Housing market: what REA’s results tell us about the property outlook

REA Group share price rises following Q3

On Friday last week, REA Group Ltd (REA), Australia’s dominant property advertising site, announced its third quarter results to the market.

Looking at some of the key figures from that release, on a year-over-year basis and for the three months ending 31 March, REA Group recorded:

• Revenue after broker commissions of $199.8 million, up 1%
• Earnings (EBITDA) of $119.6 million, up 8%
• Free cash flow (FCF) of $66.7 million, down 20%

Investors responded bullishly to these results, bidding the stock 7.71% higher on Friday, to $95.17 per share. On Monday the stock opened a shade higher, before tapering off as the session went on, trading down to $93.93 per share, as of 12:20 AEDT.

REA management described the Q3 as an improved performance, 'reflecting the continued recovery of the real estate market prior to the effects of COVID-19.'

Even so, April proved to be a brutal month for property listings in Australia, with national listings volume down 33% overall. Sydney listings fell 18%, while Melbourne listings fell a more pronounced 27% during the month.

Though April proved especially dour, for the quarter overall residential listings declined a more manageable 7%. Interestingly, Melbourne and Sydney listings were both up 6% and 5% for the quarter, respectively.

Overall, CoreLogic found that national dwelling values increased 0.3% during April.

And while listings may be down overall, people continue to flock to realestate.con.au – with REA, in February – recording a record 93.5 million visits, up 18%.

Of course, REA’s management haven’t ignored the material impact that lower listing activity would have on the company’s top-line prospects, saying:

'Weakness in new listing volumes, as well as measures the Group has undertaken to support its customers in these challenging times are expected to adversely impact revenues.’

To offset these revenue declines, the real estate advertising juggernaut noted that it is currently implementing a number of aggressive cost saving measures. In line with that, Q4 operating expenses are now forecast to come in 20%.

Housing market outlook: is a rebound inevitable?

While April proved to be a disastrous month for property listings – with Australia’s government lifting restrictions on property inspections in a number of states – various analysts have now begun to theorise what a potential rebound might look like.

Macquarie analysts, for example, said:

‘We expect a solid cyclical rebound in new property listings during CY21 on the premise that a large portion of transactions that are not occurring in the current environment are deferred, as opposed to lost.’

Elsewhere, quantifying what the kind of rebound could look like in terms of listings volume, UBS today provided a set of refined forecasts, noting that, on a year-over-year basis, they expected listing to decline 30% in Q4 of FY20; drop 25% in Q1 FY21; before turning flat in FY21; then surging 9% and 70%, respectively, in Q3 and Q4 of FY21.

Finally, J.P. Morgan said that with listing volumes appearing to have troughed in April and 'With Australia starting to ease social restrictions and NSW, WA and NT removing restrictions on public home inspections this week, listings volumes could potential pick up before July.’

How to trade REA Group: long and short

What do you make of these developments: are you bullish or bearish on Australia’s property market? Whatever your view, you can trade the likes of REA Group and Domain – long or short – through IG’s easy-to-use trading platform.

For example, to buy (long) or sell (short) REA Group using CFDs, follow these steps:

• Create an IG Trading Account or log in to your existing account
• Enter ‘REA Group’ or ‘REA’ in the search bar and select it
• Choose your position size
• Click on ‘buy’ or ‘sell’ in the deal ticket
• Confirm the trade