EPMEPM: Best Practice & Legislation

Outperforming The Market

A STRONG MARKET CYCLE over the past 12 months has led to increased revenue and profit for residential real estate agents nationally, and with it a new sense of optimism across the industry, says Daniel Evans of Macquarie Business Banking.

MACQUARIE BUSINESS
Banking’s 2014 Residential Real Estate Benchmarking Report revealed the top-performing residential real estate agencies across the country combine a drive for growth with a relentless focus on efficiency and productivity, concentrating on three key areas to outperform the market: business management, property management and people management.

BUSINESS MANAGEMENT
In the current competitive market, it is no surprise that companies are focusing more time on business management to protect their profit margins against future softening of market conditions and the ongoing trend of declining commissions.

The report showed that more than three quarters (79 per cent) of agencies’ gross revenues increased over the past 12 months, with Queensland and Western Australia experiencing the strongest growth.

Additionally, more than two thirds (68 per cent) of agencies increased profitability over the last 12 months, with the majority citing revenue growth (47 per cent) or an improved market (43 per cent) as the reasons.

This is in sharp contrast to our last report in 2012, where a significant number of agencies focused on efficiency improvements or cost-cutting. This suggests that most real estate agency principals have tried to capture as many listings or new properties for rent as they can over the past 12 months, rather than focusing on maximising productivity.

However, profit margins have not risen as revenue has increased, remaining stable at 26 per cent between 2012 and 2014. This indicates that costs have risen in line with revenue as additional staff were recruited to capture the growth in listings.

As agencies continue to grow, it is important that they look at business efficiency and productivity to limit their exposure to risk if the market were to turn.

PEOPLE MANAGEMENT
Staff numbers increased nationally to capitalise on the market boom and meet the growing demand, driving salaries and commission structures higher. The number of staff employed in the average agency rose from 15 in 2012 to 18.5 in 2014. However, there is intense competition for skilled people and it has been clear over the years that many agencies also need to focus on developing their existing team. This year’s report revealed the main areas agencies looked at to improve people management were setting key performance indicators (KPIs) and conducting regular staff reviews (52 per cent).

PROPERTY MANAGEMENT
Unsurprisingly, property sales increased nationally, with Sydney and Melbourne leading the country for both the lowest average number of days on market and the highest proportion of auctions.

Despite strong property sales, the research indicates that property management is more important than ever, now accounting for 44 per cent of overall agency revenue. Property management is growing in importance every year, with the report showing the number of properties under management has soared from a national average of 375 per agency in 2009 to 508 in 2014. This reflects the closer relationship between property management and sales volume in a market where property investors are playing an increasingly large role – with the same client often being served by both sides of the business.

Property management remains a key driver for agencies’ overall performance, with agents highlighting they are equally likely to attribute increased revenue to a lift in property management income (75 per cent) as to a rise in sales revenue (77 per cent).

By building the property management side of a business, agencies not only create a sustainable income stream, but they also increase profitability, reduce risk and fuel further sales growth in low-volume sales markets.

WHAT DOES THIS MEAN FOR REAL ESTATE AGENTS?
At a time when most sales agencies are doing well, it is important that they don’t get distracted from the fundamentals of good business practice or they risk unnecessarily exposing themselves to future downturns in the property cycle.

Businesses should establish an understanding of what their business does and who is responsible for the strategy. Once they have a clear vision, they should set goals for profitability and breakdown KPIs for revenue and costs for the next 12 months.

Owners should spend time streamlining processes and technology that will help them to improve productivity for staff, giving them more time to service clients and drive new business. These processes, such as procedures for dealing with invoices or managing leasing appointments, help agencies to build a foundation for sustainable success.

Working in this kind of culture – where success is built by adding value to clients – will help to attract team members who want to work where they are able to meet clients’ needs, provide the service that suits their values and where success is celebrated. This can lead to stronger staff engagement levels, helping to raise productivity without having to seek out highly skilled employees in a tight employment market.

OUTLOOK FOR THE RESIDENTIAL REAL ESTATE MARKET
Looking to the future, the report indicated that residential real estate agents are highly optimistic. The overwhelming majority of agencies nationally predict revenue and profit growth will continue over the next 12 months.

Agencies will look to maintain momentum and take advantage of the strong market over the next 12 months by focusing on sales, business development and marketing, as well as staff management.

Asked which areas they plan to concentrate on over the next 12 months, agencies again emphasised people management and business development, with some also seeking to drive further back office efficiencies.

Our view is that while the sales environment is currently very strong — and agencies should certainly enjoy their recent successes — market cycles have not been eliminated. Indeed, strong upward cycles are often followed by equally strong downward cycles. This means it’s important for agencies to continue focusing on efficiency and prepare for potential downturns in the future.

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Daniel Evans

Daniel Evans is the Head of Residential Real Estate for Macquarie Business Banking. Daniel joined Macquarie in 2010 and has developed a strong understanding of the day-to-day challenges facing small to medium sized businesses.