Bankwest Future of Business:Focus on Real Estate

2018

Contents

Key insights

Industry overview What’s driving industry growth?

Spotlight on Australia

Spotlight on Western Australia

What does the future hold?

What challenges does the industry face?

Where do the opportunities lie?

Forecasted industry growth

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Key insightsForeword

Understanding factors impacting your industry, and how other businesses in your industry are performing, can be a great gauge for how your business is tracking.

The Bankwest Future of Business: Focus on Real Estate Agents Report is designed to give you a snapshot of the current and expected future state of your industry, which could help you plan and spark ideas. The report covers Australia’s real estate agents, summarising trends based on statistics from IBIS World, the Australian Bureau of Statistics and other reputable sources.

There is notable variation in vacancy rates and housing affordability across the nation. Low vacancy rates on the east coast and increasing housing costs have resulted in strong industry profits across real estate services. Sydney and Melbourne recorded the strongest upswing in dwelling prices at 74.2% and 49.7% respectively in the five years to June 20171. In Perth, however, housing prices rose by just 3.7% over the five-year period, while vacancy rates remain at high levels of 6.9% in the 12 months to September 2017, highlighting the gap in housing affordability between the east and west coast.

Following colossal growth rates on the east coast in recent years, revenue nationally is projected to stagnate in coming years as house prices begin to normalise. Falling prices are expected to curb property operator and real-estate agent revenue, particularly in the eastern states.

In Perth, however, house prices have been on a downwards trajectory since mid 2015 suggesting there is more upside potential. The median house price fell to $512,000 in September 2017, down from $550,000 in September 2014, with average selling days increasing to 70 from 47 during this period2.

Bankwest’s 2017 Financial Indicator Series First Time Buyers Report found Western Australia’s first time buyers are injecting life into the state’s property market, fuelled by the drop in house prices. There are more first time buyers as a proportion of total buyers in WA than anywhere else in the country. WA first time buyers made 21.7% of all purchases in the year to June 2017 – the highest proportion in the country.

Vying for attention in a growing industry, marketing is becoming a larger portion of real estate service costs as companies focus on building brand awareness.

1 ABS 6416.02 REIWA

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Industry overview

Primary activities

Real estate services employment, seasonally adjusted, 2007-2017

Sector breakdownReal estate services, which includes both residential and commercial real estate agents and covers

valuing, purchasing, selling (by auction or private treaty), managing or renting real estate, accounts for $14.4 billion in total industry revenue. Commercial real estate agents account for just $1.7 billion of total revenue as of 2017. Annual growth, however, for commercial real estate agents is expected to exceed overall industry growth for real estate services in the five years to 2018.

Growth in Australia’s residential and commercial property stock, as well as rising property prices are driving increased employment within the sector. Total employment in the real estate services sector rose by 7.8% in the five years to August 2017 to 125,100. 

Broking service (real estate)

Real estate agency service

Real estate auctioning service

Real estate management service

Real estate rental agency service

Time share apartment management service

Valuing service (real estate)

Commercial real estate agents

Real estate services

1,957

38,439

Revenue

0

4

8

12

16

Profit

Real estate services

Commercial real estate agents

Source: ABS 6291.0.55.001

Source: IBIS 2017

Source: IBIS 2017

130,000

125,000

120,000

115,000

110,000

105,000

100,000

95,000

90,0002007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Billi

ons

($)

0

4

8

12

16

%

Annual growth 2012-17

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What’s driving industry growth?

Housing

RBA lending rate, 2012-2017

Perc

ent (

%)

Lower Reserve Bank of Australia interest rates for housing finance have improved mortgage affordability for Australian buyers and led to increased demand for real estate services. The lending rate for a standard owner occupier loan was 5.2% as at December 2017, lower than the 6.6% 10-year average, making buying a property more attractive despite rising prices in many states.

Source: RBA 2017

8.00

7.50

7.00

6.50

6.00

5.50

5.00

4.50

4.002012 2013 2014 2015 2016 2017

Rising house prices across Australia have contributed to growing industry revenue, driven by higher commission income, and created larger profit margins in the industry

House purchases nationally have increased across new and established dwellings, fuelling the market for real estate services

In WA, subdued property prices have reduced the number of enterprises over the past 5 years, likely due to less demand for real estate services following the end of the mining construction boom.

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135.0

130.0

125.0

120.0

115.0

110.0

105.0

100.0

95.0

90.0

Spotlight on Australia

The real estate services industry is forecast to allocate 16.8% of industry revenue to marketing and market research in the year to June 2018.

Rising prices (PPI) across real estate services, 2012-2017*

Real estate services sector prices have been increasing in the last four years due to strong house price growth across Australia’s east coast. With house price growth forecast to slow, the industry is expected to increase its focus on marketing and market research to establish reputation and brand credibility in the market.

*PPI is calculated on an index reference period of June 2012 = 100 Source: ABS 6427.0

2012 2013 2014 2015 2016 2017

increase in Australian capital city house prices 45.9% 58.2%

increase in Australian housing finance commitments

Drivers of real estate services prices in the five years to June 2017 include:

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Spotlight on Western Australia

VS

Data 12 months to September 2017

Median rents in Perth for houses declined in the 12 months to September 2017.

Despite Western Australia’s relatively affordable housing market, local real estate agents were impacted in the year to September 2017 by a decline in housing commitments. This was driven by a 12.2% fall in the number of purchases of established dwellings to 51,956, while purchases of new dwellings increased modestly by 1.4% to 2,821.

There are some signs that the Perth office market is stabilising.

Premium office vacancy rates within the CBD are lower than lower grade offices

11.0% 1.6%decline in housing commitments

WAdecline in housing

commitments

Australia

Data 12 months to September 2017

House rent prices

2016- $380Unit rent prices

2016- $3502017- $350 2017- $325

Office vacancy rates declined from 22.5% to 21.1% in the first six months of 2017

It takes on average 70 days to sell a property in Perth, the highest recorded in four years.

REIWA, September 2017

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What does the future hold?

WA first home buyers take advantage of cooling property prices

Establishments and enterprises are expected to contract slightly in the year to June 2018, largely due to projected declining revenues as state markets adjust to changing buyer conditions. House prices in Australia are projected to remain stagnant, which will likely cap revenue growth in the sector.

The restrictions put in place by the Australian Prudential Regulation Authority (APRA) are likely to subdue investor demand on the east coast more than the west coast. Demand for WA housing is expected to steadily improve, driven by first home buyers.

In the year to November 2017, the number of first home buyers eager to jump onto the propertyladder grew by 4.9% while the number of non first home buyers simultaneously dropped 15.0%implying first home buyers are taking advantage of the more subdued property prices.

Looking ahead... Decreasing prime vacancy rate

Evidence of base rental rates stabilising

Incentives set to ease at the top end of the market, leading to an increase in effective rents

Source: ABS 5609

15,000

15,200

Number of WA first home buyers

15,400

15,600

15,800

16,000

16,200

16,400

14,800Oct

2016Jan

2017Apr

2017Jul

2017Oct

2017

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What challenges does the industry face?

Number of first time buyers in Australia, 2007-2017

Technology to disrupt the industry

There is a historically low number of first time buyers nationally in the market, with millennials opting to rent or live at home rather than purchase a house or unit.

Online technology will continue to disrupt the real estate industry, with more online offerings increasing information available for customers, streamlining the property purchasing process and improving access to customers.

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

The rise of co-working spaces in the commercial sector will create challenges for existing suppliers of small commercial lots.

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Where do the opportunities lie?

Serviced apartments in the aged care sector may create a role for real estate services to enter the market.

Wealth in the cohort of Australians approaching retirement creates a substantial opportunity to sell smaller apartments for low need aged care customers.

Ageing populationWA is well positioned to capitalise on opportunities for real estate sales in the next five years.

Australia Western Australia

House price growth (2012-17)

Household income (weekly)

Average number of first home buyers (2016-2017)

45.9% 3.7%

$1,438 $1,643

89,326 15,256

Source: ABS 6523, ABS 6146, ABS 5609

Real estate agents will have to improve their understanding of smart houses as buyers increasingly seek properties with the latest available technology.

Real estate services companies will need to:

Transition into build to rent services to help buyers manage rental investment portfolios

Seek to exploit opportunities in the ‘build-to-rent’ sector

Clearly articulate value

Evolution of technology

Relatively affordable housing market

High incomes Strong first home buyer market

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Forecasted industry growth

Employees

Industry growth Projected growth 2017-2022

Real estate services

Commercial real estate agents

4.5%

4.9%

Establishments Projected growth 2017-2022

Real estate services

Commercial real estate agents

4.2%

-37.0%

Projected growth 2017-2022

Real estate services

Commercial real estate agents

7.2%

-9.0%

Australia’s growing population, an increasing trend toward medium density housing and forecast improvements in wage growth will underpin growth in real estate services revenue in the five years to June 2022. Uncertainty around the future performance of Australia’s retail industry is likely to drive consolidation in commercial real estate, with more than one third of commercial real estate businesses expected to exit the sector. However, moderate growth is forecast for this part of the sector as efficient businesses take up greater market share.

Source for all tables: IBIS 2017

WA is well positioned to capitalise on opportunities for real estate sales in the next five years.

Relatively affordable housing market High incomes Strong first home

buyer market

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Australian Bureau of Statistics 6416.0 (June 2017), Residential Property Prices Indexes: Eight Captial Cities, Mar 2017, Table 9b, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Mar%202017

Australian Bureau of Statistics 8155.0 (May 2017), Australian Industry, 2015-16, Australian industry by division, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/8155.02015-16

Australian Bureau of Statistics 6427.0 (October 2017), Producer Price Index, Sep 2017, Tables 1,2,3,4 and 10, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6427.0Sep%202017

Australian Bureau of Statistics 5609.0 (January 2018), Housing finance Australia, November 2017, Table 9b, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5609.0November%202017

Australian Bureau of Statistics 6523.0 (September 2017), Household Income and Wealth, 2015-2016, Household Income and Income Distribution Australia 2015-16, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6523.02015-16

Do, K. Real Estate Services in Australia, IBISWorld, September 2017

Kellly, A. Commercial Real Estate Agents in Australia, IBISWorld, March 2017

Property Council of Australia, National Market Office Vacancy Rate Falling Says New Report, August 2017

Reserve Bank of Australia, Statistical Tables, 2018, Indicator Lending Rates, available at: https://www.rba.gov.au/statistics/tables/

Real Estate Institute of Western Australia, Perth Metro- Perth Market Snapshot, January 2018-01-24

Sources

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At Bankwest, we know that Business Banking is about more than just financial solutions.

Speak to one of our Business Banking Specialists today. Call us on 13 7000.

We provide banking solutions to many of Australia’s leading businesses, including those in real estate. Whether you require straightforward banking or a more customised solution, our team of experienced banking specialists can help.

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The information contained in this report is of a general nature and is not intended to be nor should be considered as professional advice. You should not act on the basis of anything contained in this report without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this report.