It wasn’t the biggest result, nor the worst, but it did contain a warning for many other companies in and around the property and home lending businesses.
In fact the 72% slide in profit for listed real estate group McGrath (MEA) (to a pro forma $2.4 million) was a nasty sideshow to the real story from the company’s December half year release yesterday.
McGrath listed in December 2015 at $2.10 a share – it never reached that level, peaking at $1.89 before tumbling as results and problem battered the company.
Yesterday the shares ended at 61 cents, down 4.7%, after touching an all time low of 59.5 cents during trading. The results were that bad.
Pro-forma revenue fell 11% to $66.9 million. And McGrath declared a fully franked dividend of 1 cent a share, it is a nominal payment in reality.
Now McGrath has had a chequered year, losing staff, losing agents and the founder and chairman, John McGrath, but what took investors notice was the commentary on the residential property market, but the problems can’t be all blamed on management or the company’s strategy.
The company blamed challenging market conditions and low listings and sales for the weak result.
Last month it warned that “unprecedented low volumes of listings” it highlighted at November’s annual shareholder meeting had shown no sign of improving.
McGrath said company-owned listings were down 20% in the half and challenging market conditions were expected to continue.
It had started a strategic review focusing on improving the productivity and performance of its existing business segments, and exploring new revenue opportunities.
“Our aim is to grow the relative contributions of our annuity businesses and de-risk the volatility of our earnings,” new CEO Cameron Judson said yesterday.
"There is something of a Catch 22 currently as existing home owners, who might want to sell and realise a big capital gain, are hesitant to do so given any time out of the market risks watching a new target property gallop away from them in terms of price appreciation.
"As you know there are plenty of stories of those who locked in capital gains on their house only to find that time out of the market has seen prices move away from them and they have not been able to get back into the same area. Many of these problems at McGrath are peculiar to it, but there are warnings for other groups, such as Mirvac, Stockland, Villa World, Fairfax Media and News Corp/REA Group.
If McGrath is having problems with listings, so must other companies, and for builders such as Stockland, Mirvac and Villa World there’s the added warning that they should be wary of demand and settlements in the next year – they could fall away if buyers do not re-emerge in sufficient numbers.
Fairfax said on Wednesday that Domain saw a 7% fall in listings in the December half year. A year ago Fairfax was touting a 25% jump in revenue at Domain. In the December half revenue growth was weak and profits fell.
And while REA Group reported higher revenue and profits, it did reveal (as it had been hinting at during the December half year) that it saw "lower listing volumes, with the largest decreases occurring in Sydney and Melbourne in the six months.”
Real estate agents like McGrath are major users of REA Group and Domain – if they are worried about listings and finding it hard to build business, then the website companies will be hurt further down the track.
For Fairfax Media as it looks to separate Domain and turn it into a 60% to 70% owned listed subsidiary (similar to the relationship between REA Group and News Corp), the McGrath comments are a big heads up and should make possible investors more cautious.
APRA, the key home lending regulator yesterday revealed it had made a number of small changes to its rules for home lenders, especially in self managed super funds. APRA downplayed their importance, saying:
The revisions (to APG 223, the guidelines to lenders) “are designed to ensure that the sound lending practices that have been implemented across the industry since late 2014 are maintained and reinforced."
"As a result of the consultation, APRA has made a small number of refinements to the prudential practice guide, which are explained in a letter to ADIs released today. APRA does not expect these refinements to result in material changes to existing lending practices across the industry as a whole.”
“APRA is continuing to maintain its close monitoring and supervision of residential mortgage lending practices, including growth in investor lending, as part of its broader mandate to build resilience in the financial sector and promote financial system stability,” APRA warned. That is the key part of what appears to be another boring statement from the regulator. It is also why McGrath’s warning yesterday should be heeded and not dismissed as just headline grabbing from a weakened real estate agency.
