Singapore property portals face double-edged sword in regional expansion

Singapore property portals face double-edged sword in regional expansion

Wed, Nov 13, 2019

LEE MEIXIAN


REAL estate portals in Singapore are being squeezed by hefty costs on the one hand and the lack of scale on the other, but the solution they seek - looking to the region for scale - may add further short-term pain.

PropertyGuru's short-lived journey towards an initial public offering in Australia last month had laid bare the financials of the market leader in the portal space in South-east Asia. And it showed the online property classified marketplace incurring a net loss of S$3.8 million on a revenue of S$71.5 million in 2018, on a pro forma basis.

Financial statements obtained by The Business Times (BT) of other portal companies here also showed a similar trend.

The second largest player, 99.co, suffered net losses of S$6.8 million on a mere revenue of S$2.3 million, while StreetSine slipped just slightly into the red with a net loss of S$157,000 on a revenue of S$1.4 million.

The biggest expense line that pushed them into loss-making territory was invariably employee benefits and compensation. For PropertyGuru, that made up more than half of the company's topline at a whopping S$38.5 million; for 99.co, employee- benefits expense actually doubled what it generated in revenue at S$4.4 million.

StreetSine's employee benefits made up 90 per cent of its revenue. But it was directors' remuneration in fact that made up the bulk - about two-thirds - of StreetSine's employee- benefits expense at S$840,000. Staff salaries amounted to only about S$417,000.

StreetSine is owned by Singapore Press Holdings, which publishes BT. Among the three companies, it is the one that arguably earns more of its money from selling data and information to real estate agents compared to its listing business, which has a paltry market share compared to its peers.

One way to explain the high proportion of employee costs is that building a feature-rich Web portal incurs high fixed costs before it reaches a tipping point where it is able to "cruise along" with minimal maintenance.

At that point, it becomes highly scalable, even for expansion into other countries.

Most probably, the high employee compensation costs of property listing portals comprise mostly the salaries of Web developers working behind the scenes to build and refine the portal.

When BT compares this with market-leading real estate listing portals in other countries such as REA Group in Australia and Rightmove in the United Kingdom (UK), the first distinct difference is that the latter group is securely in the black, making hundreds of millions in profit in a year.

The second difference is that the percentages of their employee expenses over revenue are a fraction that of their Singapore counterparts. Even market leader Zillow in the US, which posted a net loss of US$120 million in its fiscal year ended Dec 2018, only expensed about a third of its revenue on its technology and development costs, which presumably includes its wage bill.

Granted, these foreign companies have had a longer runway, having founded their business about a decade before the Singapore firms.

But it is also possible that the depth of the markets they are located in - Australia, UK and the US - allows them to enjoy economies of scale for their labour costs.

Not so for Singapore's homegrown players, which started operating with the Republic as their only playground. It is little wonder that PropertyGuru and 99.co have been so focused on seeking funding for expansion in the region. Both have mostly grown inorganically via acquisitions.

Last year, PropertyGuru completed the consolidation of Vietnam's number one property portal Batdongsan.com.vn into the group. Just last month, 99.co announced it had inked a binding deal to take over REA Group's operations at iProperty. com.sg in Singapore and Rumah123.com in Indonesia via a joint venture, of which the startup and its investors will own a 73 per cent stake.

The answer seems to lie in scale. Even more so when one considers that, generally, property listing portals have found it difficult to monetise data.

Theoretically, some ways a portal business can monetise data are: by providing business intelligence reports, offering post-sales services through tie-ups with banks as mortgage partners, or even dis-intermediating the transaction process by brokering the sale between buyers and sellers instead (although this would turn their most important client - real estate agents - into new business competitors).

The fact that even overseas market leaders in this space have continued to draw a majority of their revenue from advertising fees shows that monetisation is not an easy stepforward.

The need for overseas expansion is ever more critical now with another threat on the horizon. The Housing and Development Board (HDB) has announced that it will roll out a housing board portal by the end of next year for buyers and sellers to transact HDB flats on a single platform, featuring both new and resale flats.

Given that HDB homes make up a third of the listings on local property portals, analysts expect this new governmental portal to basically swallow up - whole - this slice of the pie.

Perhaps factors like these are what have driven PropertyGuru to be willing to take losses in its South-east Asian core markets other than Singapore and Vietnam (where business is profitable) in order to grow its footprint.

As Liu Gen Ping, partner at venture capital firm Vertex Ventures, says, this may be a necessary move because the Singapore market is too small. "At the beginning stage of digitalisation, you need to bear losses to gain market share to prepare for the long run."

He adds that this is not unlike how Amazon's profitable business units and geographic regions finance the growth of its loss-making business units and newer regions.

"This is so that, in the long run, there is always a new growth engine to continue to grow the company."

And taking a long-term view now is critical for these property listing companies to ensure their future survival, even if that growth comes at a temporary cost to their profit.