Singapore Property Brokerage Sector - CGS-CIMB Research 2019-06-05: At Your Service

Singapore Property Brokerage Sector - APAC Realty and PropNex | SGinvestors.io APAC REALTY LIMITED (SGX:CLN) PROPNEX LIMITED (SGX:OYY)

Singapore Property Brokerage Sector - At Your Service

  • Property brokerage stocks offer investors asset-light, lower-risk exposure to property sector, with FY19-21F EPS CAGR of 4.4% and double-digit ROE.
  • We see transaction volume improvement from 2020F, from a low base in 2019F, and rising commission rates to bolster earnings recovery from 2020F.
  • Initiate coverage on the property brokerage sector with an Overweight rating and ADD ratings on APAC REALTY LIMITED (SGX:CLN) and PROPNEX LIMITED (SGX:OYY), in this order of preference.

Initiate coverage on the property brokerage sector

  • We initiate coverage on the property brokerage sector with an Overweight rating as we believe this sector offers investors a higher dividend and lower risk proxy for the Singapore property sector given their asset-light business model and fee-based revenue structure.
  • We anticipate property brokerage companies to move into a phase of earnings growth from 2020F, driven by organic revenue expansion coming from a low post-cooling-measure base in 2019F, on the back of commission rate expansion, bumper new private residential launches and our anticipation of transaction volume recovery from upgrader demand amid a stable price trend. Inorganic growth prospects from gaining more agent share through strategic alliances and mergers would likely continue to favour the larger players, in our view, thanks to their established platforms, well-known brands, wider network and reach, as well as ability to offer holistic services.
  • With the property market being well served by a total of c.30,000 agents in Singapore, we believe regional diversification into other countries in the Asia Pacific region and expanding non-brokerage income could be another medium-term growth driver. While technology has often been touted as a disruptor to this industry, our channel checks found that the impact of proptech as a disruptor is limited for now.
  • From a valuation perspective, the share price of property brokerage companies have declined 30-35% from their Jul 2018 peaks, dragged down by the market-wide rout, and close to their all-time lows. See APAC Realty share price; Propnex share price. Re-rating catalysts could come from newsflow on improved property transaction volumes.

Key comparison between APAC Realty and PropNex

APAC Realty PropNex
Number of agents (as at May 2019) 6826 7771
Market share (by no. of agents) 22.5% 25.7%
Capital structure Net debt
(Net debt to equity - 10%)
Net cash
(Net cash per share - 20Scts)
Revenue per agent (FY18) S$66,606 S$63,937
Gross Margin (FY18) 12.5% 9.6%
Regional franchisees 17 (Indonesia, Thailand, Japan, Vietnam, etc) 3 (Indonesia, Malaysia, Vietnam)

Sizeable property market

  • The Singapore property market is a deep and liquid market. According to the Urban Development Authority (URA), in 2018, a total of S$56.4bn worth of properties (excluding en-bloc) changed hands, serviced by a total of c.30,000 property agents. The transaction value in 2018 was 6.7% lower than in 2017 as a result of a weaker 2H18 following the introduction of new property cooling measures. In 1Q19, a further S$10.3bn worth of properties were transacted. The largest part of the market remained the private residential sector where new home and secondary sales accounted for 69% of total 2018 ex-enbloc transaction value while Housing Development Board (HDB) resale market made up a further c.17%.
  • APAC REALTY LIMITED (SGX:CLN) shared that it had an overall 40% market share of transaction value in 2018 while PROPNEX LIMITED (SGX:OYY) had between 34-50% share of transaction volumes in the new sales, resale and HDB resale segments.

Asset-light, lower-risk alternative to the Singapore property market

  • In Singapore, property brokerages charge a percentage of the property's value as transaction fee or commission. As property agents are typically independent contractors and not employees of a brokerage company, the fee/commission is split between the agent and brokerage company. Under this commission/fee based business model, property brokerage companies cater to the entire property market including the private and public residential, commercial and other segments including new launches, resale and leasing activities.
  • Hence, this business is highly correlated to overall property market trends without the accompanying development and unsold inventory risks. In this regard, we see property brokerages as a lower risk proxy for the property market.

Higher sensitivity to changes in market values

  • The growth in revenue of property brokerage companies tracks closely to growth in property market transaction values and activities as well as commission rates charged. Transaction values are, in turn, a function of property prices, product mix (i.e. combination of high-end, mid-market or mass-market properties) and transaction volumes.
  • In our assessment of the drivers to brokerage companies’ revenue, based on the current commission split structure, we find that their EPS are more sensitive to changes in market transaction values rather than changes in market share by value. For example, a 5% increase in overall market transaction values would lift APAC Realty’s EPS by 3% while a 1% pt hike in market share would move its EPS by a smaller 1.8%, based on our analysis. This implies that a recovery in market volumes and prices would have a more uplifting effect on APAC Realty's earnings.

Property market outlook

  • Key assumptions factored into our 2019F and 2020F property market outlook are:
    1. slight 7.4% and 5.6% increases in private new residential sales to 9,000 and 9,500 units in 2019F and 2020F, respectively, assuming 2% and 0% price hikes over the same period
    2. a lower annual private resale transaction volume of 10,000 in 2019F and 2020F, accompanied by zero price growth over the same period
    3. annual 3% and 1% increase in HDB resale volume and price, respectively, in 2019F and 2020F
    4. annual 1% increment in leasing activities in 2019F and 2020F.
  • We believe these assumptions are achievable in view of the bumper number of new launches in the pipeline, replacement demand from en-bloc sellers as well as upgrading demand from a higher number of HDB dwellers meeting their Minimum Occupation Period (MOP).

Residential market

  • According to URA and HDB, the Singapore residential market comprised c.1.4m housing units as at end-2018, of which close to 74% were public housing units or HDB flats, and the remainder were privately constructed apartments, condominiums and landed homes. Home ownership is high, with 91% of resident households owning their homes as at end-2018.
  • The Singapore residential market generated S$48.4bn worth of transactions in 2018, comprising the private residential, private resale and HDB resale segments. The bulk was contributed by the private resale market which made up 56% of total transaction value, followed by private primary transactions (25%) and the remaining 19% from the HDB resale segment.
  • Overall transaction values have been picking up steadily since the low in 2013 but are still 20% below the high recorded in 2012. While the latest round of property cooling measures put in place in Jul 2018 have led to somewhat moderated transaction volumes, according to URA statistics, prices have generally held up over the past nine months. Going forward, we expect property prices to remain largely stable and the volume of transactions to rise slightly (by 5.6%-7.4%) on the back of higher number of launches. The private resale market had a quiet 1Q19, with only S$3.7bn worth of units changing hands vs. the S$7.6bn transacted in 1Q18. Hence, we expect the private resale market to be a drag on overall market performance in 2019F and for total market transaction value to decline slightly y-o-y in 2019F before stabilising in 2020F.

Stable volumes…

  • We expect the priv up 9,000-10,000 units of primary sales from new launches in 2019F and 2020F vs. 8,380 units transacted in 2018. More importantly, whilst volumes have cooled post the property measures in Jul 2018, on a q-o-q basis, since 4Q18-1Q19, volumes have remained relatively stable, indicating continued buying interest, in our view.
  • 1Q19 transactions totalled 1,838 units, flat from the 1,836 units seen in 4Q18. With c.20,000 units from 50 projects scheduled to be marketed over the next 12- 18 months, we believe take-up would continue to be somewhat supply-led as well as coming from a portion of replacement demand from en-bloc sellers. As such, we believe property brokerage companies are well placed to benefit from sustainable volumes.
  • In addition, given the greater number of launches and increased competition for buyers’ wallet share, we expect commission rates to continue ticking up over FY19F and FY20F, thus benefiting both property agents and property agencies.

…amid near-term range-bound prices

  • We expect private home prices to move between 0% and +3% in 2019F, slower than the 7.6% expansion seen in 2018, post the property cooling measures. We think developers should continue to clear their current inventory given that they still have a 4-5 year window until the projects are completed and the Additional Buyer’s Stamp Duty (ABSD) penalty kicks in if they have remaining unsold units. As such, we expect prices to remain relatively stable in the near term.

Private resale residential market

  • The private resale segment forms the most significant part of the residential market; by value, in 2018, with 13,041 units changed hands, making up 55% of total transaction value. Meanwhile, average value per transaction had increased 1.6% in 2018 over a year ago. 1Q19 was a quiet quarter, with only 1,905 units valued at S$3.7bn transacted.
  • Historically, annual resale transaction volumes represent an annual ‘churn rate’ of 1.7%-7.7% of total private housing stock between 2010-2018. Over the past two years, the resale transaction volume ‘churn rate’ ranged 3.5-3.8%, based on URA statistics.
  • We believe that our projection of flat 10,000 transactions annually from 2019F to 2021F is a conservative assumption. Furthermore, we expect this segment of the market to remain active on the back of en-bloc replacement demand as well as relative value proposition given the current sizeable 10-15% pricing discount gap between primary and resale units.
  • In terms of pricing, we expect the average selling price to remain flat over the next three years, i.e. from 2019F to 2021F.

HDB resale market

  • While the initial sale of HDB flats are via built-to-order (BTO) launches, secondary sales of HDB flats are at the owner’s discretion following a 5-year Minimum Occupation Period (MOP). The ownership of HDB resale flats are still restricted to Singaporean citizens and permanent residents.
  • Applications for approvals to resell HDB flats have been on the rise since the trough in 2014. In 2018, there were more than 23,000 HDB resale applications, higher than the 22,000 applications seen in 2017. With more HDB units being built over the past five years, we anticipate resale transactions to continue ticking up, in line with the Singaporeans’ upgrade aspirations.
  • In the meantime, HDB resale prices appear to have stabilised after declining since the mid-2013 peak. This should be supportive of HDB resale transaction values, in our view.

Leasing market

  • The private and HDB leasing markets have been experiencing rising leasing transactions while leasing contract values have remained robust. According to APAC Realty, there were 87,256 leasing contracts signed in the private residential segment and another 46,440 HDB rental contracts receiving approvals in 2018. These represent a 3-year (2015-2018) CAGR of 7.5% and 3.6%, respectively.

Commission rates on expansion trend

  • Based on our calculations, anecdotal evidence from historical revenue and estimated share of transaction value show that implied brokerage commission rates across both the primary sales and resale markets have been rising over the past two years. With the marketplace becoming more competitive due to numerous upcoming private property launches and active strategies to gain buyers’ wallet share, we anticipate commission rates to continue trending up over the next few years. This should tra slate to positive margin expansion for property brokerages in the medium term.
  • In addition to commission rate expansion, we believe the skew towards more primary sales business would have an uplifting impact on the overall gross profit margins of property agencies. Based on the commission split structures outlined in the figures below, a property agency benefits more from commissions earned from primary sales transaction compared to a resale transaction. With an estimated 10,000-11,000 residential units planned for launch in the remainder of this year, we anticipate the increased activity to positively impact agencies’ profitability.

1Q19 margins impacted by lower operating leverage

  • Despite a 26.5% and 27.8% y-o-y drop in APAC Realty’s and PropNex’s 1Q19 revenue respectively, gross profit margins have held relatively steady as commission structures remain unchanged. However, a decline in operating leverage due to lower topline and fixed costs, such as staff costs and rental remain unchanged. This led to pre-tax margins slipping significantly in 1Q19. We think as the first quarter tends to be a seasonally weak quarter, revenue and operating leverage should stabilize and improve in the coming quarters.
  • In addition, although having predominantly similar business models, APAC Realty’s and PropNex’s gross profit margins has varied by 2.3% pts to 6.1% pts between 2015- 1Q19 due to two main reasons –
    • Firstly, APAC Realty has a larger component of higher yielding non-brokerage income. Although non-brokerage income made up 1-2% of APAC Realty’s revenue between 2015-2018, it accounted for a significant 15-19% of gross profit.
    • Secondly, apart from having very little non-brokerage income, the inclusion of a pension scheme which PropNex offers to its Team Leaders, also bumped up cost of services and led to moderated margins.

Holistic service providers with stable non-brokerage income source

  • While they generate the bulk of their revenue (96-99%) from the property agency business, property brokerage companies in Singapore tend to be a one-stop service provider with a slew of non-brokerage services such as training, property valuations, property management, rental, franchise fees and others. This provides a stable recurring addition to their income base.
  • APAC Realty’s non-brokerage revenue consistently formed 2-4% of its revenue between FY14 and FY18 but accounted for 15.7-19% of overall gross profit due to the higher profit margin. We forecast this segment to contribute c.1-2% of revenue over FY19-21F and for the high estimated gross margin of c.17% to be sustained.
  • Meanwhile, 99% of PropNex’s revenue is generated from the brokerage business with a small 1% of topline contributed by training services and property management fees. It established a real estate consultancy arm in 2018 to provide auction and corporate sales services and investment or en-bloc services. The corporate sales and auction services department undertakes transactions across all real estate segments including the industrial and commercial space in addition to residential property.
  • In Feb 2019, PropNex launched the first HDB Auction service as a means to tap into the large number of flats reaching their 5- year Minimum Occupation Period in 2019. The service offers an alternative option to HDB owners to market their flats and assist them in the price discovery process. These consultancy services form part of the brokerage services that PropNex offers to complement its existing services.

Cost-efficient regional expansion strategy

  • With Singapore being well-served by c.30,000 registered agents, we believe a medium-term growth driver for both APAC Realty and PropNex would be to expand its platform to other countries in the region that have less established independent brokerage models.
  • While APAC Realty’s overseas earnings contributions are not meaningful at present, we see scope for expansion in this segment in the medium term. We think earnings contribution from Thailand could pick up from 2H19F, when APAC Realty’s franchise agreement is potentially converted into a direct ownership structure and from Indonesia from FY20F onwards. Based on APAC Realty’s proforma FY17 estimates, we think consolidating the Indonesian operations could result in an annualised 1-2% increase in the group’s bottomline. Vietnam’s and Cambodia’s master franchise agreements would also contribute to APAC Realty’s royalty income. These have not been factored into our current estimates.
  • To recap, APAC Realty’s regional presence has expanded rapidly in several countries post listing in 2017. APAC Realty’s forays abroad have been initially conducted via franchise agreements, followed by separate partnership and cooperation agreements signed with existing franchisees to allow APAC Realty to eventually have direct ownership of these operations. This business model enables APAC Realty to have a cost-efficient learning curve as it expands into new and unfamiliar markets, with the potential to participate in the growth of the brokerage business through direct ownership in the longer term. It has franchise arrangements in Vietnam and Cambodia and plans to directly own the Thailand and Indonesia operations.
  • The Vietnam franchise was established in mid-2017 and currently has more than 1,300 agents, while the Cambodia franchise was started in Feb 2018. In Aug 2018, APAC Realty entered into a joint venture agreement with two Chinese companies to establish a presence in Hainan, China.
  • PropNex aims to strengthen its regional presence in existing markets like Indonesia and Malaysia while developing new business opportunities throughout the rest of Southeast Asia. PropNex has c.1,000 salespeople across 18 offices in Indonesia, c.300 salespeople in Malaysia and c.100 salespeople in Vietnam as at end-FY18. For each of its overseas markets, PropNex has the ambitious goal of being among the top 5 real estate agencies within five years of establishment, according to management. To date, the overseas offices operate under a franchise model rather than direct ownership by PropNex. Royalty fees from the use of the PropNex brand are recognised based on a percentage of franchisees’/licensees’ monthly sales.
  • In 2016, PropNex entered into a master franchise agreement in Indonesia. This was followed by expansion into Malaysia through a 10-year licensing agreement which is renewable for another 10 years subject to the fulfillment of conditions stipulated in the agreement. In Aug 2018, an initiation of a Master Franchise Agreement for Vietnam was struck with an initial term of 10 years and renewable for another 10 years. While PropNex has no presence in the Philippines and Thailand currently, according to management, it is constantly looking to grow its Southeast Asian footprint. Management stated that it aims to penetrate a new market every year.

Inorganic agent growth to further drive topline

  • Another driver to topline growth for property brokerages had been from inorganic sources, through the acquisition of more agents via merger of brokerages or strategic alliances. As a result, the number of brokerages shrank from 1,369 in 2015 to 1,244 as at May 2019 even as the number of agents increased to 30,286. At this juncture, we think property brokerages seeking to gain agent headcount would be via taking share from other brokerages rather than by a significant increase in the overall number of agents, in our view.
  • The consolidation trend tends to favour larger brokerages such as APAC Realty and PropNex. Larger property agencies tend to have the economies of scale required for value-added services, like consultancy, trainings and seminars, for both agents and consumers. Greater size helps to spread sunk costs over a larger pool of agents. This also helps to improve the reach of the agency and make it more attractive as a project marketing partner for developers launching new projects.
  • Some of the notable transactions include:
    • In 2017, PropNex entered into a business takeover agreement with Dennis Wee Realty (DWR) to transfer 845 DWR agents to PropNex. This move allowed PropNex to overtake APAC Realty as the largest agency in Singapore based on agent numbers. The aggregate purchase consideration was up to S$5m.
    • Two months after the merger between PropNex and DWR was announced, OrangeTee and Edmund Tie & Co unveiled a joint venture, OrangeTee & Tie. This combined OrangeTee’s 2,938 agents and Edmund Tie & Co’s 1,122 agents to form the third largest property agency in Singapore. The joint venture aimed to create economies of scale to enhance productivity and cost effectiveness and leverage technology to maximise efficiency and effectiveness.
    • In 2018, APAC Realty announced a collaboration with CBRE Realty Associates where 280-290 CBRE agents focusing on residential transactions will move over to the ERA Realty network.
    • In 2019, PropNex entered into a strategic collaboration with Global Alliance Property Pte Ltd (GAP), which operates under the Century 21 franchise, for the transfer of GAP’s salespeople to PropNex. We believe this collaboration would further strengthen PropNex’s position as Singapore’s largest listed real estate agency.

Channel checks on factors for agent retention

  • As the operating landscape for larger players becomes more competitive, we think agent retention, particularly for high performers, would be another factor that drives financial performance. To assess agent stickiness, we reached out to multiple property agents from different property agencies for their thoughts on the real estate agency sector.
  • The key areas we sought opinions on were:
    • Factors they considered when choosing an agency.
      • The majority of agents mentioned branding, exposure and support as the key reasons for selecting an agency. Branding helps to attract clients due to the established policies and procedures that tend to come along with larger and more established agencies. Larger agencies also tend to be chosen by developers to market new launches and this improves the exposure that agents get. Some agents felt that having exposure to both new launch and resale units would allow them to provide a more holistic service to their clients.
      • Many also suggested that the training sessions provided played a part in swaying their decision to join their current agency. This was especially evident in newer agents who see the value in attending training to help them find a competitive edge. Apart from formal training sessions, informal on-the-job training and guidance within teams were also a consideration. While there are benefits to joining a larger team, one agent chose a smaller team due to the more personal support and development provided.
    • Key problem with the job.
      • Almost all agents we surveyed cited the two key issues of income and time management. The commission-based nature of the role results in inconsistent income for agents. This makes it difficult for agents to do proper financial planning and also results in a higher attrition rate when the property cycle turns downwards and competition between agents becomes more intense.
      • As the majority of their clients work office hours, agents are only able to contact them in the evening or on weekends. Some also cited the high service levels required as clients are able to contact them at odd hours of the day.
    • How their agency can help improve the job.
      • Most agents cited better training programmes would help them cope with the job. This should not only be limited to property-specific topics but also personal skills like presentations, time management and budgeting. The newer agents we questioned also suggested having more support for fresh agents starting up to make up for their lack of experience. For example, being partnered with experienced agents to learn the ropes in real life scenarios or even providing leads for them to follow up on.
      • As property information is readily available online, some agents find that consumers are increasingly becoming more educated. This makes it more challenging for agents to provide value-added services. One interesting suggestion was to have stronger research teams to provide analysis on market data and trends or centralised databases for them to search for information.

Proprietary study show proptech is not a disruptor

  • Much has been said about proptech disruption within the real estate market and the potential depth and width of its impact on the market place. According to CBRE, in proptech, there are three forms of technologies that are pertinent and pervasive in the property industry. They are blockchain, augmented reality (AR) and artificial intelligence (AI).
  • In tandem with the increasing presence of proptech in the property industry, the number of online platforms offering property brokerage services has been on the rise. We have conducted ground checks on the impact of proptech entities on the property brokerage industry in Singapore.
  • Proptech players have thus far aimed to solve two key ‘pain points’ in real estate transactions, matching buyers & sellers and reducing transaction costs. A search on Singaporean proptech players shows that the majority of them are online property listing portals that help match buyers and sellers. For matches on such portals, transactions are still being carried out by agents from traditional real estate brokerages like APAC Realty and PropNex. Proptech players that help to reduce transaction cost allow buyers and sellers to undertake transactions themselves without using an agent or with basic transaction processing services.

Channel checks on factors for agent retention

  • As the operating landscape for larger players becomes more competitive, we think agent retention, particularly for high performers, would be another factor that drives financial performance. To assess agent stickiness, we reached out to multiple property agents from different property agencies for their thoughts on the real estate agency sector.
  • Meanwhile, APAC Realty has restructured its franchise agreement in Thailand and entered into a cooperation agreement to directly hold the ERA master franchise rights for Thailand. This facilitates cross-selling opportunities for Thailand properties in Singapore and vice versa. ERA Thailand has been operational since Jun 1993 and has close to 400 agents that record an average of c.1,000 transactions per year.
  • We think that the negative impact of proptech players will be limited in the near term as the majority are listing portals that help match buyers & sellers and do not directly act as an intermediary in the transaction. Instead, our ground checks revealed that property agents benefit from the use of online property portals via increased outreach and lower costs.
  • A basic advertisement in The Straits Times Classifieds section with three lines of text and no pictures on a weekday would cost an agent S$38.52 per day per listing based on a check done on 13 May 2019 for an advertisement on 13 June 2019. This costs substantially more compared to the S$880 annually for 10 concurrent listings with no restrictions on text and pictures for PropertyGuru’s most basic subscription package. Comparing the two options, 23 single-day listings on the Classifieds would completely cover the cost of the annual subscription.
  • Online property portals also tend to contain significantly more information than 3-4 line newspaper ads. This improves the efficiency of buyers searching for homes as filters and maps can help buyers narrow down their search. Our ground checks with agents and APAC Realty and PropNex also suggest that online property portals help to improve the conversion rate from property viewings as buyers are better informed before viewings.
  • Apart from the actual listings, many proptech players also provide value-added functions like mortgage calculators, basic home valuation and sophisticated search capabilities. Such functions increase the value proposition of these online marketplaces as platforms since consumers do not have to navigate to a different site to find such information.
  • While online property portals have gained in popularity, DIY portals have caught on to a lesser extent due to the complexity of property transactions. The vast majority of home buyers and sellers do not undertake property transactions frequently enough to fully understand the process of executing the full transaction cycle. Even when either party has sufficient knowledge, they might not want the hassle that comes with property transactions. DIY portals like Ohmyhome and DirectHome have acknowledged this and have added fee-based agent and documentation services for buyers and sellers.
  • For sellers, property agents provide multiple services like price discovery, marketing the property, managing buyer enquiries, scheduling viewings and negotiating and closing a sale. For buyers, property agents help to identify suitable properties based on buyers’ requirements like location and size as well as help during the negotiation process.

Valuation and recommendation

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://research.itradecimb.com/ 2019-06-05
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