Profits crash at REA amid Asia write-down

07 Feb 2019

Profits at Australia-based REA Group have crashed 98 percent to $2.5 million AUD ($1.8 million U.S.), due to a $173.2 million AUD ($122.8 million U.S.) impairment charge on the goodwill of its Asia business.

The write-down is the second since the company acquired IProperty Group (now REA Group Asia) three years ago. The company booked a $180 million AUD impairment charge in 2017.

But REA, which operates Australia’s No. 1 property site, remains optimistic about Asia. This is despite challenging macroeconomic conditions, including additional government measures to cool the property market in Singapore and other territories.

“The long-term potential of Asia is very clear,” Owen Wilson (LinkedIn profile), who succeeded Tracey Fellows as chief executive last year, said in a statement to the ASX. “We will continue to invest to maintain and strengthen our leadership position while these markets mature.”

Morgans analyst Ivor Ries (LinkedIn profile), who was otherwise impressed with the results of its Australian business, said the write-down was “not a good look.”

“REA Group has now provisioned approximately half the cost of buying the IProperty business,” he said in a note to clients. He added that the “core Australian residential business of continues to be an earnings powerhouse.”

Total revenue was up 15 percent to $469.2 million AUD, driven by a 16 percent increase in its Australian operations, which delivered $428.5 million AUD in revenue.

EBITDA (earnings before interest, taxation, depreciation, and amortization) was up 18 percent to $293.2 million AUD. That’s despite a housing downturn that’s seen listing volumes decline 3 percent nationally and a massive 10 percent in Sydney — the country’s largest property market.

Instead, revenue was driven by the uptake of depth products and price rises implemented at the start of the 2019 financial year. It was also bolstered by the inclusion of revenue from HomeTrack, the data and property analytics business REA Group acquired from Zoopla in May last year.

Depth revenue increased 16 percent to $343 million AUD. Remarkably, revenue from its financial services business also increased 11 percent to $14.7 million AUD. This growth is, however, likely to be hindered going forward, after the banking royal commission recommended changes to the remuneration of mortgage brokers.

While the Federal government has stayed mum on whether it will shift to the recommended upfront, borrower-pays model, it is already committed to banning trailing commissions paid to brokers by 2020.

Shifting away from the conflicted remuneration model — where banks paid mortgage brokers to sell products — will likely put downward pressure on brokers, as borrowers will be required to pay a fee for service. It’ll also eliminate the revenues flowing from banks to brokers that currently amount to $2.4 billion AUD a year.

But Wilson remains bullish on the value mortgage brokers provide consumers and the prospects of its financial services businesses. The company acquired a bricks-and-mortar business in 2017 and operates an online-only offering in partnership with NAB.

“We are confident that quality brokers will continue to be sought out by customers, regardless of which remuneration models eventuates,” he said.

The company’s outlook for the year ahead was more subdued. REA forecasts lower rates of revenue growth amid market conditions that are not expected to improve. The rate of decline in listing volumes accelerated in January, with listings down 11 percent nationally, 19 percent in Sydney and 13 percent in Melbourne.

In addition to the housing downturn, a federal election is expected in May. A change in government could also bring changes to mortgage broker remunerations and negative gearing on investment properties. A state election in NSW is due at the end of March, further impacting the Sydney property market.

“The rate of revenue growth is expected to exceed the rate of cost growth for both the second half and the full year, however, this will not be the case in the third quarter,” the company said.


Angela Hawksford

Angela is a writer and journalist based in Sydney, Australia. She has extensive knowledge of the Australian real estate industry, having started her career in real estate advertising at News Limited newspapers, where she worked across a number of different mastheads in Sydney. She s also worked in television, magazines and online, and regularly contributes feature articles to The Sydney Morning Herald, MiNDFOOD and The Newcastle Herald. Angela also works as a content writer, creating written content for a number of SMEs across an array of industries, including real estate, education, technology and digital media.