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Holding the keys to the property kingdom

Goola Warden
Goola Warden11/6/2020 07:00 AM GMT+08  • 14 min read
Holding the keys to the property kingdom
The property agency business is becoming oligopolistic as the top four agencies gun for size and pricing power
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The structure of Singapore’s residential property market has changed considerably over the past 10 years. Nowhere was the transformation more obvious than during the “circuit breaker” months when Covid-19 safe management measures forced the marketing of residential properties to go digital and put the onus of promoting a project squarely on the shoulders of property agents.

Meanwhile, developers are paying commissions averaging 3% to 4% for new launches compared to 1% just five years ago. Small boutique developers are reported to be paying commissions of up to 8% for projects that have difficulty selling. For example, a large development in Marina Bay is said to be paying agents a higher commission to sell the remaining units.

Furthermore, instead of many small- and mid-sized agencies competing for projects, the property agent sector here is dominated by a handful of sizeable players. Four or five property agencies or 90% account for the bulk of property agents compared to 71% just two years ago.

Back in 2012, the two listed agencies — APAC Realty, the owner of ERA Realty Network, and PropNex Realty — accounted for around 23% market share (see Chart 1). PropNex’s market share was 8.5% with the likes of Huttons and OrangeTee & Tie at 7.9% each, followed by a bunch of smaller players.

The quest for size was triggered when PropNex, which acquired Dennis Wee Group in 2017, listed in 2018. It has since continued to gain market share and this year, accounts for more than 28% of all agents, and around 50% of transactions in the primary and secondary markets.

“We are the best in every project because we close the most number of units in every development. What sets us apart from other agencies is our cultures of sharing and working hand in hand to support each other. Training in our second differentiator, and we conduct huge outreach through seminars so our agents understand the market situation. And the third factor is technology. These three things make a huge difference,” says Mohamed Ismail Gafoor, executive chairman and CEO of PropNex.

PropNex has emerged as the largest property agency by the number of agents, revenue and earnings but Gafoor plans to continue growing his salesforce organically. “We are a market leader having more than 50% of primary sales in terms of the number of units. We have close to a 50% market share of secondary properties and public housing. Even my salesforce accounts for 28% of the total in Singapore,” he says. “A lot of good productive agents have crossed over to join us without me having to buy them. So ours is organic growth which takes place when agents cross over because our agents are more productive,” he claims.

Would this eventually imply that the residential property market is likely to be controlled by a small number of big property agencies? It appears increasingly so, especially for the primary market. Commissions for new launches are negotiable, hence property agencies and their agents have pricing power. And as developers have to meet deadlines because of the cooling measures implemented since 2011, commissions for poorly selling projects tend to rise as deadlines approach.

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Social media versus print

With technology and social media, the role of property agents has changed over time. Previously developers would promote their new launches. But now, with the decline in print advertising, properties are increasingly advertised for sale and rent on Facebook, Google and online dedicated websites, and oftentimes, the agents themselves are doing the advertising.

“Unlike 10 years ago when print advertisements were the main source of generating leads to the showflat, salespeople these days have to spend marketing dollars on Google ads and Facebook ads. Prior to a new launch, they have to create their own website, replete with video marketing. All these cost a lot of money. In fact, for salespersons who are committed to selling a new launch, commissions from the first and even second unit sold are used to pay off their marketing expenses,” says Eugene Lim, director of marketing and sales at developer Oxley Holdings.

While some agents continue to use the classifieds of dailies to advertise units, agents increasingly find online advertising a much more effective tool. For instance, Facebook’s advertisements target certain demographics. “I advertise almost exclusively online,” says a property agent named Soon. “Online advertising is a lot more effective while print is more expensive.”

No surprise then, that increasingly, new launches are advertised on Facebook, Instagram and Twitter before projects are formally launched. Agents also send out mass messages to customers via Twitter, Whatsapp, WeChat and even Telegram for both new launches and resale units in the secondary market. Property agencies to which agents are attached are using technology to help agents’ sales.

“With the Covid-19 pandemic, digital technologies have been more than ever important in real estate work. ERA has and will be working on more digital initiatives such as training on online marketing, collaboration with tech companies and adopting technologies for the real estate industry,” says Jack Chua, executive chairman and CEO of APAC Realty.

PropNex’s Gafoor says: “We have an inhouse IT division whereby we are at any time engaging 20 software developers to continue to value-add to the various processes and continue to develop various platforms. For instance, we have created a PA (personal assistant) app which all our agents are given free.”

New commission structures

Some observers blame the trend of rising commission on various cooling measures put in place to control speculation in the residential property market. These include the five-year timeline for developers to sell all their units in a new project from sites acquired in government land sales (GLS) before punitive charges are imposed under the additional buyer’s stamp duty (ABSD) for developers.

Meanwhile, properties bought in non-GLS processes such as the collective sale market have additional charges from Qualifying Certificates (QC). A remission from a QC is possible if the development is completed within five years and all the units sold within two years of completion. If not, tiered QC charges would have to be paid by the developer.

The five-year time limit pressures developers to sell within the period, and this may lead to developers paying higher commissions to ensure a good sale at launch, market observers note. In addition, developers may offer higher commissions for projects which are close to meeting the sell-by deadlines.

“Agencies will pitch for projects, and developers hold the final decision. Usually, developers will fix the commission and all agencies will follow the same structure. It’s a win-win,” says Ken Low, managing partner at SRI.

“There is no real fixed commission per se. It varies from development to development and from time to time. Agents work in teams, and teams bid for projects via expression of interest by agents who are qualified to sell projects,” says Soon. “Bidding for projects is also open to any agent who has buyers for the projects. They bring the buyers in and are served by project agents,” he adds.

Oxley’s Lim says agents are very critical to the success of a new launch. “Salespersons on the ground are extremely critical in selling new launches in today’s market. They are part of the whole ecosystem that determines the success of a launch. While the developer’s responsibility is to come out with good concept, layout and effective marketing and pricing strategy, having a team of effective salespersons working the ground and getting the concept across to the masses is very important.”

“Having a team of salespersons who share the same vision of the project is crucial as well. They need to be equally proud of the project like us,” Lim adds. Agencies are selected based on the size of the project. “Typically, for a project that is less than 100 units, one to two agencies will suffice. It has to make sense for the salesperson to work on this project knowing that their marketing dollar is well spent and effective. However for projects that are more than 500 units and mega project of 1,000 units you will need support from multiple agencies to sell the project,” Lim explains.

For instance, Oxley appointed Huttons, a mid-sized agency, to market Sea Pavilion Residences which had only 24 units. This was because of both location and size. According to Lim, Huttons was the market leader for selling boutique projects.

For projects such as Riverfront Residences which had 1,478 units and Affinity at Serangoon which had 1,057 units, Oxley appointed a number of agencies including PropNex and ERA as well as OrangeTee & Tie and Huttons.

How commissions are shared

Several layers are involved in the entire sales process. On the ground, there is the project IC. He or she will meet the developer every week to give feedback on what sells and help the developer with a better strategy to sell the remaining units. When an agent brings buyers to the project, there are taggers and ground agents who sell the project. Taggers are onsite personnel who know everything there is to know about the project.

Commissions paid to an agent have to be shared among four parties, through a tiering system. Out of the 3% commission, the agent who brings the buyer gets 2.2%, the tagger 0.2%, the team of project ICs who train taggers and liaise with the developer get 0.3%, and 0.3% to the agency, says an unnamed agent.

Should sales of a new launch slow down, commissions are increased to 4% to 5%. “If more than 30% of the project is sold during the first three months, there is no need to draw down on the construction loan or equity, so it makes sense to pay 3% at the new launch,” the unnamed agent says.

For resale units, the commission is a standard 1% to 2% to be shared by both buyer and seller agents, which is why the resale market is so slow, market observers say.

Agents have also invested in video conferencing platform Zoom, free webinars and seminars to reach out to an audience. For some projects which are more difficult to sell, agents have to spend a bit more on social media marketing.

“While the commission rate is important, it is not just a high commission that does the job. A lot of people have the misconception that a high commission is paid out to the salesperson on the ground. What many people do not understand is that a salesperson spends a lot in social media marketing to reach out to buyers,” Lim says.

Oligopoly in the making?

PropNex has around 8,800 salespeople attached to it and has the largest market share of residential unit sales, according to Gafoor. While PropNex’s market share is good for the company and its shareholders, it is also good for the Singapore property market? Has the company benefitted at the expense of the developers?

“The top three agencies control more than 66% of agents and in a way determine new launch commissions. Developers are more than ready to incentivise agents in this market to move inventory, otherwise, they run the risk of buyers being taken to a competing project,” notes RHB analyst Vijay Natarajan. He reckons that the agency business can be considered an oligopoly because their size and scale make it difficult for developers to ignore.

The impact of agents’ commissions on the price of the property is more nuanced. While between 3% and 5% is meaningful for a $1 million property, it pales in comparison to ABSDs on second properties which is now 12% of the purchase price. Perhaps buyers could stay away from boutique developers as they have to cough up the highest commissions and this would feed into the property price.

Should consumer protection agencies do anything about the outsized power of property agencies? According to the Competition and Consumer Commission of Singapore (CCCS), competition law in Singapore proscribes anti-competitive conduct that “unduly prevent, restrict, lessen or distort competition in any market in Singapore”.

Specifically, it includes anti-competitive agreements, abuse of a dominant position and anti-competitive mergers. “In determining whether a particular conduct is anti-competitive, CCCS will need to carry out a detailed examination of the market(s) concerned and the effects of the conduct in question on competition,” notes CCCS, adding it will not comment on specific observations raised, citing need to examine the specific facts and circumstances of the case in detail in order to determine if there is any anti-competitive conduct.

CCCS says that if anyone suspects that any business, company or organisation is engaged in anti-competitive conduct that infringes the Competition Act, a complaint can be filed. “CCCS will evaluate the complaints and other information obtained to see if there are sufficient grounds to commence an investigation. CCCS will open a formal investigation if it has reasonable grounds for suspecting that competition law has been infringed,” it adds.

In the first half of this year, it is clear that the property agencies have reported higher earnings and higher margins (see Table 2). Among the developers, only Bukit Sembawang Estates, which is largely a residential property developer, recorded margins in double digits. Frasers Property is not representative because its 1HFY2020 is for six months to March 31 and does not include the circuit breaker impact. FPL has also announced profit guidance for its FY2020 results due on Nov 11.

Elsewhere, CapitaLand, City Developments (CDL) and Oxley Holdings announced noncash impairments to their investment properties, which caused sharp declines in their profit before tax during their 1HFY2020. And while PropNex’s share price is up just shy of 19% this year, CapitaLand, CDL and UOL Group are testing their 1QFY2020 lows, perhaps demonstrating that pricing power is with the property agencies and their agents, oligopoly or not.

How to play the stocks of property agencies

Atotal of 3,517 private residential new homes (excluding ECs) were sold in 3Q2020, almost doubling the number of units sold in the previous quarter, a sign that buyers are still actively looking for opportunities, says CBRE Research. The resale market also rose, with resale transactions at 3,467 in 3Q2020, from 933 units in the previous quarter. “A healthy resale market is needed to support capital movements in the new sale market,” CBRE says. “Key contributing factors include ample liquidity in the market, coupled with low interest rates, where property investment is perceived to have a strong sense of stability and security.” Residential prices have also held steady, firming marginally (+0.1%) year to date. “The rise in prices reflects strong underlying demand and perceived favourable long-term prospects of Singapore private residential properties. Sellers enjoy holding power due to unprecedented government stimulus supporting the economy. This has mitigated distressed sales and allowed sellers to hold on to their selling prices,” says Cushman & Wakefield. Since property agencies are asset-light and they do not carry development risk, they are natural plays for investors who want exposure to the local property sector. In addition, despite the onset of Covid-19, PropNex also declared an interim dividend of 1.5 cents, an increase of 20% from last year’s. PropNex does not have a dividend policy but had agreed to pay out 50% of profit after tax in FY2018 after the IPO. In FY2019, PropNex distributed $12.95 million in dividends to shareholders for FY2019 which translated into a payout ratio of 64.6%. Because of the impact of Covid-19, most of the developers have not paid out an interim dividend. The economic outlook remains uncertain, unemployment is on the rise, and the rebound in residential sales may fizzle out. OCBC Research is suggesting caution. “Looking ahead, we expect to see some moderation given the effects of URA’s new restrictions on the re-issue of Option to Purchase (OTP) by developers which came into effect from Sept 28,” OCBC Research says.

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