Real estate advertising portal owner REA Group Limited (ASX: REA) saw its shares take off yesterday, rising 4% to $51.28, after posting a strong first half result.
Net profit rose 34% to $94.7 million, as revenues gained 25%. REA also increased its potential growth drivers, taking 20% stakes in each of iProperty Group Ltd (ASX: IPP) and US real estate business Move, Inc.
iProperty is attempting to do in several Asian countries what REA Group has done in Australia, and holds the number one property portal position in a number of countries. Move operates in the US market, and News Corp (ASX: NWS) has taken the remaining 80% stake in the company. REA Group is 62% owned by News Corp.
But recent moves by REA Group to deliver strong growth in Australia may have opened up the company to a huge risk. REA is reducing the subscription fees it charges real estate agents, in favour of optional listing depth revenues. Listing depth refers to the premium products REA Group offers, including Premiere Property, Highlight Property and Feature Property, which generate much higher page views than a standard ad, and obviously cost more.
The strategy that REA is pursuing is to try and take more of the agent's fee for selling a house. With those commissions running between 2.5% to 5% of the sale price, REA feels that it can offer more of the services that typical agents provide, such as price comparisons and historical data and thereby drive even more growth in revenues.
How successful REA will be remains to be seen, considering there are a number of other companies offering those ancillary property sales services, such as OntheHouse Holdings Ltd (ASX: OTH), as well as push back from agents.
But the biggest issue is that while Australia's property market has been booming, demand for REA's premium listing products has grown, and the company has also been able to increase the prices for these products. When property sellers are no longer willing to pay for those premium products, such as when the property market cools, REA could face heavy downward pressure on revenues.
With a current P/E of 37 times, REA is priced for perfection. What investors may not realise is that the company's revenues may be much more volatile from now on, and the risks have risen significantly.
