- Real estate businesses face profitability challenges amid economic shifts.
- Turnover rises, staffing woes, and rising operating costs persist.
- Firms grappling with succession planning in a competitive landscape.
The real estate industry has been fraught with uncertainty as of late, and real estate business owners are facing a critical juncture where they must retain their talent and adapt their governance and systems to this new scenario if they are to succeed, according to Macquarie Business Banking’s 2023 Real Estate Benchmarking report.
Resilient in precarious times
Macquarie Business Banking’s latest nationwide survey of 431 residential real estate firms found a resolute industry that withstood the rapid market conditions shifts over the past few years.
The study revealed a paradigm shift in the real estate business, with survey respondents having witnessed the best and worst parts of the property cycle.
The recent lacklustre economic conditions were among several factors behind a decline in profitability.
Shrinking profits and revenues
Macquarie Business Banking’s national head of real estate, Domonic Thompson, commented that 2023 was tough for real estate agents. Revenues and profitability have suffered as operating costs continued to exceed revenue gains.
FY2022 and FY 2023 gross revenue and profit
“While real estate agents have seen their revenue heavily influenced by external factors, profit margins and performance remain within relative control through cost management, efficiency and productivity monitoring,” he said.
“Overall, we’ve seen the industry experience ongoing margin pressure, which has impacted sales and property management commissions, with 71% of respondents recording flat or declining net profit margin in the 2023 financial year, and an increasing number of businesses reported declining year-on-year profitability since 2014.
“Price discounting and competition were identified by 43% of respondents as a key challenge, while staff costs (63%) and operating costs (57%) are the key reasons for a decline in profitability during the 2023 financial year.”
Property management key to navigating challenges
Nevertheless, Thompson noted that the industry held steady despite precarious market conditions. Businesses with a stronger property management focus fared better in this environment.
“Property management portfolios continue to be a focus for growth and scale, which is being bolstered by acquisitions.
“With 80% of agencies focused on property management growth, the key to success will be to shift away from price-driven competition towards offering holistic value, nurturing existing client relationships, as well as future buyers, vendors and property managers.”
Thompson also said businesses have struggled to retain essential team members and draw in fresh talent.
“With one in four people changing roles over the past 12 months, coupled with increased wages and operating costs, the industry is at a critical point where agencies need to address staff challenges by building trust and respect.”
“Getting the people and culture balance can help differentiate an agency, drive better financial outcomes and enhance business value.”
Domonic Thompson, Macquarie Business Banking
The survey found that turnover has been at 25% across all roles for the 2023 financial year, rising to 35% for property management roles.
Hence, operating costs have increased, with agencies spending more on filling vacancies, training and developing new staff and filling gaps in client experiences.
“What we’re seeing is business owners needing to adjust business structures to run more efficiently in the current climate, or even taking a more active role in the business to prepare for anticipated economic headwinds, reduce associated staffing costs or optimise chances of success in securing property listings.”
Future plans: ownership and involvement
“With merger and acquisition activity deferred through the pandemic period and market volatility, we saw an increase in business sale, exit and succession activity in 2022; however, in our view, the challenge for many is navigating a highly competitive landscape to transact,” Thompson said.
“More than half (55%) of real estate business owners are considering succession or reduction of operational involvement in their agency, and the key to understanding and maximising business value includes improving business performance, supporting staff with strong processes and systems, offering opportunities to develop and grow within the business, and communicating a strong client value proposition.”