ANALYSIS -- Benchmarking success

MACQUARIE RELATIONSHIP BANKING’S 2012 Residential Real Estate Benchmarking Report – the third to be produced, with earlier releases in 2007 and 2009 – delivers an in-depth and comprehensive appraisal of the health of real estate agencies nationally.

Released in May, the report was based on responses from 416 agencies nationwide, and provides principals with a useful tool to gauge their own performance. Moreover, as Macquarie Relationship Banking indicates, the results can serve as a guide to help them set “business strategy, planning and direction (macro), and support and drive KPI setting and job role structuring (micro)”.

The following is a snapshot of some of the report’s key findings.

THE PM JUGGERNAUT
Few principals would dispute the significance of the role property management plays in generating profit and steady cash flow for an agency.

The report found the total income generated for real estate agencies from property management jumped from 29 per cent in 2007 to 42 per cent in the last 12 months.

The report also forecasts, however, that property management’s share will rise by just one per cent in the future.

Graeme Baxter, managing director at ACTON in Western Australia, agreed that property management growth will slow down.

“I think we’ll see it plateau off, yes. As the sales market recovers, that will come back somewhat,” he told Real Estate Business. “Traditionally, property management income is somewhere between 20 and 30 per cent. To find it at 42 per cent would be an anomaly based on the slower sales market.”

But even with a recovering sales market, agents will continue to grow their rent rolls.

“The benefit that most people see is the cash flow, because it is such a regular cash flow,” Mr Baxter continued, “and the asset value of your business, which is in direct correlation with your rent roll.

“I don’t think it will slow down; it’s just the sales market will recover and, as a percentage of overall income, [agencies] will rely more on sales,” he said.

Shaun Bassett, head of the residential real estate division at Macquarie Relationship Banking, told Real Estate Business that principals will continue to rely on property management in the coming years.

“Thirty per cent of agents who responded to our survey told us that they don’t anticipate any growth in sales in their regions over the coming year,”

Mr Bassett said. “We anticipate a continued focus on property management which [is reflected] in the survey in terms of a more balanced focus between sales and property management from an agency.”

The report also revealed the average rent roll has grown from 375 in 2009 to 436 in 2012 in terms of properties under management (PUM), with agencies across all states having demonstrated positive growth.

Leah Calnan, director at Metro Property Management in Victoria, said even though many principals traditionally lean toward sales, she believes there is “no end in sight” to property management’s growth.

“I don’t believe [property management’s growth] will slow down, mainly because of the diversity of the national market,” she told Real Estate Business.

“Perth is booming at the moment, and the Northern Territory is about to take off. Rental vacancy rates are quite low. Victoria might be struggling but I don’t think it’s [the case] across the country,” she said.

RENT ROLL AS SALES GENERATOR
The power of property management doesn’t end there, the report found, with a rent roll generating almost one in five sales for an agency.

While the national average for sales taken from the rent roll sat at 16 per cent, the report revealed that Queensland based agencies are the most effective at converting sales from their rent rolls (19 per cent). This was followed by small agencies (17 per cent); WA agencies (16 per cent); and NSW and medium-sized agencies (15 per cent).

Large agencies (13 per cent) come in just ahead of agencies in South Australia and Victoria (12 per cent).

“More than half (56 per cent) of agencies rely on less than 10 per cent of their total sales numbers coming from their rent roll, up from 48 per cent of agencies in 2009,” the report said.

“Only four per cent of agencies reported more than 60 per cent of their total sales are sourced from rent rolls. Queensland and small agencies feature in this regard as seven per cent of agencies report that revenue from the sale of properties on their rent roll accounted for more than 60 per cent of their total sales revenue.”

Gerri Keays, corporate property management executive at Ray White, said it was critical that agencies try to keep rent roll properties on their books, even when they were being sold.

“What we try and do is sell the property back to the investors we’ve got,” she said.

“During week zero, what we try and do is hold a preview open for inspection only for our landlords. We encourage principals to send it out as a hard copy invitation because it has a greater impact. And we do just the one preview inspection before it opens up to the public.

“It also makes landlords feel special, even if they can’t go. If you’ve got 250 to 300 landlords and one per cent show up to the open, that’s still three people.

“And most investors are interested in having the property tenanted. They don’t want vacant properties, they want a property with a good tenant in it,” Ms Keays said.

“It works really well and some offices are getting 60 per cent return on the properties that are coming back to the rent roll,” she continued.

“If it’s already rented, there’s faster settlement and the buyer has an income the second the property settles.”

PROFIT LEVELS
The report also identified a strong link between robust property management divisions and overall profit levels.

More than one fifth (22 per cent) of all agencies did not make a profit in the financial year, although 58 per cent achieved a return above 10 per cent, and one in ten of total agencies achieved a return of more than 30 per cent.

Revenue from the rent roll now accounts for 42 per cent of total revenue (up from 36 per cent in 2009).

“Property management revenue has increased from previous surveys, and the outlook from agencies indicates this trend will continue in the future,” the report said.

“Results have also shown a strong correlation between profitability in agencies and properties under management, with larger portfolios seen as profitability increases.”

Commission levels have risen in the past two years for both real estate sales and property management, yet agents remain under intense pressure to cut their rates.

The report found that average national commissions for sales rose 0.1 per cent from 2009 to 2.6 per cent, while property management commissions rose by half a per cent to 7.6 per cent.

The results surprised Ric Mingramm, general manager and director of sales at PRDnationwide Kippa-Ring & Kallangur, in Brisbane.

“If you look at the local area, we’ve got so many discount commission guys,” he told Real Estate Business.

“We got a flyer yesterday offering [commission of] 1.25 per cent, plus free advertisements – as the market tightens, people are dropping their pants left, right and centre,” Mr Mingramm said.

Mr Bassett said agents who offer heavily discounted commissions won’t survive.

“When we entered hard times, there were a lot of people heavily discounting,” he said. “What we’ve seen is those who charge a commission rate considerably lower than the average simply can’t survive.

“Those who protect what they charge consider it a reflection of the service you provide,” said Mr Bassett.

Although he admits to losing quite a few listings, Mr Mingramm’s approach towards commissions is to wait until you have a contract before even discussing rates with the client.

“When you’ve got a contract, and the vendor has decided to dig in their heels and won’t move for five or six hundred bucks and insists on a commission cut, then you’re better off to cut your commission by the five hundred bucks and get something.

“But if you discount your commission upfront, and that situation still happens, then you might have to undercut yourself twice.

“Most of the time, if you get a really good sale, they won’t even ask, but if they want more, then that’s when you might have to negotiate.”

Lee Tamblin, from Perth-based 1st Place Realty, ran his business for two and a half years as a ‘one per cent commission’ agent, but recently increased his rate to 1.5 per cent. However, he told Real Estate Business both models are sustainable due to the quantity of properties he sells.

“We found that we lost business because we were too cheap, and people began questioning what we do and how we do it,” he said.

“Some people won’t sell anywhere near the amount of properties I sell. This year I’d be close to a hundred properties, and that’s me on my own.

That’s the reason I can do it for one per cent – plus I don’t have an office, I work from home.

“I could stay at one per cent for the next two to three years or so, but if I want to grow and get staff, I’ve got to increase my price slightly.”