Investment Merits

• Exceptional market share

PropNex and ERA comprise c.48% of the property agents in Singapore (Figure 1). In 2018, these two brokerages made up for 93% / 77% / 83% of HDB resale / primary residential / secondary residential transactions (by no. of units) (Figure 2). Industry consolidation in the past has seen PropNex and ERA gain market share over the years, from 13% and 15% of total property agents in Singapore in 2012 to 26% and 23% in 2019, respectively. The dominance of these two market players within the real estate brokerage market in Singapore allowed them to capture a substantial amount of transactions, be it in a buyers’ market or sellers’ market.

• High unleveraged return on capital

Both companies clocked in high double-digit ROEs over the years – PropNex 31% and APAC Realty 17%, for FY2018 – with little to no leverage (the debt presently held under APAC Realty relates to a mortgage over its single investment property). The brokerage business is asset-light, with most of the salesforce being paid on a variable basis, allowing both companies to easily maintain or grow their high ROE.

• Resilient even in industry downturns

Both PropNex and APAC Realty were able to match or beat the movements of the property market each time, with their revenue YoY change overlapping that of the private residential transactions YoY change (Figure 20). In 2018 for example, PropNex and APAC Realty recorded a +6% and +30% increase in revenue, respectively, in spite of the -8% decline in private residential transactions. On the flip side, in 2017, PropNex and APAC Realty recorded a +39% and +35% increase in revenue, respectively, outstripping the +21% growth in private residential transactions.

Outlook

The real estate agencies’ model is highly scalable and resilient, especially with both APAC Realty and PropNex capturing an average c.85% of total market transactions. Aside from gaining market share and being a proxy to the Singapore residential market when volumes pick up, a key upside would be the pivoting towards overseas markets – by eventually owning and consolidating said operations, thus also diversifying the earnings base out of Singapore.

Investment Actions

Initiate on the Real Estate Agencies sector:

1. BUY on APAC Realty Limited (TP: S$0.65)
2. BUY on PropNex Limited (TP: S$0.63)

Real estate agencies landscape in Singapore

The real estate agency industry in Singapore is dominated by a handful of players (c.72% market share of agents belonging to just four players – see Figure 1) with the remaining market share spread over a thousand agencies.

The industry has gone through multiple consolidation exercises in the past (Figure 22), as a result of heightened compliance requirements and competition. This is also driven by the need to consolidate the smaller brokerages, as the natural attrition rate eats into the agent count of these brokerages – particularly so for agents that are not within the top few agencies.

PropNex Realty (PropNex) and APAC Realty (operating under the ERA brand), the only two listed real estate agencies in Singapore, have consistently held the top two positions in terms of market share of agents and currently hold close to half of the entire market share of property agents in Singapore. The bulk of these agencies’ earnings are generated via brokerage income, which is a function of transaction volume and prices, market share and commission rates. Other income is earned from – among other items – royalties by sub-franchisees, property valuation and management, training and auction.

Figure 1: PropNex and ERA Realty comprise close to half of the entire market share of property agents in Singapore

Source: CEA, PSR

Figure 2: Agency count among the biggest real estate agencies in Singapore. Currently, only PropNex and APAC Realty (operating under the ERA brand) are listed

Source: CEA, PSR

Figure 3: Correspondingly, PropNex and ERA Realty both have 80-90% share of transactions across the private residential (primary and secondary) and HDB resale markets

Source: APAC Realty, PropNex, PSR

Commission structure for private residential sales (primary sales and resale)

Key difference between primary sale and resale is that the agency would get an additional fixed percentage override (a fixed 0.5% cut from the gross broker commission) – called the project marketing services. The gross broker commission rate is a negotiated rate between Seller and Agencies – up to 5% for primary sales and typically 1-2% for secondary sales (figures 26-29, 34).

Figure 4: Example of a primary sale (private residential)

Source: PSR

Figure 5: Example of a resale (private residential)

Figure 8: General seasonality effect observed for the resale and leasing segments, compared to the other segments. Given the time lag between the commencement of transactions and eventual revenue recognition, the lower rental and resale income in the first half of the year could be attributed to typically lower transaction volumes at year-end as well as the Chinese New Year.

Source: APAC Realty, PSR

Figure 9: Sensitivity analysis between the commission rates and market share on revenue. For primary sales transactions, the margin may seem compressed as the project marketing fees are a fixed cut regardless of the level of commission rates paid out by the developer to the agency.

Source: PSR

Key risks

• Losing agent count to other agencies

Risk of losing market share of number of agents to other agencies. While the number of agents do not directly correlate to the market share of transactions, the loss of key performing agents can result in a more-than-proportionate shift in market share of transactions.

In addition, the consolidation of agencies do not necessarily result in a sustained increased agent count, as there could be fallout due to a clash of company culture, among other things.

• Potential technological disruption of business

Risk from companies offering online platforms or solutions that ultimately reduce the need for an agent and that would render the brokerage business non-competitive.

While we believe a wholesale displacement of real estate agents by technology platforms is unlikely in the near-term, there is a risk of certain market share migrating to these online platforms.

What does it take to be a property agent?

Requirements to be a property agent in Singapore:

1. at least 21 years of age
2. is not registered as a salesperson with another estate agent
3. does not hold a licence as any other estate agent
4. has a minimum of four GCE “O” level passes (or obtained an equivalent or higher qualification as determined by the CEA)
5. passed the Real Estate Salespersons (RES) Examination

Outlook for Singapore property market

Figure 10: Major property events through the decades

Source: CEIC, PSR

Demand – muted in the near term

• Pool of buyers have shrunk to first-home buyers and en-bloc sellers.
• However, potential demand froj upgraders as the number of flats hitting the minimum occupation period (POD) in 2019 is double than that in 2018.

Supply – possible adjustment in upcoming supply

• Avg. annual demand of 9.4k units < pending launch of c.18k units (excl. ECs) of ~60 launches in 2019.
• En-bloc market has cooled; reserve prices being cut.
• GLS tenders announced for 1H2019 lowest level since 1H2007 portending a possible halt of confirmed GLS sites.

Figure 11: Uncompleted primary transactions held up better than that of the secondary market, both QoQ and YoY

Source: CEIC, PSR

Figure 12: Prices took a dip QoQ in 1Q19, while rents held steady

Source: CEIC, PSR

Figure 13: Take-up rate of uncompleted new launches declined to 0.6x in 1Q19 (2018 average: 1.1x)

Source: CEIC, PSR

Figure 14: Household balance sheet has been healthier over the years

Source: Singstat, PSR

Figure 15: Vacancy rate had been declining since late 2017

Source: CEIC, PSR

Figure 16: Excluding one quarter (3Q16), 1Q19 would have been the 22^nd consecutive YoY dip in the HDB resale price index

Source: CEIC, PSR

Figure 17: Anticipated line-up of 69 projects (>25k units) in 2019. Below are some of the new launches and top-selling launched developments in 1Q19

Source: CEIC, PSR

Figure 18: Developers have thrown in a “sweetener” in the form of higher commissions to agents post-cooling measures, which also underscores the significance of the agencies’ roles during these new property launches

Source: PSR

Figure 19: How the two listed Singapore property agencies stack against its global and regional listed peers. PropNex Ltd has the highest ROE and P/B ratio amongst all counters

INVESTMENT MERITS

• Exceptional market share

PropNex and ERA comprise c.48% of the entire market share of property agents in Singapore. In 2018, these two brokerages made up for 93% / 77% / 83% of HDB resale / primary residential / secondary residential transactions (by no. of units). Industry consolidation in the past has seen PropNex and ERA gain market share over the years, from 13% and 15% of total property agents in Singapore in 2012 to 26% and 23% in 2019, respectively. The dominance of these two market players within the real estate brokerage market in Singapore undeniably allow them to capture a substantial amount of transactions, be it a buyers’ market or sellers’ market.

• High unleveraged return on capital

Both companies clocked in high double-digit ROEs over the years – PropNex 31% and APAC Realty 17%, for FY2018 – with little to no leverage (the debt presently held under APAC Realty relates to a mortgage over its single investment property). The brokerage business is asset-light, with most of the salesforce being paid on a variable basis, allowing both companies to easily maintain or grow their high ROE.

• Resilient even in industry downturns

Both PropNex and APAC Realty were able to match or beat the movements of the property market each time, with their revenue YoY change overlapping that of the private residential transactions YoY change (Figure 20). In 2018 for example, PropNex and APAC Realty recorded a +6% and +30% increase in revenue, respectively, in spite of the -8% decline in private residential transactions. On the flip side, in 2017, PropNex and APAC Realty recorded a +39% and +35% increase in revenue, respectively, outstripping the +21% growth in private residential transactions.

Figure 20: Both PropNex and APAC Realty were able to match or beat their revenue movements against the movements in the property market transactions each time

Source: URA REALIS, PSR, APAC Realty, PropNex

Figure 21: Agency practices across countries – the 70-90% commission payout is unique to Singapore

Figure 22: PropNex and ERA have consistently been the top two in terms of market share of number of agents, closely followed by Orange Tee & Tie Pte Ltd and Huttons Asia. PropNex had done two consolidation exercises in the past, of Dennis Wee Realty in Jul 2017 and Global Alliance Property (operating under the Century 21 franchise) in Feb 2019.

Source: CEA, Cushman & Wakefield, Frost & Sullivan, PSR

Figure 23: Demographics of property agents in Singapore

Most are exclusively property agents and do not hold any other occupation.

Majority of the registered property agents in Singapore are above 40 years of age.

Source: CEA, PSR

Read the full report for insights on APAC Realty Limited and Propnex Limited.