over the next five years. However, the more significant trend of digitisation of real estate services will more than counter

this trend through its ability to undermine the industry’s services and represent a lower-cost substitute while at the same time becoming a core component to a real estate agent’s sale arsenal, more so entrenching the trend’s influence.

The residential market

Conditions in the residential property market will influence industry growth significantly over the next five years. The residential property market is expected to experience growth and reallocation in investment activity due to lowering interest rates in the context of international economic conditions and potential buyers after waiting for the market to improve will start to take advantage of lowering prices, particularly as people previously hesitant to invest now start to feel the need to upgrade their living situation. Furthermore, improvements in the domestic economy, such as employment conditions, income levels, recovering confidence from the resources industries and the recovery of the Brisbane market from flooding, are expected to strengthen foreign and local investor confidence and encourage property investment. Urban growth boundaries, high density development planning approval processes, stamp duty costs and housing supply, all administered by state

governments, will be major determinants for residential real estate in the next five years. Although currently real incomes are outgrowing increases in housing prices, persistently increasing urbanisation and slow expansion from governments will lead to strain in relation to housing affordability. The NSW Government is moving to address this problem by releasing 10,000 new housing blocks over the next four years. Steady population growth is also expected to stimulate market investment activity over the next five years. When combined with a decrease in the average household size, this will lead to a rise in the number of households in Australia. Data released by the ABS indicates that the average household size is expected to decline from 2.6 people in 2001, to 2.5 people by 2016. The growth in population, combined with reduced household sizes, will lead to increased demand for residential housing, which will drive sales and leasing volumes.

The commercial market

The strengthening commercial property market is expected to assist industry growth. The industrial and office markets are expected to experience a steadier level of demand for property space from 2011-12 due to improving economic, demographic and financial conditions that are anticipated to encourage property investment. The retail market stabilised in 2009-10 and improvements to employment conditions and income levels through 2016-17 are expected to

lead to growth in retail sales volumes. This increase will lead to growth in demand for property space and drive sales and leasing volumes as a result. The industrial market is expected to reach a more stable level of property investment, as a steadier demand for property space returns to the market. Growth in the demand for industrial products is likely to be driven by the China-based commodity boom and improvements in the domestic economy


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Industry Performance

The commercial market continued

and business conditions. This growth will encourage expenditure on industrial products and strengthen manufacturing production, import volumes and inventory

levels. As a result, IBISWorld expects that demand for industrial property will increase through 2016-17, leading to growth in property sales and leases.

The influence of technology

Although real estate agents are becoming more proactive in the use of technology to carry out their work, there remains a long way to go. Online property portals, such as www.realestate.com.au and www.domain.com.au, will entrench their position as the agents’ front window of the 21st century, listing hundreds of thousands of properties for sale or lease. Improving technology will increase the popularity of virtual tours of properties through the internet. New applications will be developed to take advantage of the rapid uptake of smartphones by customers. Agencies will dedicate a greater percentage of their advertising and marketing budgets to online initiatives in the next few years, as they begin to move away from traditional media channels. In this vein, REA Group, owner of real estate advertising website realestate.com. au, has angered the industry by raising advertising costs, using its data towards free property valuations and approaching vendors directly to upsell advertisements. These moves by REA Group affect the industry due to its dominant share (about 70%) of real estate online advertising. Furthermore, REA Group is not the only website guilty of such behaviour. As a result, the job of the real estate agent is being undermined, and

this is expected to lead to a more competitive market. The moves by REA Group have attracted the ACCC, which is currently investigating industry claims. Some property franchises have responded by either undermining the valuation data through entering false sales prices or withholding advertisements from the website entirely. This new environment will require agents to reassess their business models in order to guarantee their need in selling and managing property. Websites are evolving, with real estate information aggregator Onthehouse.com.au launched recently, making information for vendors and buyers much easier to access. Already some new business models have arisen in response, such as Refund Real Estate, which aims to share sale commissions with vendors, buyers and the agent to help guarantee that buyers are satisfied with the real estate agency’s service. Agent-assisted companies like BuyMyPlace and PropertyNow have also popped up, serving a more advisory role to property vendors in sales or leasing as opposed to taking on the services completely, at a fraction of the cost. Established companies in the United States are known for directly contacting consumers to place ads, cutting out the real estate agent in the process.


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Industry Performance Life Cycle Stage

Industry activity is mainly influenced by economic activity and interest rates Household formation and population growth influence demand

% Growth of profit/GdP

Products and services have essentially remained the same over a long period of time

Maturity

30

Quality Growth

Company consolidation; level of economic importance stable

25

Key Features of a Mature Industry

High growth in economic importance; weaker companies close down; developed technology and markets

Revenue grows at same pace as economy Company numbers stabilise; M&A stage Established technology & processes Total market acceptance of product & brand Rationalisation of low margin products & brands

20

15

Quantity Growth

Many new companies; minor growth in economic importance; substantial technology change

10

5

0

real Estate Agents Shakeout

decline

Crash or Grow?

–10 –10

–5

Shakeout

–5

Legal Services

0

Potential Hidden Gems

Time wasters

Future Industries 5

Hobby Industries

10

15

20

25

30

% Growth of establishments SOURCE: WWW.IBISWORLD.COM.AU


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Industry Performance

Industry Life Cycle This

industry is Mature

This is a mature industry. In the long term, industry growth is closely aligned with overall economic, social and demographic trends. The cost and availability of housing credit for both owner-occupiers and investors affects industry growth. Industry activity is mainly influenced by economic activity, access to debt funding and interest rates. Underlying demand is influenced by household formation and population growth. Demand is also influenced by levels of home ownership. There is often limited ability to add value to traditional services, although some real estate agency firms have diversified into advisory, finance, conveyancing and facilities management

activities. There was some consolidation of businesses under franchise banners, especially from 2000-01 to 2003-04. Most services have essentially remained the same over a long period of time. Outsourcing of corporate real estate activities is providing a niche growth market. Outsourcing of professional real estate services on a global level has increased substantially in the past five years as corporations have focused resources and capital on their core competencies. Public and other noncorporate users of real estate, such as government agencies and health and educational institutions, have begun outsourcing real estate activities as a means of reducing costs.


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Products & Markets

Supply Chain   |   Products & Services   |   Demand Determinants Major Markets   |   International Trade   |   Business Locations

Supply Chain

Key buying industries K7300

Finance in Australia Finance industries require valuations, property advice and mortgagee selling services.

L7711 Residential Property Operators and Developers in Australia Households and other investors letting residential properties require real estate agents to sell and manage real estate. L7713

Office Property Operators in Australia Owners of office properties require the services of real estate agents.

L7714 Retail Property Operators in Australia Owners of retail properties require the services of real estate agents. L7715

Industrial and Other Property Operators and Developers in Australia Owners of industrial properties require the services of real estate agents.

Key selling industries J7121 Wired Telecommunications Carriers in Australia Real estate agents require telecommunications services.

Products & Services

J7122

Mobile Telecommunications Carriers in Australia Real estate agents require telecommunications services.

L7852

Graphic Design Services in Australia Agents require commercial art and display services for advertising properties.

A decline in the total number of investors in the market was partly contained by additions to the First Home Owner Grant. The fall in investment is estimated to have caused a decline in residential property sales from 57.5% of revenue in 2004-05 to 56.4% today. This proportion is expected to remain stable through 2011-12. Income from the sale of residential property and vacant residential land accounted for about 53.3% and 3.1% of total industry revenue respectively. Revenue from the sales of nonresidential property and vacant land is expected to account for 9.0% of industry revenue, up from 8.1% in 2004-05. Residential property management and residential leasing and letting are expected to account for a combined 12.6% of industry revenue. Revenue from non-residential property management and non-residential leasing and letting is expected to account for 7.0% of industry revenue. Property sales can be conducted by private treaty (accounting for 79% of all income from property sales commission) or auction (21%). Real estate agents can

sell property in conjunction with other agents. Agents that are members of state real estate institutes can sell properties that are listed on multiple services and administered by the institutes. Major real estate agencies are now forming joint ventures to participate in the fast-growing facilities management segment to generate fees from acting on behalf of tenants (e.g. government and major company tenants). Facilities management includes the management of hard services (e.g. air conditioning, electrical systems, fire safety, lifts, boilers, mechanical repairs and maintenance); the control of contracts for soft services (e.g. cleaning, security, pest control, catering and grounds maintenance); and property agent services such as management of leases, property inspections, rent reviews, re-leasing of space and tenant relocations. Other services include property valuation fees, fiduciary and escrow consulting, and other miscellaneous consultancy fees in addition to reimbursement from property owners for various expenditures. The broader industry also includes research agents, listings agents and some tenant


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Products & Markets

Products & Services continued

representatives. Real estate firms have traditionally acted on behalf of property owners, rather than tenants or purchasers. A growth market is in the provision of consulting advice to property tenants, and the number of property consultants advising potential buyers about commercial and residential property has increased. Other real estate agents also include those that source income from joint ventures. Real estate agents lost market share in the prime commercial and retail property

segments. Large fund managers control a significant proportion of the prime office and industrial property markets and the shopping centre market. Fund managers and other financial institutions can arrange direct deals, putting in place attractive financial structures for investors (e.g. trusts and syndication). Property trusts allow investors to obtain an exposure to property without purchasing real property. New financial derivative products can also provide investors with an exposure to property risks and returns.

Products and services segmentation (2011-12)

4.1%

2.9%

Non-residential leasing Non-residential property management Residential leasing

9%

Non-residential sales

1.6%

56.4%

Residential sales

11%

Residential property management

15% Other

Total $9.0bn Demand Determinants

Demand is mainly influenced by the level and value of property sales and leasing activity, levels of home ownership and levels of housing rents. This in turn is influenced by property values and yields, interest rates, economic growth, business profitability, household incomes, household wealth, taxation considerations, population growth and ageing, employment growth and the varying number of people per household. Demand for residential real estate services is also affected by the frequency that people change their homes and the extent to which people invest in rental housing property assets. Workforce and retiree mobility affects the extent to which people change homes. The demand

SOURCE: WWW.IBISWORLD.COM.AU

for residential rental management services is affected by levels of home ownership and renting. Selling transaction costs (including taxes) affect selling activity. Lower transaction costs can increase demand from potential buyers. Residential property revenue is positively affected by population growth, new home construction, low interest rates, the availability of flexible mortgage products, and the volume of the total stock of housing. Revenue also increases when housing prices increase at a relatively fast rate, due to an increase in household wealth along with a wish among some to use this wealth to relocate to areas with superior facilities or to invest in


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Products & Markets

Demand Determinants continued

residential property. In addition, a rise in workforce and retiree mobility acts to increase housing sales activity. Growth in the number of overseas students and an increase in the mobility of Australian students have generated a specialised market for student accommodation. This will benefit both sales and leasing activity. The extent to which property vendors and lessors use (or do not use) an intermediary affects demand. The growing retirement home industry generally does not involve real estate agents. Institutions and large property trusts have a significant investment in prime real estate and many of these organisations have their own real estate services operations. The internet can

provide an efficient medium to approach the market directly. Demand for non-residential real estate agency and broking services is affected by the level of investment in non-residential property, by growth in the stock of non-residential property (i.e. from new construction), interest rates, the availability of debt capital, and by the extent to which property sales transactions are conducted by agents. Demand is also affected by the extent to which industry services are used when buying and selling property. Large professional property investors often conduct property management and sales activities in-house, without the use of the services of an agent.

Major Markets

The Real Estate Agents industry is involved in the leasing and selling of residential, commercial (e.g. retail, office and industrial) and rural property. Customers of real estate agents are therefore made up of vendors (for sales) and lessors (for property management). The latest data from the ABS indicates that the majority of residential property (69%) in Australia is owned, while rented dwellings account for about 30% of the market. Australia’s property buyers market is comprised of three main retail groups –

Household owner-occupiers, investors and commercial businesses. With no significant changes made to the domestic industry over the past five years, the market breakdown between household owner-occupiers and commercial businesses has remained constant. Since the global financial crisis, however, investors have been investing more into Australian property due to the stability of the economy, while owner-occupiers’ purchasing levels have been slowly dropping, increasing investors’ overall market

Major market segmentation (2011-12)

18.8%

Commercial businesses

52.9%

Household owner-occupiers

28.3% Investors

Total $9.0bn

SOURCE: WWW.IBISWORLD.COM.AU


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Products & Markets

Major Markets continued

share. Businesses have avoided investments over the past five years due to lowered consumer sentiment. However, speculative business investment does not account for a large proportion of business interaction with the property market and thus their market share has remained stable. The owners of residential property are largely owner-occupiers and investors (mainly household investors). The owners of non-residential properties include investors (including syndicates), family companies and trusts, superannuation funds, insurance

companies, property trusts and other managed funds, and businesses that own their own property. The lessors of residential properties are mainly household investors and households that have temporarily relocated (e.g. due to travel or work commitments). The lessors of nonresidential properties include households, family companies and trusts, superannuation funds, insurance companies, property trusts and other managed funds, and businesses that sub-lease part of the building in which their premises are located.

International Trade

Australian real estate agency firms can capitalise on international markets by selling properties to foreign investors. Australian firms can also establish offshore operations to participate in cross-border sales and in overseas real estate markets. Firms pursuing opportunities offshore have concentrated on the non-residential markets. The Foreign Investment Review Board regulations restrict the level of foreign investment in Australian residential property. Asian owners became net sellers of real estate in the booming market from 2003 to 2006, often moving their capital and making substantial gains on assets and currency. The importance of Asian investors in 2009 in Australia’s nonresidential and residential apartment markets provided advantages for commercial real estate firms. This includes either forming relationships with foreign firms or having a presence in foreign markets. Vendors of large properties will increasingly seek agents with access to foreign buyers. Firms planning to participate in the real estate markets overseas need to be cognisant of laws requiring local equity participation. Since the global financial crisis, real estate capital investment both locally and internationally has increased its focus on

the Australian market. While in 2006, net outflows from both Australian and foreign investors totalled about $14 billion, a sharp reversal in 2007 led to a net inflow of real estate investment measured at about $4 billion in 2010. Domestically, aversion towards exposing investments to the uncertain global environment, which slowly recovered from the global financial crisis, created an inward focus. For both foreign and local investors, investment can be attributed to Australia’s healthy growth, developed market stability, geographical proximity to emerging markets and the level of real estate market transparency (the highest in the world), which provides a stable opportunity. In 2008, foreign purchasers made up approximately 9% of investment in commercial property in Australia. In 2009, foreign buyers again became active, particularly as many of the Australian Listed Property Trusts became net sellers of real estate to reduce gearing levels. A rising level of foreign agribusiness property investment in rural Australia from mostly China and the Middle East since 2009. However, this has led to local residents becoming concerned about food security. In response, the government has chosen to gather extra information about foreign investment in Australia.


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Products & Markets Business Locations 2011-12

nT 0.5

QLd 26.9

wA 9.1

SA 5.7

nSw 35.8

ACT 1.6

VIC 19.2

Establishments (%) Cold Zone (<10) <25 <50 Hot Zone (<100) not applicable

TAS 1.1

SOURCE: WWW.IBISWORLD.COM.AU


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Products & Markets

Distribution of establishments vs. population 50 40 30 20 10

WA

VIC

TAS

SA

QLD

NT

NSW

0 ACT

According to the ABS, 81.9% of real estate agent establishments in Australia are located in New South Wales, Victoria and Queensland. The remaining states and territories comprise 18.1% of establishments. This breakdown of establishments has remained relatively consistent over the past five years. The regional distribution of establishments is largely a reflection of population demand pressures, with New South Wales, Victoria and Queensland home to 77% of the nation’s residents. Future establishment growth will largely follow regional population movements and commercial growth areas, which dictate commercial real estate demand. A significant proportion of residential investment during the past decade has been allocated towards holiday home purchases and renting, which has increased residential demand in Queensland. Although the after-effects of the natural disasters that affected the state at the beginning of 2011 will reduce demand for investments in holiday properties in the state, residents looking to relocate elsewhere are expected to negate this. The resource boom over the past several years has resulted in substantial rises in demand for both commercial and residential real estate in Western Australia, leading to a larger presence of

Percentage

Business Locations

Establishments Population SOURCE: WWW.IBISWORLD.COM.AU

the Real Estate Agents industry in the state. IBISWorld estimates that residential property prices rose an average of 31% from 2006 until 2010. In 2009, this lowed slightly due to uncertainty about future events. Confidence has started to increase in 2011, and subsequently stronger growth in Perth and the rest of the state is expected. Mid-sized businesses dominate all states. The largest businesses have the strongest presence in smaller markets, notably the Northern Territory and the Australian Capital Territory, because they are competing with much smaller operations in these states.


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Competitive Landscape

Market Share Concentration   |   Key Success Factors   |   Cost Structure Benchmarks Basis of Competition   |   Barriers to Entry   |   Industry Globalisation Market Share Concentration Level Concentration

in this industry is Low

Key Success Factors IBISWorld

identifies 250 Key Success Factors for a business. The most important for this industry are:

IBISWorld estimates that the four largest operators will account for just over 15% of industry revenue, indicating a low market concentration. According to the ABS, businesses that make over $2.0 million only account for 4.8% of all businesses in the industry. The largest businesses have strongest presence in smaller markets, notably NT and ACT since they are competing with much smaller operations in these states. Rather, industry operators are

predominantly self-employed and localised firms, although a number participate in national franchise systems. A significant proportion of national operators operate in the commercial and rural segments. The market share of the largest four operators had been slowly increasing up to 2007-08. However, the advent of the global financial crisis stalled the progress of the large companies in gaining market share.

Proximity to key markets The position of the agency office is important; it should be close to the customers it intends to serve.

centres of influence.

Access to highly skilled workforce Performance of staff should be regularly assessed. Low performers should be cautioned and/or re-trained, or they should be quickly replaced by new sales staff. Aggressive marketing/franchising – given the high level of competition A significant amount of effort and time should be devoted to marketing and promotional activities. It is also important to develop a referral base and

Cost Structure Benchmarks

Costs are expected to account for 93.0% of industry revenue in 2011-12, while profits will make up the remaining 7.0%. The largest cost for real estate agencies is wages and salaries, which have decreased as a percentage of revenue over the past several years. This has been a result of companies reducing operational expenses in response to slowing sales volumes and profit margins. Recently, many of the leading agencies have employed on a commission-only basis. A significant proportion of costs are linked to property management,

Management of portfolio The effective management of assets and tenants enables agencies to maintain a continuous leasing revenue stream. Having contacts within key markets For commercial real estate agencies, it is important to establish strong relationships with institutional and private investors, banks and international real estate agencies. Market research and understanding Property research activities can bolster revenue from sales and property management.

marketing and administration services. This comprises about 20.1% of revenue and includes the expenses associated with selling and managing real estate property, such as procuring and retaining tenants, collecting rent, auction costs and advertising. In addition to the expenses listed above, companies in the Real Estate Agents industry incur various costs that affect their daily operation. These include rent (10.8% of revenue), utilities (1.1%), depreciation (1.8%) and other operational costs (10.5%).


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Competitive Landscape

Cost Structure Benchmarks continued

Sector vs. Industry Costs Average costs of all industries in sector (2011-12)

Industry costs (2011-12)

100

■ Profit ■ wages ■ Purchases ■ depreciation ■ utilities ■ rent ■ Other

7.0

18.7

Percentage of revenue

80

44.2

33.1

60

1.0

14.3

40

3.1

4.6

1.1 10.8

1.8

1.4

20

24.7

34.1

0 SOURCE: WWW.IBISWORLD.COM.AU

Basis of Competition Level & Trend  ompetition C

in this industry is High and the trend is Steady

The level of competition in the Real Estate Agents industry is mainly based on the sale and management of properties (e.g. residential, retail, office, industrial and rural). To obtain a competitive advantage in the industry, agents use a range of strategies to ensure their probability of success. One strategy real estate agents use to gain a competitive advantage is effective advertisement. It is through advertising in magazines, newspapers, TV and websites that prospective tenants and home owners are able to find properties they are interested in buying or renting. Advertising is particularly important when trying to attract interest from potential interstate-based and overseas-based investors. Multinational companies and developers are increasingly seeking to form relationships with major global real estate agencies to provide real estate leasing and facilities management services.

The industry is a sales-based industry and therefore requires employees with strong selling skills. Close attention needs to be paid to factors such as developing a referral base, managing clients, shop or office fit-out and layout, and sales staff selection, training, monitoring and motivation. Some agencies may turn away potential customers who do not fit their market niche (e.g. concentration on prestige or high-value properties). Where sales commissions are deregulated, competition is also based on price. Sales commissions on commercial properties have been deregulated in all states. Victoria, Tasmania, the Northern Territory, New South Wales and South Australia have deregulated fees on residential properties. Queensland has not deregulated residential fees. Western Australia has plans to deregulate fees.


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Competitive Landscape

Barriers to Entry Level & Trend  arriers to Entry B

in this industry are Low and Increasing

Industry Globalisation Level & Trend  lobalisation G

in this industry is Low and the trend is Increasing

Barriers to entry are relatively low in this industry, mainly due to relatively low entry costs. State government licensing regulations stipulating minimum experience and education requirements can inhibit the entry of firms or people engaged in complementary professions (such as solicitors and accountants). There is significant competition in the industry, and it is imperative to develop a referral base and centres of influence in order to build a critical mass of customers and sales. Prospective buyers of property tend to concentrate their search within a localised area. Established firms can have expertise within defined areas. These local markets are generally catered for by a small number of firms and it can be difficult for a new entrant to penetrate. Real estate firms have a high level of variable costs (principally salaries, commissions, vehicle operating cost and advertising), which reduces the opportunities to accrue economies of

IBISWorld estimates that this industry exhibits a low level of globalisation. There is a low level of foreign ownership in local residential real estate establishments. Similarly, the Australian industry, overall, does not have any significant level of investment in overseas-based establishments. However, globalisation is high in the commercial real estate segment. Most of the large national commercial real estate agents in Australia have been sold to overseas interests (e.g. CB Richard Ellis, Jones Lang LaSalle and Knight Frank). Jones Lang LaSalle states that ‘large

barriers to entry checklist Competition Concentration Life cycle stage Capital intensity Technology change Regulation and policy Industry assistance

Level High Low Mature Low Medium Heavy None SOURCE: WWW.IBISWORLD.COM.AU

scale through expansion. The volatility of firm incomes, due to the cyclical nature of the property market, makes it important for real estate agencies to have maximum control and flexibility over their cost structures. Operating profit margins tend to fall as income increases. This can benefit smaller, new entrants as larger firms may find it more difficult to vary their cost structures (e.g. managers’ salaries) in line with variations in the level of activity.

users of commercial real estate services demonstrate a desire for a single source service provider across local, regional and global markets’. The ability to offer a full range of services on this scale requires significant corporate infrastructure investment. Smaller regional and local real estate service firms, with limited resources, are less able to make such investments. Some large overseas-based franchisers have entered the Australian residential real estate market. Local companies, such as LJ Hooker, have significant overseasbased franchise networks and franchisees.


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Major Companies

LJ Hooker Limited   |  Ray White (Real Estate) Pty Ltd   |   Other

Major players (Market share)

Ray White (Real Estate) Pty Ltd 4.3%

90.1% Other

LJ Hooker Limited 5.6%

Player Performance LJ Hooker Limited Market share: 5.6%

LJ Hooker is a real estate agency that was established in 1928 and floated on the Australian Stock Exchange in 1947. In 1989, the Queensland financial institution Suncorp purchased LJ Hooker. The Suncorp Group provides banking, insurance, investment and superannuation services, focusing on retail customers and small- to medium-sized businesses. In September 2009, Suncorp sold LJ Hooker to focus on its core business. LJ Hooker was acquired for about $65 million by LJ Resurrection Pty Ltd, a company set up by L Janusz Hooker and David Hooker. The company has a network of more than 700 franchises and agents in the network manage about 100,000 properties. LJ Hooker operates in 13 countries around the world, with offices in New Zealand, Hong Kong, Papua New Guinea, India and Indonesia. The value of property managed by the LJ Hooker network is about $20 billion. The global financial crisis affected the performance of LJ Hooker. The business contributed $8.0 million in profit for Suncorp in 2009, a decrease of about 42% from profits of $14 million in 2008. While better domestic results were expected during 2010, thanks to lower unemployment and improved consumer sentiment lead to stronger property sales, consumer sentiment and general property market conditions has nonetheless continued to put strain on the company’s resources. Since leaving the Suncorp Group, the business has focused on improving its operations in Australia and New Zealand. In November 2010, the firm bought New Zealand real estate company Harveys. Its intentions for international expansion, however, are low priority. In 2010-11, the

SOURCE: WWW.IBISWORLD.COM.AU

LJ Hooker Limited – financial performance revenue ($ million)

(% change)

2009-10

28.2

N/C

2010-11

34.2

21.3

year

SOURCE: ANNUAL REPORT

company boasted that in Australia it was able to outperform the markets during the 12 months to March 2011 and maintain its office network, with establishment numbers starting to grow once again. Though the group’s profit has fallen, conditions are starting to stabilise. During 2009-10, comparable shopping centre net operating income for the global portfolio grew by 1.6%, with the Australian and New Zealand portfolios exceeding expectations with growth of 5.9%. The US portfolio, however, declined by 3.9%, and the UK portfolio declined by 4.2%. The portfolio on December 2009 was 97.2% leased. This was its highest level since September 2008, and an improvement from the low of 96% experienced at the end of March 2009. This was driven by a strong performance in the Australian and New Zealand portfolios, which are over 99.5% leased. Improvements were also made in the US and UK portfolios leased from March 2009, which increased from 90.1% to 92.8%, and from 96.6% to 99.0% respectively. Improvements were also seen across the Australian portfolio, with total retail sales for the 12 months up 3.8% to $21.5 billion.


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Major Companies

Player Performance Ray White (Real Estate) Pty Ltd Market share: 4.3%

Ray White (Real Estate) Pty Ltd is a real estate agency that commenced operations in 1902. Today, the company has over 10,000 staff and works across several business lines. These include its residential, rural and commercial real estate agency services and financial, insurance and construction operations. The real estate agency services segment has about 1,105 offices across Australia and New Zealand. The residential arm makes up the majority of this segment, with about 90% of offices. Ray White Financial Services offers mortgages through two brands: Ray White Financial Services and the Loan Market, writing more than $3.5 billion in home loans every year. Ray White Invest is the

property funds management arm of the Ray White Group. Ray White Insurance provides home and contents insurance, while Ray White Constructions has been undertaking all forms of construction since 1994 and generates annual revenue of over $32 million. The group experienced a difficult real estate environment in 2008-09, associated with the global financial crisis. Property sales dropped from $28.1 billion in 2008 to $25 billion in 2009. Total revenue fell by about 8.8% over the year, decreasing from $136 million to $124 million between 2008 and 2009. The drop in revenue was largely a result of the reduced property sales growth.

ray white (real Estate) Pty Ltd â&#x20AC;&#x201C; financial performance year*

Sales ($ billion)

(% change)

revenue ($ million)

2004

21.6

-10.0

N/C

2005

19.8

-8.3

N/C

2006

25.0

26.3

N/C

2007

27.5

10.0

N/C

2008

28.1

2.2

136.0

2009

25.0

-11.0

124.0

*year end december

Other Companies

First National Real Estate

Estimated market share: 3.5% First National Real Estate started in rural Victoria in 1981, and has since expanded across Australia and into New Zealand and the Pacific. It is the thirdlargest real estate network in Australia, with about 475 offices. Over 50% of these offices are located outside of metropolitan areas and as a result the company has a strong focus on rural and residential property. It is also involved in commercial property. First National targets these different markets through different branding, such as First National Residential, First National Commercial and First National Rural.

SOURCE: COMPANY WEBSITE

Raine & Horne

Estimated market share: 3.0% Raine & Horne was established in 1883 in Sydney. Still family owned, since its inception it has had a strong focus on residential real estate. Since 1984 the company has also moved into commercial real estate and has interests in rural property and finance. Like other successful residential-focused real estate brands, its franchise network has enabled its brand to spread and raise recognition.

LPI (Australia) Holdings Pty Ltd

Estimated Market Share: 2.2% Better known as Jones Lang LaSalle, LPI is a financial and professional services


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Major Companies

Other Companies continued

firm specialising in real estate services and investment management. Founded in 1997, the company employs more than 36,000 people and has 180 corporate offices worldwide, operating in more than 750 locations across 60 countries. The firm is an industry leader in property and corporate facility management services, with a portfolio of about 1.6 billion square feet worldwide. The company operates across three geographic business segments: the Americas; Europe, the Middle East and Africa; and the Asia Pacific region. Another segment of LPI is its LaSalle Investment Management arm, one of the world’s largest and most diverse in real estate, with about US$40.0 billion of assets under management. Company revenue, at a group level, decreased by about 8.0% from $3.2 billion in 2008 to $2.9 billion in 2009. The reduced revenue was largely a result of the global financial crisis, which affected commercial and residential sales volumes and property prices. Profit margins were also affected, decreasing from a profit of $100.0 million in 2008 to a loss of $4.3 million in 2009. The company, however, saw this revenue largely recover during 2010 in line with the recovery of business sentiment and revenue and profit managed to move back to pre-crisis levels.

CB Richard Ellis Pty Ltd

Estimated market share: 2.1% CB Richard Ellis (CBRE) is a global real estate service organisation. It is a Fortune 500 and S&P 500 company headquartered in Los Angeles. It employs

about 29,000 people across more than 425 offices worldwide. The company offers strategic advice and execution for property sales and leasing; corporate services; property facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. In Australia and New Zealand, the group has 39 offices and more than 1,500 employees. The global credit crisis had a serious impact on CBRE. Sales of office, retail, industrial and residential properties were affected globally. Revenue and profits for the group declined in 2008, and the company was forced to streamline its operations. Between 2007 and 2008, profits for the group decreased from $390.5 million to a loss of $1.0 billion. Profits improved in 2009, to total $33 million. The growth in profits was largely a result of the effective management of the company’s cost structure, with operating expenses declining faster than revenue (21% compared with 19%). During 2009, the company produced $4.2 billion of global revenue, to which the Australian market is estimated to have contributed about 4.3%. Thanks to the recovery in the commercial property market, the company has also managed to bring revenue close to pre-crisis levels.

Colliers International Holdings (Australia) Limited

Estimated market share: 1.9% Colliers International is a global real estate service provider that was founded in Australia in 1976. Today, the company has 294 offices in 61 countries, and about

LPI (Australia) Holdings Pty Ltd – financial performance year*

revenue ($ million)

(% change)

nPAT ($ million)

(% change)

2006 2007 2008 2009 2010

172.9 225.7 204.5 163.5 208.2

13.5 30.5 -9.4 -20.0 27.3

10.3 20.1 14.7 14.7 N/C

58.5 95.1 -26.9 0.0 N/C

*year end december

SOURCE: ANNUAL REPORT AND IBISWORLD


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Major Companies

Other Companies continued

Cb richard Ellis Pty Ltd (Australian operations) – financial performance year*

revenue ($ million)

(% change)

nPAT ($ million)

(% change)

2006 2007 2008 2009 2010

168.8 248.8 204.7 212.8 231.4

33.7 47.4 -17.7 4.0 8.7

17.8 26.0 9.6 18.1 24.1

54.8 46.1 -63.1 88.5 33.1

*year end december

SOURCE: ANNUAL REPORT AND IBISWORLD

12,750 employees. The company’s Australian enterprise includes over 1,000 personnel in 28 office locations. The company has recently been involved in two large acquisitions: PRD Nationwide in 2006 and Roberts Weaver Group in 2007. These purchases significantly expanded the company’s residential services and workplace consulting, project management and design services. In 2009, global real estate services provider FirstService gained control of Colliers International. In 2009, the company recorded revenue of $165.2 million, a decline from 2008. This fall was largely due to reduced property sales following the global financial crisis. A strong reduction in company expenses meant that reduced revenue did not seem to affect profit margins. In fact, the group experienced profit growth over the year, from $4.2 million in 2008 to $10.0 million in 2009. Like other commercial property real estate agents, this continued during 2010, with revenue reaching $206.9 million thanks to a recovery in business sentiment.

Elders Limited

Estimated market share: 1.3% Established in 1836, Elders is the oldest real estate agency in Australia. Listed on the Australian Stock Exchange, it is a wholly owned subsidiary of Futuris Corporation Ltd, a diversified company with interests in manufacturing, property, finance and rural services. Elders Rural Services provides a large range of services to farmers and nonfarmers for livestock, wool, merchandise, finance, insurance and real estate. Elders Real Estate, a major segment of Elders Group, is the largest rural real estate organisation in Australia and the market leader in broadacre property sales. Elders also operates in the metropolitan residential real estate market, has a national network of over 380 offices (including 162 franchised businesses) and sells over 70,000 properties per year. During 2009-10, Elders elected to discontinue its real estate operations in New Zealand due to a lack of scale and efficiency, and sharpened its focus on the Australian market to core traditional broadacre and rural property. Operations

Colliers International Holdings (Australia) Limited – financial performance year*

revenue ($ million)

(% change)

nPAT ($ million)

(% change)

2007 2008 2009 2010

212.9 175.7 166.4 206.9

N/C -17.5 -5.3 24.3

14.9 4.1 9.4 16.2

N/C -72.5 129.3 72.3

*year end december SOURCE: ANNUAL REPORT AND IBISWORLD


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Major Companies

Other Companies continued

specifically related to residential property were to be franchised out, reducing the exposure and burden on the head office. Revenue in real estate operations fell to $56.8 million in the Australian network, with activity in the rural market remaining stagnant due to drought. Despite this focus, in 2010-11 the segment still saw mixed trading conditions, with prices falling in residential markets and broadacre markets remaining stable. Water rights activity levels also brought uncertainty to rural property markets, particularly since high levels of rainfall reduced demand for property close to water sources. As a result sales revenue declined by 8.0% during the period. The global financial crisis affected the profit margins and revenue of the company. The company experienced a

Elders Limited â&#x20AC;&#x201C; financial performance year* 2008-09 2009-10 2010-11

Sales (million)

(% change)

61.0 56.8 52.3

-12.4 -6.9 -7.9

*year end September SOURCE: ANNUAL REPORT AND IBISWORLD

loss of over $415 million in 2009, down from profit of $36.0 million in 2008. Revenue was also affected, decreasing by about 12% from $3.5 billion in 2008 to $3.1 billion in 2009. However, at a domestic level, the group experienced growth in sales revenue, which increased from $1.6 billion to $1.7 billion between 2008 and 2009.


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Operating Conditions

Capital Intensity   |   Technology & Systems   |   Industry Volatility Regulation & Policy   |   Industry Assistance Capital Intensity Level The level

of capital intensity is Low

The level of capital investment required to operate a property unit varies depending on the size, location and sector the real estate agency operates in. By comparing the ratio of wages to depreciation, it is possible to determine the level of capital used for every one unit of labour and thus determine how much capital is used in production as opposed to labour. By analysing the industry’s cost structure, IBISWorld estimates that the industry has a wages to depreciation ratio of approximately 24.6:1, indicating that this industry has a high labour intensity and low capital intensity. This is in line with the operation of real estate agencies, which include a high level of personal contact with clients and other parties (i.e. home owners, buyers and tenants). The latest data released by the ABS highlights this trend, with labour costs representing the major cost associated with this industry.

Capital intensity

Capital units per labour unit 0.4 0.3 0.2 0.1 0.0

Economy

Real Estate Property & Agents Business Services

Dotted line shows a high level of capital intensity SOURCE: WWW.IBISWORLD.COM.AU

Depreciation costs remain a relatively minor expense at 1.8% of revenue. Nonetheless, improvements in technology, leading to needed exposure online, have increased the role of capital in the industry over the past several years.

Tools of the trade: Growth strategies for success Investment Economy

recreation, Personal Services, Health and Education. Firms benefit from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labour skills are key to product differentiation.

Information, Communications, Mining, Finance and real Estate. To increase revenue firms need superior debt management, a stable macroeconomic environment and a sound investment plan.

real Estate Agents

Traditional Service Economy wholesale and retail. Reliant on labour rather than capital to sell goods. Functions cannot be outsourced therefore firms must use new technology or improve staff training to increase revenue growth.

Finance Legal Services

residential Property Operators and developers

Mobile Telecommunications Carriers

Capital Intensive

Labour Intensive

new Age Economy

Old Economy Agriculture and Manufacturing.

wired Traded goods can be produced Telecommunications using cheap labour abroad. Carriers

To expand firms must merge or acquire others to exploit economies of scale, or specialise in niche, high-value products.

Change in Share of the Economy

SOURCE: WWW.IBISWORLD.COM.AU


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Operating Conditions

Technology & Systems Level The level

of Technology Change is Medium

The technological aspects of the industry include office automation, telecommunication products and internet presence. Real estate agents can have their own internet presence, which can provide, among other things, details and pictures of listed properties for potential purchases or lessors. An ABS survey of the industry found that 70.4% of all businesses in the industry had a web presence in 2002-03. IBISWorld estimates that this figure has grown to more than 90% in 2009-10, with 98.5% of franchised real estate agents expected to have a web presence. Some real estate agents conduct auctions online, where participants can bid in real time. In Australia and New Zealand, examples of companies with online listings include www.realestate. com.au, www.realcommercial.com.au and www.propertylook.com.au, and real estate office solutions. Computer software can significantly reduce the cost of providing property management services, which is a labour intensive operation. Investment real estate (IRE) software systems provide sophisticated transaction processing and analysis tools. IRE systems can be broken down into two categories: operational and decision support. Operational systems support day-to-day activities and are transactional in nature (e.g. property maintenance, management and accounting). Decision support systems consolidate operational data with industry benchmarks and market assumptions to enable a strategic analysis of an asset portfolio (e.g. to measure performance, forecast cash flows and support investment decisions).

The provision of pre-encoded bank deposit slips to property tenants for payment of rent can reduce costs in the collection of rent. In December 1995 it was announced that Australia Post and Macquarie Bank had formed a partnership to allow rents to be paid at any post office, using a plastic card (with a bar code) issued by real estate agents. The service, known as DEFT Payment System, was developed and is owned by Macquarie Bank. Payments can be made through Australia Post offices, by telephone or mail. Cosmos Ltd, a public listed company, is market leader in the payments sector and its products include a tenant card for electronic rent payments. New software allows agencies to install a computerised touch pad on shop windows allowing potential customers to scroll through unlimited photos and descriptions of listed properties in or outside office hours. Consumer acceptance of interactive computer technologies (such as the internet) presents a significant risk to conventional marketing approaches adopted by real estate agent firms. Such innovations may ultimately provide vendors with an enhanced ability to sell their own properties privately (without an agent). However, these technologies will also create opportunities for industry players. Innovative enterprises may be able to use such technologies to market properties to potential buyers that have access to computer terminals, expanding the real estate firm’s geographic coverage. Podcasting in the real estate industry is in the early stages of development. Realcast developed podcasts for two of Ray White’s Victorian offices.


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Operating Conditions

Level The level

of Volatility is Low

The volatility of the revenue growth for the Real Estate Agents industry over the past five years has been relatively low, thanks in part to the steadying effect of rental portfolios on revenue. Factors that have caused some stability have been related to the global financial crisis, which has affected the demand for properties and thus sales rates. The demand for real estate property has varied by sector (residential, retail, office, industrial and rural); however, A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment. When a firm makes poor investment decisions it may face underutilised capacity if demand suddenly falls, or capacity constraints if it rises quickly.

in general, demand has been affected by changes to a range of economic, demographic and financial factors over the past five years. Changes to interest rates, unemployment levels, income, consumer confidence and access to finance have all affected the purchasing power of companies and investors. This has affected sales volumes, property prices and rental rates, which have affected revenue growth margins.

Volatility v. Growth 1000

revenue volatility* (%)

Revenue Volatility

Hazardous

rollercoaster

100 10

real Estate Agents 1 0.1

Stagnant –30

–10

blue Chip 10

30

50

70

Five year annualised revenue growth (%) * Axis is in logarithmic scale SOURCE: WWW.IBISWORLD.COM.AU

Regulation & Policy Level & Trend  he level of T

Regulation is Heavy and the trend is Steady

The Real Estate Agents industry is tightly regulated by state and territory governments through laws governing the entry requirements and the conduct of firms and their employees. Some governments, such as Queensland, also prescribe maximum fee scales. State government legislation sets out the licensing requirements for people and corporations to provide defined real estate services. In most states, there are four real estate license categories: agent, branch manager, salesperson or subagent, and corporation. The requirements differ between states but principally cover the areas of educational qualifications, experience, character and residence. All mainland states have legislation covering land valuers. There is no valuer registration system in the Australian Capital Territory or the

Northern Territory. State governments are examining the educational and licensing requirements for agents, with the possibility of a relaxation of requirements particularly in the areas of property management, commercial property sales and business sales. On the other hand, the real estate institutes strongly oppose such moves and appear to have been largely successful in lobbying state governments against them. In each state and territory, the majority of real estate agents are members of a real estate institute, although membership is not a legal requirement to practice as an agent. The institutes, which have attracted membership exceeding 80% of all real estate agents, regulate members by imposing professional codes of conduct


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Operating Conditions

Regulation & Policy continued

Industry Assistance Level & Trend  he level of T

Industry Assistance is None and the trend is Steady

and a disciplinary proceedings framework. The institutes provide members with multiple listing services; combined buying power to provide agents with training, standard contracts, indemnity insurance and stationery at a competitive cost; and government, media and community lobbying. Work safety guidelines for the real estate industries have also been released in Victoria, Queensland and New South Wales, helping agents to identify risks to employees. The Victorian practice code, Real Estate Agent Out-of-Office Safety, released in 2006, aims to help protect real estate agent staff from dangerous people and prescribes practices and penalties for breaching the code. In 2008, Victorian legislation was amended to state that the auctioneer must make clear that the auctioneer is not able to accept bids or offers for a property after the property has been knocked down to the successful bidder. Federal regulation Federal government regulation currently emerges from the ACCC, from the Franchise Code of Conduct or when foreign investment is involved. The ACCC produced a guide on how the real estate industries are affected by the Trade

Practices Act. Real estate franchise systems must comply with the Franchise Code of Conduct. The National Real Estate Franchise Association of Australia, which represents franchisors, recently entered into a strategic alliance with the Real Estate Institute of Australia. The Institute of Conveyancers represents conveyancers. Several changes to the Foreign Acquisitions and Takeovers Act were made to during 2009 and 2010, including broadening its scope to cover all types of foreign investments. The four lowest thresholds for private business investment were also replaced with a single threshold of 15% in a business worth $219 million, which was increased to $231 million in 2010. Furthermore, temporary residents need to notify the government before buying residential real estate. The Productivity Commission’s 2010 annual report on consumer services highlighted the industry’s concern that the differences between each state and territory regulatory environment create undesired complications for interstate organisations. Property services, however, will be one of the first industries to be included in the National Licensing System by 1 July 2012.

No import tariffs apply to this industry. Other than licensing requirements (refer to Regulation), there is no protection specifically afforded to this industry. However, government policy can influence real estate activity, such as interest rates; own acquisition, sale and leasing of property; investment in infrastructure; taxes on sales transactions and property investors; and grants to first home buyers. Since September 2007, the regulation on self-managed superannuation funds (SMSFs) has allowed investors to borrow or charge their assets held within their funds to encourage investment diversification in order to mitigate risk. As a consequence, investors are now able

to actively invest in property via SMSFs. In October 2008, the Federal Government announced an initiative to double the First Home Owner Grant on existing property, and triple it for new housing in an attempt to renew spending. The Government doubled the grant for first home buyers from $7,000 to $14,000 on existing property. An extra $14,000 was provided for first home buyers who buy a newly constructed house, taking their grant to $21,000. This incentive for first home buyers boosted revenue for real estate agents, especially in sales of low- to mid-price housing. These grants were phased out and eventually abolished in December 2009 due to budget tightening measures.


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Operating Conditions

Industry Assistance continued

The New South Wales government in 2009 introduced an ‘empty nester’ stamp duty concessions, exempting stamp duty for residents over 65 when they purchase a newly constructed home worth up to $600,000 after selling their primary place of residence. This was done to

create downsizing opportunities and to encourage new home construction and was scheduled to end in 1 July 2011. The incoming government, however, has elected to extend the concessions for an extra year and broaden eligibility to people over 55.


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Key Statistics Industry Data 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Sector Rank Economy Rank

Revenue ($m) 10,258.7 9,901.7 8,921.7 9,172.9 9,551.4 9,282.9 8,987.8 8,751.3 8,942.2 9,022.7 8,887.3 8,842.9 9,046.3 9,362.9 9,774.9 11/33 116/495

Annual Change 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Sector Rank Economy Rank

Revenue (%) -3.5 -9.9 2.8 4.1 -2.8 -3.2 -2.6 2.2 0.9 -1.5 -0.5 2.3 3.5 4.4 29/33 315/495

Industry Value Added ($m) Establishments 6,522.3 39,543 6,230.5 40,333 5,551.3 40,734 5,707.7 41,146 5,433.2 42,546 5,152.9 43,102 4,793.3 42,296 4,619.6 40,528 4,648.1 40,123 4,572.7 39,544 4,481.1 39,684 4,447.5 39,486 4,572.1 40,394 4,720.6 41,243 4,892.8 42,483 12/33 7/33 76/495 23/495

Enterprises 33,738 34,412 34,756 35,104 35,455 35,918 35,247 34,542 34,197 33,503 32,285 31,255 31,182 31,492 32,192 7/33 19/495

Employment 76,599 75,833 72,041 74,203 72,719 71,264 69,164 68,472 69,412 67,621 66,669 66,336 68,669 72,174 77,319 12/33 59/495

Exports ---------------N/A N/A

Imports ---------------N/A N/A

Wages ($m) 4,942.3 4,819.3 4,342.5 4,464.8 4,502.8 4,361.1 4,097.8 4,031.2 4,072.6 3,987.1 3,903.3 3,872.1 3,984.4 4,111.9 4,255.8 8/33 44/495

Domestic Demand N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Industry Value Added Establishments (%) (%) -4.5 2.0 -10.9 1.0 2.8 1.0 -4.8 3.4 -5.2 1.3 -7.0 -1.9 -3.6 -4.2 0.6 -1.0 -1.6 -1.4 -2.0 0.4 -0.7 -0.5 2.8 2.3 3.2 2.1 3.6 3.0 31/33 31/33 371/495 421/495

Enterprises (%) 2.0 1.0 1.0 1.0 1.3 -1.9 -2.0 -1.0 -2.0 -3.6 -3.2 -0.2 1.0 2.2 31/33 435/495

Employment (%) -1.0 -5.0 3.0 -2.0 -2.0 -2.9 -1.0 1.4 -2.6 -1.4 -0.5 3.5 5.1 7.1 33/33 452/495

Exports (%) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Imports (%) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Wages (%) -2.5 -9.9 2.8 0.9 -3.1 -6.0 -1.6 1.0 -2.1 -2.1 -0.8 2.9 3.2 3.5 32/33 407/495

Domestic Demand (%) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Average Wage ($) 64,521.73 63,551.49 60,278.17 60,170.07 61,920.54 61,196.40 59,247.59 58,873.70 58,672.85 58,962.45 58,547.45 58,371.02 58,023.27 56,972.04 55,042.10 17/33 206/495

Share of the Economy (%) 0.63 0.57 0.50 0.50 0.46 0.42 0.38 0.36 0.36 0.34 0.32 0.30 0.30 0.31 N/A 12/33 76/495

Key Ratios 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Sector Rank Economy Rank

IVA/Revenue (%) 63.58 62.92 62.22 62.22 56.88 55.51 53.33 52.79 51.98 50.68 50.42 50.29 50.54 50.42 50.05 17/33 107/495

Imports/Demand Exports/Revenue (%) (%) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Figures are inflation-adjusted 2012 dollars. Rank refers to 2012 data.

Revenue per Employee ($’000) 133.93 130.57 123.84 123.62 131.35 130.26 129.95 127.81 128.83 133.43 133.30 133.30 131.74 129.73 126.42 26/33 423/495

Wages/Revenue (%) 48.18 48.67 48.67 48.67 47.14 46.98 45.59 46.06 45.54 44.19 43.92 43.79 44.04 43.92 43.54 7/33 41/495

Employees per Est. 1.94 1.88 1.77 1.80 1.71 1.65 1.64 1.69 1.73 1.71 1.68 1.68 1.70 1.75 1.82 28/33 459/495

SOURCE: WWW.IBISWORLD.COM.AU


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Jargon & Glossary

Industry Jargon

AUCTION CLEARANCE RATE The total number of homes sold at auction as a percentage of homes put up for auction.

FIRST HOME OWNER GRANT A government grant for first home owners. This is a national scheme funded by states and territories. HOME OWNERSHIP RATE Homes occupied by owners as a percentage of total available homes.

IBISWorld Glossary

BARRIERS TO ENTRY Barriers to entry can be High, Medium or Low. High means new companies struggle to enter an industry, while Low means it is easy for a firm to enter an industry. CAPITAL/LABOUR INTENSITY An indicator of how much capital is used in production as opposed to labour. Level is stated as High, Medium or Low. High is a ratio of less than $3 of wage costs for every $1 of depreciation; Medium is $3-$8 of wage costs to $1 of depreciation; Low is greater than $8 of wage costs for every $1 of depreciation. CONSTANT PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using 2011-12 as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the ‘real’ growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the Australian Bureau of Statistics’ implicit GDP price deflator. DOMESTIC DEMAND The use of goods and services within Australia; the sum of imports and domestic production minus exports. EARNINGS BEFORE INTEREST AND TAX (EBIT) IBISWorld uses EBIT as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding tax and interest. EMPLOYMENT The number of working proprietors, partners, permanent, part-time, temporary and casual employees, and managerial and executive employees. ENTERPRISE A division that is separately managed and keeps management accounts. The most relevant measure of the number of firms in an industry. ESTABLISHMENT The smallest type of accounting unit within an Enterprise; usually consists of one or more locations in a state or territory of the country in which it operates. EXPORTS The total sales and transfers of goods produced by an industry that are exported. IMPORTS The value of goods and services imported with the amount payable to non-residents.

INDUSTRY CONCENTRATION IBISWorld bases concentration on the top four firms. Concentration is identified as High, Medium or Low. High means the top four players account for over 70% of revenue; Medium is 40 –70% of revenue; Low is less than 40%. INDUSTRY REVENUE The total sales revenue of the industry, including sales (exclusive of excise and sales tax) of goods and services; plus transfers to other firms of the same business; plus subsidies on production; plus all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); plus capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded. INDUSTRY VALUE ADDED The market value of goods and services produced by an industry minus the cost of goods and services used in the production process, which leaves the gross product of the industry (also called its Value Added). INTERNATIONAL TRADE The level is determined by: Exports/Revenue: Low is 0-5%; Medium is 5-20%; High is over 20%. Imports/Domestic Demand: Low is 0-5%; Medium is 5-35%; and High is over 35%. LIFE CYCLE All industries go through periods of Growth, Maturity and Decline. An average life cycle lasts 70 years. Maturity is the longest stage at 40 years with Growth and Decline at 15 years each. NON-EMPLOYING ESTABLISHMENT Businesses with no paid employment and payroll are known as non-employing establishments. These are mostly set-up by self employed individuals. VOLATILITY The level of volatility is determined by the percentage change in revenue over the past five years. Volatility levels: Very High is greater than ±20%; High Volatility is between ±10% and ±20%; Moderate Volatility is between ±3% and ±10%; and Low Volatility is less than ±3%. WAGES The gross total wages and salaries of all employees of the establishment.


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Real Estate Agents in Australia