Industry will shrink, says franchise head

Simon Parker

A recent claim that one major Australian real estate network will fail within the next two years has gained support from the head of a major Victoria-based franchise group.

Nigel O’Neil, CEO at hockingstuart Group, told Real Estate Business that he agreed with Professionals Real Estate Group chief executive Glyn Morgan that one major real estate franchise group will collapse within the next two years.

“With the current weakness in the property market I believe we're going to experience a period of major rationalisation,” Mr Morgan said last week.

“I agree with Glyn that there is likely to be rationalisation in the Australian real estate landscape during 2012 and beyond, with those franchisors that provide little more than a brand likely to come under pressure as 'full service' franchise groups grow in stature,” Mr O’Neil said.

“I think those businesses that have large amounts of debt will be rationalised first, along with those brands that are unknown by the consumer, your ‘no name’ or localised brands, if you like.”

Mr O'Neil, whose franchise group has more than 40 offices, said agency principals must take a close look at their cash flow if they’re to survive.

“The key is understanding cash flow…clearly understanding the ebbs and flows of real estate,” he said.

“If they’re holding a lot of unpaid vendor paid for advertising (VPA), and [factoring in that] days on markets have doubled over the past 12 months, they’re carrying the value of that stock, it will be quite stressful in their businesses, as an example.”

He added that any new entrant to the market would struggle to survive. This followed Mr Morgan’s claim that established franchises would come under pressure from new firms or international companies moving into the Australian market. This included Keller Williams (KW), the second largest real estate group in the US, which boasts around 80,000 agents and 690 offices.

“History shows that it has been difficult for U.S based franchise groups to successfully enter the Australian real estate market due to the difference in how the markets operate, with arguably the Australian market more developed than the US market in terms of what agents offer clients and what franchisors offer franchisees,” Mr O’Neil said.

“What is likely to happen is that the growth will come from quality localised Australian franchise groups that are listening to their franchisees and changing to meet the evolving needs of the consumers.

“These businesses will continue to attract quality professionals that can keep pace with the changing landscape and observe the industry as the inevitable consolidation occurs.”

Using Melbourne as an example, Mr O’Neil said most of the dominant real estate groups are Victoria-based that have grown a niche in various parts of the city.

“There’s no really significant player out of the US or interstate that operates in Melbourne,” he continued. “Why is that the case? I think the agents in Melbourne have developed very strong local understanding and local knowledge to make sure that they offer vendors [what they want] and to attract buyers.”