After three decades of exceptional market growth, Australia’s property boom is showing signs of slowing. Residential agencies are facing declining sales commissions and property management fees, and while commercial agencies continue to benefit from limited stock they face intense competition. At the same time, new tech-enabled business models are emerging – driven by customer demands for more transparency and better value.
There has never been a better time to re-think the buyer, vendor, landlord and tenant experience.
Performing through market uncertainty
“Our industry life cycle is mature, and I’m seeing a level of cautiousness amongst agency owners,” comments John Knight of businessDEPOT. While most property experts agree both residential and commercial market prices are now at their peak or in decline, continued strong population growth, low interest rates and a positive economic outlook indicate a significant nationwide fall is unlikely.1
However, sales commissions and property management fees are under pressure across the nation, with residential commissions down to as little as 1.5 per cent, while residential property management fees are also declining to 5 per cent.2
We still see high performing residential real estate agencies achieving high profits, according to Macquarie’s latest benchmarking.3 They’re more efficient – managing more properties per manager while keeping salaries under control.
For commercial agencies, property management fees are an increasingly important source of reliable income, as well as new sales and leasing opportunities. More than half their new tenants and renewals are sourced from the rent roll.4
So what do high performing agencies have in common? Efficiency gained through new technology, streamlining processes and client response time. “We’re seeing real estate’s first digital assistant, RITA, automate common tasks for sales teams – this allows you to handle more business with the same cost base,” comments Knight.
However, continuing to perform in these market conditions will take more than reducing your costs or boosting back office efficiency. It demands a re-think of the client experience – whether that’s vendor, buyer, landlord or tenant.
Impact of outside forces
New entrants to the market are moving quickly to remove friction from the process of buying, selling or renting – whether that’s simpler, faster transactions, or focusing property management more on building asset value and positive tenant relationships than maintenance and inspections.
And incumbent real estate agencies are taking note. 29 per cent of residential real estate agents expect flat fee agencies to impact their business in the next three years, while 14 per cent worry about Airbnb and 18 per cent about direct sale by owner services.5 Meanwhile, 31 per cent of commercial agencies believe disruptive competitors are one of the biggest threats to their businesses in the future.6
If, for example, Airbnb moved into long-term rentals, it could certainly impact rent roll valuations –– just as Uber has affected the value of traditional taxi plates. But other new entrants are already impacting specific revenue lines across the market.
One example is Spacely, which taps into the needs of new start-ups and gig economy workers to provide short-term and shared workspaces around Australia. uTenant matches industrial tenants and landlords online, while fixed-fee high-tech residential agency Purple Bricks claims to have sold over $1.1 billion in Australian real estate.7
Despite the rising profile of these new players and platforms, which promise improved client experiences that are faster and more cost-effective, few agencies are investing in transformation.
While 41 per cent of commercial agencies believe technological advancement will be one of the biggest impacts on their business, the majority of their IT spend is on cloud software or web upgrades – rather than platforms for significant change like process automation or data analytics.8
According to Knight, successful agents need to know their data incredibly well. “Invest in data mining capabilities, and use it to generate new sales leads. You also need to know your own numbers inside out, from profitability to staff performance, to make smarter decisions and take opportunities.”
He also sees this trend impacting business valuations, as rent rolls get broken down into smaller transactions subject to demand and supply. “These days, in certain markets, we are seeing it’s not as easy to sell a rent roll as it used to be, and given these are the major component of value there may be long term consequences.”
The changing face of property services
With these changing market dynamics, we expect agency revenue composition could look significantly different with the next five to seven years. Given that moving process is potentially the biggest pain point for every client, a broader service offering could include solving insurance, utilities, finance and the move itself. We also see significant potential in removing friction from ongoing maintenance – for tenants and landlords.
Knight says he’s already seeing agency models where ‘clipping the ticket’ on an added service is a growing revenue stream. “For example, maintenance services can help you increase the lifetime value of a customer. Or white-labelling a local pest control service to add value to property management– there’s no incremental cost to your business when you partner, but it is incredibly important to first check that both organisations have aligned values and goals.”
More than half of commercial agencies also plan to introduce new services in the next 12 months, such as commercial negotiations or market commentary and analysis. But looking at broader workplace trends, there may be other opportunities to diversify.
For example, the ‘WeWork’ effect means a greater focus on a choice of workplace settings, as well as wellness facilities such as meditation rooms. Jones Lang Lasalle’s global research reveals the importance of ‘human experiences’ at work, with workplace effectiveness substantially higher among employees who work in offices with innovative amenities, especially hobby space, childcare facilities and creative areas.9
These are services commercial agencies can facilitate (and monetise) as property managers. Across commercial and residential, it’s no longer simply a case of location, location, location. Technology enablement, environmental design and energy efficiency are increasingly important criteria – and buyers and tenants seek guidance on these aspects
The opportunity for property services
Source: Based on IBIS World reports
Invest in tech enablement
Just as we’ve seen in every other sector, new technology is already transforming the client experience while also reducing costs. So if you don’t already have a transformation strategy, you could quickly fall behind.
Start by thinking how you would disrupt your own business. Is there a gap a competitor could fill with a faster, cheaper or better experience? What manual processes could be automated (such as property valuations) to free more time for positive relationship building?
Then decide whether your current platform can deliver that. If it can’t, seek a proptech partner, invest in an upgrade – or outsource.
Look beyond property for inspiration
The next great idea is unlikely to come from within real estate. Start by looking at new experiences and technologies in adjacent sectors – such as legal services, mortgage broking or insurance. How are they building trust in their service value? How are they using artificial intelligence to guide complex decisions, or connected devices to obtain data? Could the same approach solve client problems, or improve outcomes?
Re-think your revenue model
Adding more business lines can create a more defendable business model – as long as you maintain your core focus on what you do exceptionally well.
Consider adding adjacent services to solve broader client problems. For example, if your strength is in property management, look for ways to proactively help landlords build more value into their assets – rather than waiting for an annual rent review – and save time on approving ad hoc repairs.
Brand trust starts with your people
Customers rely on word of mouth more than ever - and it’s digital. Holly explains the growing importance of belief-driven buyers, and why you need to understand what your community really cares about. Watch the video to learn why your employees are crucial to building trust in your brand.
A strategy for growth
Businesses are operating in a completely new landscape, dealing with uncertainty, volatility and an accelerated momentum of technological change. And that may mean re-thinking the way you define your strategy.
In 2000, McKinsey defined three horizons of growth based on the maturity and relative risk of different types of projects.^ We believe this is a useful way to describe the three growth initiatives that will need to happen concurrently in order to sustain business growth in this changing business landscape.
Re-frame your perspective
This is a time of opportunity, not threat. We believe business owners are in a strong position to thrive.
To grow sustainably and profitably, it’s important to acknowledge that traditional rules no longer apply. Business models have been democratised and boundaries have dissolved. Customer expectations are driving the pace of change.
Consider your innovation model and mindset, the broader business ecosystem you can tap into, and the capabilities you need to put in place.
We trust you found this report informative and insightful, and we’d be happy to continue the conversation with you.