The residential real estate market has always been a hotbed for investments by individuals hoping to “trade up” in life, by upgrading from an HDB flat to a swanky new condominium. Property agencies facilitate such transactions by acting as agents for both buyers and sellers (for resale flats) and for developers (for newly launched flats). Commissions are generated based on the number of transactions as well as the size of each transaction.
There are two listed property agencies in Singapore – PropNex Limited (SGX: OYY) as well as APAC Realty Ltd (SGX: CLN). In the last year, each has seen its revenue and net profit fall off a cliff as the government introduced yet another round of property cooling measures. The measures were aimed at curbing property price rises, which were in excess of economic fundamentals. By and large, the measures seem to have worked as prices have moderated and the previous “en-bloc fever” (where older estates were being sold off en bloc to developers to replenish their land banks) has simmered down.
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An assessment of competitiveness – the gross margin
As an investor, I was curious to assess if the two largest agencies managed to maintain their competitive edge despite the fall in transaction volumes. The best way to assess this, in my opinion, is to look at each company’s gross profit margin. The gross margin represents the gross commissions received by the company (from both buyers and sellers), minus the commissions paid out to property agents. If the gross margin falls, it may be an indication that the property agency was starting to pay a higher percentage of commissions to their agents in order to push for higher sales volumes.
No conclusive gross margin erosion
Source: Compilation from both companies’ quarterly reports
I looked at the quarterly gross margins for both companies over a period of eight consecutive quarters, and the results are tabulated in the table above. There has been no noticeable pattern or trend indicating a deterioration in gross margins, as these seem to bounce around depending on which quarter it is. From the above table, it seems that both agencies are not sacrificing any gross margins to push agents to more aggressively capture sales. My guess is that these agents might be incentivised in other ways.
APAC Realty has consistently higher gross margins
One finding which stood out in the above is how APAC Realty has always had consistently higher gross margins as compared to PropNex. The average gross margin over eight quarters was 12% for APAC, while it was only 9.7% for PropNex. This probably implies that PropNex pays its agents a higher proportion of commission as compared to APAC Realty. It could also be that APAC Realty is able to attract agents to join based on its geographical reach, track record and reputation; rather than its commission structure.
Investors need to keep a watchful eye
It has been almost a year since the property cooling measures were implemented, but the agencies’ gross margins still seem to be holding up. Investors need to continue to be vigilant and monitor their gross margins over the next few quarters. Transaction volumes have been steadily falling over the last 12 months, and there may still be a tipping point where the agencies may raise the commission levels for agents to spur them to push for more sales. When that happens, investors may witness gross margin contraction occurring.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.