Slowdown hits home for agents
http://www.smh.com.au/news/business/slowdown-hits-home-for-agents/2005/09/25/1127586747071.html
The end of the boom has meant harder days for agents, as Margot Saville and Jonathan Chancellor report.
There are plenty of For Sale signs going up all over your suburb. But they are not being put up on your neighbours' houses. All over the city, real estate agents, hit by the downturn in listings and property sales, are selling their assets and shutting up shop.
These results are hitting hardest in Sydney, the epicentre of the industry. Forty per cent of Australian real estate businesses are situated in NSW; the vast majority of those are located in the capital.
According to Australian Property Monitors, 10,192 properties were auctioned in Sydney in the year to June 30, 2005, with a clearance rate of 52 per cent, raising $4.3 billion. This is well down on the previous year's total of $7.6 billion, raised from 15,746 properties.
And things aren't likely to get better soon. Forecaster BIS Shrapnel said earlier this year that the median Sydney house price was expected to fall about 7 per cent over the next three years.
Agencies are responding to the downturn by cutting their selling commissions, shedding staff and, in several cases, selling their rent rolls before closing the doors. Employee agents are being turned into independent contractors, receiving commissions of up to 80 per cent of the fee, in return for paying a share of the agency's costs.
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Only a few years ago, agencies charged 3 per cent commission and paid about 50 per cent of the fee to the selling agent. These days, if you are selling a house in a popular area, you can get the fee down to 1 or 1.5 per cent. In addition, it is now taking twice as long to sell a property as it did in the boom, which devastates the agency's profits. According to the Real Estate Institute of Australia, agency profit margins have halved to less than 10 per cent, their lowest level in years.
Across the sector, agency revenues were down 15 per cent in 2005 and 6 per cent in 2004, according to research company IBISWorld, which predicts further falls in 2006. General manager Jason Baker says that, in real terms, industry revenues are almost back to 2001 levels.
"Revenue is getting smaller, the margins are getting squeezed, and [the agents] are overbidding each other in order to win properties. As they shed employees, players will go out of business."
However, this situation is just part of the cycle, he says.
"It's not permanent. In a few years time, things will go back to more realistic levels."
The industry has shed between 10 and 15 per cent of its professional staff in the past 12 months, according to L.J. Hooker's director of business, Michael Davoren.
"At the first signs of rationalisations, people start to sell their rent rolls. It's a sign that the agency is looking for capital, a cash injection. There's a fair bit of that going on at the moment," he says.
Davoren says that five years ago, it cost $100,000 to set up an agency. That figure is now $250,000 to $300,000, partly due to the increased costs of technology.
"A lot of offices pay people too high a commission, which is a mistake. You need to have the balance right.
"Some agencies are charging 1 per cent commission - you can't sustain that across the board. It needs to be 2.5 per cent for the agency to be profitable.
"If the role of the agent is just to get a sale at any price, then the real estate industry is in big trouble; anyone can do that in a private sale."
One agency which has seen a few property cycles is McGrath Real Estate, which has been operating since 1988.
Chief executive John McGrath says that, industry-wide, the number of listings is down by 30 per cent and prices are down 10 per cent.
"On a lot of indicators, there's a lot of pain. We are down 5 per cent on sales and listings but up on EBITDA [earnings before interest, tax, depreciation and amortisation], which is up 12 per cent year on year," he says.
McGrath has cut back on communications, technology and made business efficiencies. And although staff haven't been retrenched, he says, people who leave are not replaced.
The agency is negotiating to sell its 2700-strong rent roll to Melbourne property manager Run Property in return for equity in the new business, of which former National Australia Bank chief executive Frank Cicutto is a director.
Industry observers say that one of the reasons for the restructure is that the agency will then be able to sell off key offices to employees as a way of keeping them. McGrath confirms that they are looking at the employee sale option.
"That is definitely on the radar. We have a good brand and we are looking for a way to find opportunities to enable key people to participate in equity. But I still intend to maintain equity in most of the business."
Despite operating in the country's most expensive markets, McGrath reported a bottom-line loss of $367,000 in the year to June 30, 2004. McGrath says that was due to increased amortisation charges brought about by changed accounting standards. In fact, the company made an EBITDA profit of $2.5 million, he says.
McGrath Real Estate does not want to sell its rent roll outright because it wants to continue to be involved in a property management business, which can make profit margins of 10 to 15 per cent if well managed, he says.
"I have a personal interest in their business model; I see it as the way of the future. Aggregation and consolidation must happen," he says.
Paul Villanti, the chief executive of Run Property, concurs.
He says the new business is Australia's leading property management company, with 5000 properties under management.
"There is no industry more fragmented than property management. There are 6500 firms which do it with an average rent roll of 212 properties.
"They are usually run by one person [who is] asked to be a jack of all trades. It's an impossible set of skills for one person.
"That person becomes very, very busy and can't spend much time with the owners on the important things, like how they can improve the value of their property."
On the issue of higher commissions to salespeople, McGrath is standing firm.
"We pay up to 60 per cent commission. Other businesses are paying 80 per cent but we think that is unsustainable. Not so long ago the average was 35 per cent.
"If you look at the figures, a lot of the mid to large agencies are making 6 per cent gross margins, then if you pay 80 per cent commissions, then you are about to go broke. Your margins are too slim and that is an unsustainable path.
"We are a full service agency - we provide training, compliance, a working studio for the marketing material, etc, you can't do that with a 80:20 fee split."
The president of the Real Estate Institute of NSW, Rowen Kelly, says selling commissions have been driven right down but are now coming up again.
"Because it's harder to find buyers, agents' jobs are harder, so agents need to be offered more incentive to get a good result.
"In the boom, anyone could sell a house and that drove commissions down. People just went for the cheapest; owners are now being more reasonable."
According to McGrath, buyers know "you get what you pay for".
"There are people out there selling houses for 1 per cent but the best agencies are being paid between 2 and 3 per cent.
"Before the end of the year, there will be closed signs on real estate doors throughout Australia.
"You have to take a long-term view."
http://www.smh.com.au/news/business/slowdown-hits-home-for-agents/2005/09/25/1127586747071.html
The end of the boom has meant harder days for agents, as Margot Saville and Jonathan Chancellor report.
There are plenty of For Sale signs going up all over your suburb. But they are not being put up on your neighbours' houses. All over the city, real estate agents, hit by the downturn in listings and property sales, are selling their assets and shutting up shop.
These results are hitting hardest in Sydney, the epicentre of the industry. Forty per cent of Australian real estate businesses are situated in NSW; the vast majority of those are located in the capital.
According to Australian Property Monitors, 10,192 properties were auctioned in Sydney in the year to June 30, 2005, with a clearance rate of 52 per cent, raising $4.3 billion. This is well down on the previous year's total of $7.6 billion, raised from 15,746 properties.
And things aren't likely to get better soon. Forecaster BIS Shrapnel said earlier this year that the median Sydney house price was expected to fall about 7 per cent over the next three years.
Agencies are responding to the downturn by cutting their selling commissions, shedding staff and, in several cases, selling their rent rolls before closing the doors. Employee agents are being turned into independent contractors, receiving commissions of up to 80 per cent of the fee, in return for paying a share of the agency's costs.
AdvertisementAdvertisement
Only a few years ago, agencies charged 3 per cent commission and paid about 50 per cent of the fee to the selling agent. These days, if you are selling a house in a popular area, you can get the fee down to 1 or 1.5 per cent. In addition, it is now taking twice as long to sell a property as it did in the boom, which devastates the agency's profits. According to the Real Estate Institute of Australia, agency profit margins have halved to less than 10 per cent, their lowest level in years.
Across the sector, agency revenues were down 15 per cent in 2005 and 6 per cent in 2004, according to research company IBISWorld, which predicts further falls in 2006. General manager Jason Baker says that, in real terms, industry revenues are almost back to 2001 levels.
"Revenue is getting smaller, the margins are getting squeezed, and [the agents] are overbidding each other in order to win properties. As they shed employees, players will go out of business."
However, this situation is just part of the cycle, he says.
"It's not permanent. In a few years time, things will go back to more realistic levels."
The industry has shed between 10 and 15 per cent of its professional staff in the past 12 months, according to L.J. Hooker's director of business, Michael Davoren.
"At the first signs of rationalisations, people start to sell their rent rolls. It's a sign that the agency is looking for capital, a cash injection. There's a fair bit of that going on at the moment," he says.
Davoren says that five years ago, it cost $100,000 to set up an agency. That figure is now $250,000 to $300,000, partly due to the increased costs of technology.
"A lot of offices pay people too high a commission, which is a mistake. You need to have the balance right.
"Some agencies are charging 1 per cent commission - you can't sustain that across the board. It needs to be 2.5 per cent for the agency to be profitable.
"If the role of the agent is just to get a sale at any price, then the real estate industry is in big trouble; anyone can do that in a private sale."
One agency which has seen a few property cycles is McGrath Real Estate, which has been operating since 1988.
Chief executive John McGrath says that, industry-wide, the number of listings is down by 30 per cent and prices are down 10 per cent.
"On a lot of indicators, there's a lot of pain. We are down 5 per cent on sales and listings but up on EBITDA [earnings before interest, tax, depreciation and amortisation], which is up 12 per cent year on year," he says.
McGrath has cut back on communications, technology and made business efficiencies. And although staff haven't been retrenched, he says, people who leave are not replaced.
The agency is negotiating to sell its 2700-strong rent roll to Melbourne property manager Run Property in return for equity in the new business, of which former National Australia Bank chief executive Frank Cicutto is a director.
Industry observers say that one of the reasons for the restructure is that the agency will then be able to sell off key offices to employees as a way of keeping them. McGrath confirms that they are looking at the employee sale option.
"That is definitely on the radar. We have a good brand and we are looking for a way to find opportunities to enable key people to participate in equity. But I still intend to maintain equity in most of the business."
Despite operating in the country's most expensive markets, McGrath reported a bottom-line loss of $367,000 in the year to June 30, 2004. McGrath says that was due to increased amortisation charges brought about by changed accounting standards. In fact, the company made an EBITDA profit of $2.5 million, he says.
McGrath Real Estate does not want to sell its rent roll outright because it wants to continue to be involved in a property management business, which can make profit margins of 10 to 15 per cent if well managed, he says.
"I have a personal interest in their business model; I see it as the way of the future. Aggregation and consolidation must happen," he says.
Paul Villanti, the chief executive of Run Property, concurs.
He says the new business is Australia's leading property management company, with 5000 properties under management.
"There is no industry more fragmented than property management. There are 6500 firms which do it with an average rent roll of 212 properties.
"They are usually run by one person [who is] asked to be a jack of all trades. It's an impossible set of skills for one person.
"That person becomes very, very busy and can't spend much time with the owners on the important things, like how they can improve the value of their property."
On the issue of higher commissions to salespeople, McGrath is standing firm.
"We pay up to 60 per cent commission. Other businesses are paying 80 per cent but we think that is unsustainable. Not so long ago the average was 35 per cent.
"If you look at the figures, a lot of the mid to large agencies are making 6 per cent gross margins, then if you pay 80 per cent commissions, then you are about to go broke. Your margins are too slim and that is an unsustainable path.
"We are a full service agency - we provide training, compliance, a working studio for the marketing material, etc, you can't do that with a 80:20 fee split."
The president of the Real Estate Institute of NSW, Rowen Kelly, says selling commissions have been driven right down but are now coming up again.
"Because it's harder to find buyers, agents' jobs are harder, so agents need to be offered more incentive to get a good result.
"In the boom, anyone could sell a house and that drove commissions down. People just went for the cheapest; owners are now being more reasonable."
According to McGrath, buyers know "you get what you pay for".
"There are people out there selling houses for 1 per cent but the best agencies are being paid between 2 and 3 per cent.
"Before the end of the year, there will be closed signs on real estate doors throughout Australia.
"You have to take a long-term view."
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