Oct. 31, 2012, 9:58 a.m. EDT
How to invest in the Australian (property) dream Commentary: Value in Australia’s online real-estate stocks
By Ben Weiss
TEL AVIV (MarketWatch) — Lost amid the furor of the U.S. elections and quarterly earnings, a report last week showcased one country as having the world’s highest median wealth, plentiful land, sparse population, substantial natural resources and a high quality of life.
We are talking, of course, about Australia.
How do you sell a haunted house? How do you sell a house that's haunted or in which someone has died? Ghost clearer and Prudential real estate agent Cindi Hagley joins Al Lewis of Dow Jones Newswires The News Hub to discuss how it's done. Photo: AP.
Central to the country’s wealth creation has been its active and resilient property sector, which also sports one of the highest rates of individual property ownership in the world.
No need to call the bank or your agent. The easiest way to tap into this wealth is through an investment in Australia’s online real-estate companies, which are growing at a healthy clip and trading at half the values of their cashed-up and hungry overseas competitors.
Online real estate stocks have been big stock-market winners in the U.S.
Against the hype and hysteria of the recent disappointing Internet IPOs including Facebook (NASDAQ:FB) and Zynga, (NASDAQ:ZNGA) are some quiet winners in the online world, notably Zillow Inc., (NASDAQ:Z) which raised $69 million in July 2011 and is trading nearly double its listing price, and a smaller rival, Trulia Inc., (NYSE:TRLA) which raised $102 million and is up 30% since September.
Like competitors which include HomeAway (NASDAQ:AWAY) and Move Inc., (NASDAQ:MOVE) Zillow and Trulia operate Internet marketplaces connecting home shoppers with real-estate information and local agents.
Revenue comes from a mix of subscription fees from real-estate agents and display advertising — a $23.7-billion-a year-industry operated by the nearly one million agents active nationwide. In the U.S., Zillow is the market leader with 35 million unique users (vs. Trulia with 23 million) and owns the most downloaded real-estate mobile application.
U.S. investors have been quick to catch on to the attractive metrics of these online companies, and valuations for the U.S. peer group are now at frothy levels.
Down Under, however, it is another story, with an even more vibrant real-estate industry and valuations perhaps half those of the overseas peer group.
Great Australian Dream It is the Great Australian Dream for every Australian to own a house with a white picket fence. This is far from a cliché — Australia has one of the highest rates of property ownership in the world, with some 70% of households owning their own homes.
Australia is widely regarded for its mining riches, But not many people may realize that it’s Australia’s property sector that counts for the biggest single share (8%) of its gross domestic product. And with a strong and growing economy supported by positive net migration, Australia’s property sector will surely continue to stimulate investor interest.
Against this strong macro backdrop, Australia is also seeing rapid growth in its $3-billion-a-year digital-advertising industry, with online classifieds, in particular real-estate listings, growing at a healthy 15% clip over the past five years.
Leaders in the online-real-estate space include REA Group, (ASX:AU:REA) which through its realestate.com.au portal is the dominant player online with 7.3 million unique users. (News Ltd. holds 60.7% of REA Group. News Ltd., in turn, is a subsidiary of News Corp., (NASDAQ:NWSA) (NASDAQ:NWS) which is the parent of The Wall Street Journal, Dow Jones Newswires and MarketWatch.)
REA is followed by Fairfax Media’s (ASX:AU:FXJ) domain.com.au with 3.6 million.
Onthehouse, (ASX:AU:OTH) a smaller competitor, focuses on property-valuation data, similar to the model of Zillow and the UK’s No. 2 site, Zoopla.
Across the Tasman Sea in “God’s Own Country,” Trade Me Group (NZE:NZ:TME) (ASX:AU:TME) is another interesting company to keep an eye on. Since it was established in 1999, it has managed to fend off eBay (NASDAQ:EBAY) in the local market to become the top website for all types of classifieds in New Zealand. Today it counts nearly half New Zealand’s 4.4 million population as members.
Looking out to next year’s forecasts, the valuation ratios of Australian companies are 50% cheaper than their overseas peers.
Also noteworthy is that these Internet companies pay dividends, which is often a sign of confidence and stability in a company’s business model.
But as always, a note of caution: There’s been talk in Australia that an agency-led consortium might create its own portal, which could pose a big competitive threat to incumbents. See: TradeMe CEO warns of emerging competition.
Valuations of online-real-estate-companies, U.S./U.K. vs. Australia/NZ
| Name | Ticker | Market Value (US$ millions) | p/e | price/ebitda | price/sales | Dividend yield | | HomeAway | AWAY | $2,057 | 53 | 38 | 7 | 0% | | Move | MOVE | $323 | 33 | 16 | 1 | 0% | | Rightmove | UK:RMV | $2,696 | 27 | 23 | 15 | 1% | | Trulia | TRLA | $588 | 743 | 60 | 11 | 0% | | Zillow | Z | $1,237 | 120 | 96 | 13 | 0% | | Median Average | | | 22 | 17 | 8 | | | REA Group | AU:REA | $2,343 | 22 | 17 | 8 | 2% | | Trade Me | NZ:TME | $1,443 | 23 | 17 | 13 | 1% | | Onthehouse | AU:OTH | $45 | 16 | 5 | 2 | 1% | | Median Average | | | 22 | 17 | 8 | | Sources: Reuters and MarketWatch
How long until U.S. companies start laying foundations in Australia?
Online real estate companies have recently shown a growing propensity to invest outside their home countries. For example, HomeAway has bought online sites in the UK, France, Germany and Brazil while REA Group has a strong presence in international markets such as Italy, Luxembourg and Hong Kong, through its squarefoot.com.hk site.
And there is a healthy list of potential acquirers, too.
Fresh from recent capital-raisings, both Zillow and Trulia are sitting on strong net cash positions and the balance sheets of the four listed U.S. players boast a total of more than $500 million of cash on hand.
Other possible acquirers might include Google (NASDAQ:GOOG) and eBay.
A Google acquisition of an online real estate company would dovetail nicely with its Google Maps application, enabling people to easily search properties for sale and for rent.
As for eBay, its $6 billion in cash is enough to buy Trade Me Group four times over and take a commanding position in New Zealand. (It is worth noting that Trade Me’s 51% investor, Fairfax Media, is facing challenges and could be a seller.)
So investors should keep an active eye on this space for any “For Sale” signs.
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