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The Future of Real Estate Portals (Preview)

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This all-new, global research takes a deep look into the future of real estate portals. The focus areas include portals’ expansion into adjacent revenue streams, closer to the transaction vs. more of the transaction, a deep dive into Rightmove’s growth dilemma, the implications for investors, and more.

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The Future of Real Estate Portals (Preview)

  1. 1. FUTUREOF REAL ESTATE PORTALSPrepared by Mike DelPrete, June 2018 Preview
  2. 2. Real estate portals are big, multi-billion dollar businesses. This report takes a look into the future of these businesses as they evolve from search engines to service engines. I focus on the challenges, threats, and opportunities that I believe portals will face during the coming years. As with all of my work, I provide critical thinking combined with evidence and data to support my positions. I come from the industry, as the former head of strategy at a major real estate portal. Now I travel the world engaging with leading portals and real estate tech businesses, working on strategy, sharing insights, and helping them grow. Mike DelPrete June 2018 An introduction
  3. 3. The Future of Real Estate Portals Report Setting the stage: revenue and growth Adventures in adjacent revenue streams Closer to the transaction vs. more of the transaction The Rightmove dilemma The top threats to portals Crossing the Rubicon: portals vs. agents What all real estate portals need to prosper Implications for investors Appendix 1: Product development prioritization framework Appendix 2: Depth listing product strategies 05 14 34 51 73 81 94 103 108 116
  4. 4. The railroads are in trouble because they assumed themselves to be in the railroad business rather than in the transportation business. — Theodore Levitt, 1960 “ ”
  5. 5. Setting the stage: revenue and growth
  6. 6. Real estate portals are big businesses globally. Source: the last publicly available, full year financial results. Zillow Group EBITDA is actual, not adjusted, for an accurate comparison.
  7. 7. The portals are incredibly profitable, especially in mature markets. Note: I am reporting Zillow’s EBITDA margin and not its typically reported “Adjusted EBITDA,” to provide an apples-to-apples comparison.
  8. 8. #2’s in their markets Global leaders Annual revenue growth is strong in the U.S. but mixed elsewhere. Source: the last publicly available, full year financial results. Wow!
  9. 9. Real estate listing revenues for portals are simple to understand. Revenue = Yield ($) x Customers (#) • Yield, also known as average revenue per advertiser (ARPA), measures the amount each customer pays monthly. • Portals increase their core listing revenues by convincing customers to pay more (price rises or new products), or by acquiring new customers. • In mature markets – namely the U.K., Australia, and New Zealand – the portals have reached customer saturation. No new customers.
  10. 10. The main lever for revenue growth is increasing yield (ARPA). But ARPA growth is declining. Note: All comparisons are annual, except IS24 (which is quarterly). Annual ARPA growth at IS24 is 2.1%
  11. 11. The trend is even more pronounced in the U.K. Portals can only raise prices so much each year. Source: annual reports, investor presentations.
  12. 12. In the U.S., Zillow’s Premier Agent business is still growing, but growth is slowing. Source: annual reports, investor presentations.
  13. 13. Portals still generate most of their revenue from agent listings; not much diversification. Note: Zillow Group revenue is from Premier Agent, the equivalent core agent advertising business.
  14. 14. Adventures in adjacent revenue streams
  15. 15. Property advertising Agent profiles Valuation & data Home services & repairs Home inspiration UtilitiesMovingInsuranceMortgages Many portals are trying to diversify revenue streams by expanding across the value stream. • Providing more value to customers • Making investments or acquiring businesses • Getting involved in more of the transaction • “One-stop shop” mentality
  16. 16. Activity across the value stream is varied by portal, with some common trends. Home inspiration Home services and repairs Valuation and data Agent profiles Mortgages Insurance Conveyancing Moving Utilities
  17. 17. Home inspiration Home services and repairs Valuation and data Agent profiles Mortgages Insurance Conveyancing Moving Utilities Rightmove and Zoopla have taken opposite diversification strategies.
  18. 18. Home inspiration Home services and repairs Valuation and data Agent profiles Mortgages Insurance Conveyancing Moving Utilities Most portals start their diversification strategy with valuation and data services. Low-hanging fruit and very much related to the core portal business.
  19. 19. Home inspiration Home services and repairs Valuation and data Agent profiles Mortgages Insurance Conveyancing Moving Utilities Mortgages and insurance have the biggest revenue pools, but are also difficult to get right. Easy to justify in a spreadsheet, much harder and expensive to execute.
  20. 20. Runner-up portals have diversified their revenue streams more aggressively, out of necessity. Listing Revenues % of Total REA 84% Domain 47% Rightmove 76% Zoopla 25% Revenue Diversification #2 in Australia #2 in U.K.
  21. 21. Generally, adjacent revenue streams carry much lower profit margins than classified listings. Listing Revenues % of Total EBITDA Margins REA 84% 66% Domain 47% 35% Rightmove 76% 76% Zoopla 25% 39% Revenue Diversification and Profitability
  22. 22. Adjacency revenues are still small and expensive to start-up. Expansion comes at a (big) cost. Revenue EBITDA Revenue as % of Total EBITDA Margin REA (Financial Services) $13.2 million $5.7 million 3.4% 43% Domain (Transactions) $11.1 million ($1.7 million) 6% (15%) Domain (Transactions) consists of utility comparison and switching, Domain Loan Finder, and Domain Insure. Revenue Adjacencies: REA vs. Domain (H1 2018)
  23. 23. Zoopla is the global leader in diversification. It’s portal only accounts for 25% of revenues. It’s important to note that Zoopla: • Spent a lot of money on acquisitions (£450 million). • Targeted existing businesses with proven product/market fit. • Executed its strategy well. Source: MDP estimates based on FY 2017 financial reports, disclosures, and investor presentations.
  24. 24. Zoopla has integrated its acquisitions well, but the synergy value is unclear. • The key question in Zoopla’s diversification strategy is: How much are the businesses benefiting from cross-sell synergies? • In other words, are the acquired businesses growing faster than they would have as stand- alone businesses? • Two measures to look at are revenue growth and lead generation growth post-acquisition.
  25. 25. The comparison business saw a revenue uptick immediately after acquisition, before slowing. +38% +10% +17% Zoopla acquired its comparison business in 2015, and its 2015 results include 4 months of revenue. Modest revenue growth after a promising start. Source: ZPG financial results and investor presentations.
  26. 26. New lead generation has slowed significantly, showing little sign of a direct traffic benefit. Note: this is a like-for-like new lead comparison, and doesn’t include pro-forma leads from mid-year acquisitions.
  27. 27. In the case of Zoopla, the verdict is still out on the synergy value. • While I’m sure there is synergy between the businesses, it’s not what I would call a runaway cross-sell success. • There is modest growth, but it’s not clear if the source is organic or inorganic. • I would treat any cross-sell synergy as an added bonus, not a given. The core business case should stand on its own merits!
  28. 28. Closer to the transaction vs. more of the transaction
  29. 29. In their efforts to diversify revenue streams, real estate portals are moving closer to the transaction and doing more of the transaction.
  30. 30. The strategy is multi-dimensional. Real estate portals are operating along two axes. Closer to the transaction Far from the transaction More of the transaction Less of the transaction
  31. 31. Portals began focused on property advertising, but many are expanding across the entire transaction. More of the transaction Less of the transaction Property advertising Agent profiles Valuation & data Home services & repairs Home inspiration UtilitiesMovingInsuranceMortgages
  32. 32. The classic classifieds model stays far from the transaction, only connecting buyers and sellers. Closer to the transaction Far from the transaction A true marketplace: connecting buyers and sellers. Part of the transaction. Intimately involved with buyers and sellers, or actually buying and selling inventory.
  33. 33. As portals move closer to the transaction, they move closer to consumers, displacing agents. Closer to the transaction Far from the transaction More of the transaction Less of the transaction Closer to consumers Closer to agents
  34. 34. Marketplace businesses are high-margin and scale inexpensively. Expansion is less scalable. Closer to the transaction Far from the transaction More of the transaction Less of the transaction Low Margin, Less Scalable High Margin, Highly Scalable
  35. 35. At 130 slides, the full report covers: • Closer to the transaction vs. more of the transaction • The Rightmove dilemma • The top threats to portals • Crossing the Rubicon: portals vs. agents • What all real estate portals need to prosper • Implications for investors • Appendix 1: Product development prioritization framework • Appendix 2: Depth listing product strategies If you’d like to read more, please buy the full report! Buy Now! $500 for individuals, $2,500 for corporates
  36. 36. About the author
  37. 37. I’m a strategic advisor and global expert in real estate tech. I’m a former CEO, tech entrepreneur, and head of strategy at a major real estate portal. I’ve travelled the world talking to and working with leading property portals and real estate tech businesses, gathering first-hand knowledge and insights on industry trends and themes. I advise corporates, work with startups, mentor founders and executives, and work on challenging entrepreneurial projects. • www.mikedp.com • Mailing list • mdelprete@gmail.com About the author: Mike DelPrete
  38. 38. I’m involved with a number of ventures across the industry, and always happy to chat. Consulting I’m leading the University’s new Real Estate Tech program, one of the world’s first. Let’s talk about how we can collaborate. I’m managing director for the Boomtown Real Estate Tech Accelerator. Let’s talk about how we can help launch your early- stage business. I’m a sought-after strategy and new ventures consultant. Let’s talk about how I can help you or your business.
  39. 39. My other industry reports A 190+ slide presentation where I take a global view of emerging models in real estate that are changing the way consumers buy and sell houses. It’s a data-heavy, representative scan of the market that pulls out facts, highlights insights, and draws conclusions. An evidence-based, 100+ slide presentation looking at the top real estate portals from around the globe. It gives an illuminating view of best practices, emerging trends, growth strategies, and common insights and challenges.
  40. 40. The Adventures in Real Estate Tech Book Adventures in Real Estate Tech is a 110-page collection of my past insights, analysis, and articles from 2016 to today. My work offers a data-rich, evidence-based analysis of real estate tech, with a healthy dosage of strategic insights. I cover the trends that are changing the industry and the major players gaining traction around the world. The scope is global, because we all have a lot to learn no matter where we live. Order a copy today!
  41. 41. A note on data sources The data sources include company reports, investor presentations, earnings calls (and transcripts), and supporting documentation. All information used is in the public domain. No confidential information has been used in this report. Some data has been estimated from financial statements and other known data points. Copyright © Mike DelPrete

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