This real estate industry update includes a SWOT analysis and some information and commentary on the Melbourne apartments market.

Strengths

• Revenue expected to be over $27bn (FY2020).
• Forecast 1.8% annual revenue growth over 5 years to FY2025-26. This is up from 1.3% forecast growth for the 5 year period in 2019.
• $3.9bn industry profit in 2020, (down from $5.4bn in 2019).
• Close to 122,000 jobs currently provided in the real estate industry (down from 140,000 in 2019).
• Australia has approximately 40,000 real estate businesses. Victoria has approximately 8,000 real estate businesses, which has risen in the last five years due to increasing demand for residential property, which is reflected in record housing price growth.

Weaknesses

• Working capital cycles will remain tight.
• A growing turnover may result in lower profits, leading to increasing competition.
• Market trends have reduced demand for real estate agents and the services they offer, likely to lead to an even more competitive market over the next five years.
• Despite the rise of online property portals, business numbers are projected to marginally increase over the next five years as consumers continue to demand expert advice.
• This new environment will require agents to reassess their business models to guarantee a significant role in selling and managing property.
• Tighter margins and increasing competition is also evidenced in the recent Feb-21 McGrath market update (MEA.AX). They saw a 17% churn rate - being total number of properties lost as a percentage of total properties under management at the start of the year.

Opportunities

• Significant changes in consumer preferences, with a significant movement of people towards regional markets, by people both in capital cities, and those returning from overseas due to the COVID-19 pandemic. This is impacting the broader real estate industry.
• The CBA/RAI “Regional Movers Index” analysis shows that the biggest group of capital city dwellers moving to regional areas are targeting high population coastal centres close to capital cities. The Top 5 LGAs by share of capital to regional migration were : The Gold Coast (11%), Sunshine Coast (6%), Greater Geelong (4%), Wollongong (3%) and Newcastle (2%).
• Urban growth boundaries, high-density development planning approval processes, stamp duty costs and housing supply will be major demand determinants for residential real estate services over the next five years.
• House price growth is anticipated to boost the number of housing transfers over the next five years, further supporting industry revenue (sales) growth.
• Government stimulus and incentives expected to continue property growth.

Threats

• Highly regulated industry.
• Funding is becoming harder to obtain for real-estate businesses.
• Projected increases in competition from digital competitors are anticipated to place downward pressure on revenue growth.
• Online property portals, such as realestate.com.au and domain.com.au, are anticipated to become increasingly dominant over the next five years.
• Over the past five years, several real estate advertising websites have caused controversy in the industry by using their increasing market power to raise advertising costs, using their data for free property valuations, and approaching vendors directly to upsell advertisements.
• Projected interest rate rises in the second half of the next 5-year period will likely reduce mortgage affordability over the next five years, reducing the ability of some consumers to establish or increase their property portfolios, and constraining revenue growth. (Statistics: IBIS-Dec2020)

Melbourne apartments – market in focus

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Charter Keck Cramer observed that underlying demand was estimated to decline from 57,000 in FY17 to just 30,000 new dwellings in FY21 due to lower overseas and interstate migration. This is a real-estate services sector that we have seen under significant distress.

Falling levels of overseas immigration and tourism caused demand for traditional and short stay rentals to plummet, at the same time as apartment completions remained robust.

In Melbourne, for example, apartment rents were down 7% in the 12 months to December.

2020 and vacancy more than doubled (from 2.1% to 4.7%). 16,400 apartments were estimated to have been completed in 2021, so the market is expected to remain soft. But from 2022 onwards, completions will decline significantly (3,200 apartments launched in 2020, the lowest in the last decade).