50 July 9­10, 2011 The Weekend Australian Financial Review www.afr.com

Perspective

Property online:a real estate nightmare

Ben Hurley

The real estate agent and theproperty valuer are waging acommon battle to survive theinternet’s dangerous incursions intotheir realm.

Fear runs deep in the industrythat they will be the next victim ofthe great shift online, which hasforced sweeping changes uponindustries like the print media,retail sector and the selling of booksand music.

Trade knowledge has been thereal estate agent’s key to your door.It’s the appraisal offered in the hopethat you will choose him or her tosell your property. The valuer goesfurther still, putting a dollar valueon your home that banks trustenough to sometimes lend millionsof dollars against.

But now both are seeing theirexpertise undermined by thedesktop valuation – a complexalgorithm used by data provider RPData to value every home in thecountry, every week, withoutactually visiting it.

RP Data is now offering it for freeto home owners via its Facebookpage, while advertising portals likedomain.com.au andrealestate.com.au also offer serviceslike home valuations or marketinformation such as comparablesales, as a way of building candourwith home owners in the hope theywill be chosen for the advertisingcampaign.

While there is some contentionabout the accuracy of thesevaluations, banks are embracingthem for many property lendingtransactions, substantially reducingthe valuers’ market share.

And, by providing the consumerwith an unprecedented depth ofmarket information, they furtherchallenge the real estate agent’sdaily job – which is as much aboutconvincing buyers to raise theiroffer as it is about convincing theclient to lower expectations.

“I’ve had members tell me theyhave people who openly disagreewith agents on sold prices becausethey have got it from so­calledvaluations online,” says EnzoRaimondo, chief executive of theReal Estate Institute of Victoria.“They’re not valuations. They arejust information put up there bydata companies and advertisingportals. It’s causing a lot ofconfusion out there.”

RP Data’s use of the word“valuation” to describe its offeringhas so riled the Australian PropertyInstitute, which is the industry bodyrepresenting valuers, it is calling forregulators including the Fair TradeOffices in each state to investigate.

RP Data chief executive GraemeMirabito says his tools are notmeant to replace industryprofessionals. Rather they aredesigned to “empower

professionals, educate the media,and inform individuals”.

“We’re in no way trying tocircumvent the professionals,”Mirabito says. “You may haverecently renovated and it’s not inthe data, or you may have a view ofthe ocean and it’s not indexed inthe data. This is just a tool to helppeople to get more across what isgoing on. You do need an advisorlike you do anything else.”

But the effect on the valuationprofession has been devastating.The industry is already reeling inthe post­financial crisis fallout, withmajor banks launching dozens oflawsuits accusing large valuationfirms of negligent valuations, in anattempt to recover multi­milliondollar losses on bad loans.

Smaller valuers are folding as thecost of public indemnity insurancesoars and work dries up as onlinevaluations gain momentum. Theremaining firms are engaging in acutthroat price war, shorteningturnaround times to 48 hours and,according to some, jeopardising thequality of their work.

Philip Western, senior national

vice president of the AustralianProperty Institute, said in 1992 avaluer was typically paid $975 tovalue a residential property worth$500,000 in order to do a thoroughjob. He said some valuers were nowpaid less than $200 for a job.

“That’s the extent it’s being forceddown,” Western says. “You’re gettingvaluers having to effectively make aliving, and to come out on top theyare having to do multiple valuationsa day, probably way over and abovewhat they should be doing if theyare doing a proper job.”

He said online assessments had“really gained momentum in thelast 12 months” and maintains theyare “much more risky” if banks areto lend against them.

The API argues the figures areinaccurate and should not betrusted by consumers. It says theydo not take account of qualitativeinformation like the view or aspector the condition of the property.

But Susie Peacock, WestpacGroup head of secured risk,defended the growth of desktopvaluations, saying they were notbecause of cost cutting. Traditionalvaluations – where somebody visitsthe property – were now onlynecessary on particularly riskyassets.

“If you have a security in anestablished area, the risk of the deal

is low, you know the customer, it’s asecurity that has been bought andsold 10 times over the last five yearsand you have a lot of data on it, youwould be happy not sending avaluer to that security and goingwith RP Data,” she said.

“Who knows whether that’s betteror worse than a formal valuationfrom a valuer. It is based oncomparable sales, a propertyestimate and uses statistics toderive the estimate instead of usingthe judgment of a valuer.”

It remains to be seen whethertechnology will soon start makinginroads on the real estate agents’turf – particularly after a quietvictory last month which involvedthe Australian Competition andConsumer Commission, thenation’s biggest real estate websiterealestate.com.au, and a handful ofcompanies that help home ownerssell without the usual servicesoffered by a real estate agent.

“Agent­assisted” companies likeBuyMyplace and PropertyNow offerhome owners a range of servicesdesigned to help them sell theirhouse at a fraction of the cost ofgoing with a real estate agent. Whilethe offerings differ betweencompanies, owners are typicallygiven a sign board, an advertisingcampaign, advice on the value oftheir property, conveyancingservices and sometimes helpnegotiating a sale price. Thecompany’s input takes place byphone from an office that couldcover the whole country, ratherthan the real estate agent who onlyworks a few suburbs, and is heavilyreliant on electronic marketinformation. The owner does thelabour­intensive bits like showingcustomers through the house.

They occupy a very small marketshare but the mere mentioning ofagent­assisted companies makesmany real estate agents bristle.Indeed it was pressure fromrealestate.com.au’s biggest realestate clients that played a majorpart in keeping these companies offthe nation’s most widely read realestate advertising platform. Untillast month.

It all happened quietly but agroup lead by PropertyNow ownerAndrew Blachut had for years beencomplaining to the ACCC, and thisyear he claims his voice was heard.Last month, a group of agent­assisted companies received a letterfrom Greg Ellis, CEO of REA Groupwhich owns realestate.com.au,saying rules that had locked themout of the site for five years wouldno longer apply, as they were “outof step with the market andindustry regulatory practices.”

It remains to be seen whetheraccess to realestate.com.au willincrease their appeal given theyhave had access to market number­two domain.com.au all along. Butthere is little doubt they willbenefit more than real estate agentsfrom the availability of electronichouse valuations direct toconsumers, together with a growingrange of free property advisoryservices that equip home ownerswith more market knowledge thanever before.

A more likely inroad into realestate agents’ profits could be a

The traditional role of realestate agencies is beingchallenged by the rise ofonline valuations and evenportals that assist inprivate sales.

[Online valuations]are based oncomparable sales,and use statisticsto derive theproperty estimateinstead of usingthe judgment ofa valuer.Susie Peacock, Westpac

company like US­based Redfin, anonline marketing portal whichemploys a team of salespeople whomake direct contact withconsumers to sell ads – a moverecently made by realestate.com.au.The difference with Redfin is that itsreps show potential buyers throughproperties and, if they can close thedeal, take home part of the realestate agent’s commission.

It’s an intensely controversial ideanow being passed around amongAustralian real estate agents – anindustry also in turmoil as a weakhousing market forces thousands ofreal estate agents out of work. Theyalready hand over money torealestate.com.au to obtain “leads”the company has gathered offeringfree home valuations to consumers.

Ellis was keen to hose down thesesuggestions when questioned aboutit by The Australian FinancialReview last month.

“REA knows its business and ourbusiness is an advertisingbusiness,” Ellis said. “REA will nevertake a dollar from the commissionof selling and listing property,that is

They’re notvaluations. They’rejust informationput up there bydata companiesand advertisingportals. It’scausing a lot ofconfusion.Enzo Raimondo, REIV (above)

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www.afr.com The Weekend Australian Financial Review July 9­10, 2011 51

Perspective

So much for that good oldinside run into an IPO

Matthew Drummond

It was a glamorous affair – whichcost a lot of people a lot of money.

The 2009 float of departmentstore chain Myer was billed as thecorporate event of the year. ModelJennifer Hawkins dazzled on thecover of the prospectus. Therevenue figures inside looked rosy.

Retail investors, “mums anddads”, signed up for about half thecompany’s shares in the$2.2 billion initial public offering,and they have every reason to beunhappy. As soon as MyerHoldings hit the boards of the ASX,the shares plunged from the $4.10offer price. Today Myer trades atabout $2.60.

Better off are the stockbrokerswho encouraged these investors tosign up. Six brokers that agreed tounderwrite part of the float, aprocess called “going firm”, earnedcommissions from Myer worth1.35 per cent of every dollar oftheir clients’ money they could laytheir hands on. Others earnedcommissions of 1 per cent.

How, it is now being asked, issuch a practice any different fromfinancial planners earningcommissions for shovelling theirhapless clients into risky managedinvestment schemes to growalmond plantations? Suchcommissions are about to banned– why should stockbrokers betreated any differently?

The question has got a lot ofstockbrokers very concerned. Atissue is the viability of manybusiness models. Also at risk is theoutlook for corporate floats.

As one top investment bankernotes, corporate floats don’t occurif there are too many risks and oneway of reducing risks is to getcommitment from retail brokers togo firm and pick up some of thestock. That system relies entirelyon paying commissions.

“If [a commissions ban] affectsthe ability to pay broker firm fees,that’s going to be a materialchange to the way we go about

accessing retail demand and thatcould materially hurt our ability todo IPOs. That would be a massivechange to the way the industryworks,” the banker says.

It is widely accepted that thesystem under which financialplanners earned commissionsfrom manufacturers of investmentproducts had to change. Conflictsof interest were rife; investors wereshoehorned into investments thatgave handsome upfront andtrailing commissions to theiradviser, but proved to be duds forthem. Under the Future ofFinancial Advice reforms (FOFA),financial planning commissionswill be banned from 2013.

As consultation on the FOFA

changes comes to an end, a pennyhas just dropped amongstockbrokers. The fees they earnwhen signing up their retail clientsto capital raisings by listedcompanies look very similar tofinancial planners’ commissions.Some brokers earn as much as aquarter of their revenue from suchfees.

The question of whether brokersand financial planners ought to betreated the same way under FOFAturns on the answer to a simplequestion: when brokers haveaccess to a float, are they likely tobe tempted by commissions toconvince as many of their clientsas possible to sign up for stock? Orwill they be directed by a desire tokeep their client’s long­terminterests at heart, forgoing short­term personal gain, and haveclients who are likely to return for

Stockbrokers say if youban commissions oninitial public offerings itwill be the end of capitalraisings as we know them.

And the price dropped immediately . . . Myer boss Bernie Brooks, left, Jennifer Hawkins and chairman HowardMcDonald at the ASX launch of the company’s shares in 2009. Photo John Woudstra

the exclusive domain of the realestate agents.”

That is probably true, but thesefears are driving nothing short of anational protest movement towrestle market information backunder agent control.

Real estate agents have beenentering the prices homes were soldfor, including confidential sales,into online management systemsthat feed the information tocompanies including Fairfax(owners of domain.com.au), REA,RP Data and others. Thisinformation is valuable for itsimmediacy, compared withgovernment sales data whicharrives after about three months,and is a crucial ingredient toelectronic valuations. Now they areturning off the tap.

Major franchises includingProfessionals, RE/MAX and FirstNational are entering a zero salesprice into the system, and the fourbiggest franchise groups LJ Hooker,Ray White, Raine & Horne andCentury21 have been holding talksabout doing the same.

The movement has moremomentum in Victoria, where agroup of the state’s biggest realestate networks are holding weeklymeetings at the offices of the RealEstate Institute of Victoria, wherethey are discussing feeding all oftheir listings and sales informationexclusively onto industry­ownedportal realestateview.com.au.

In documents obtained from oneof those meetings, an “objectives”section states “we are the centralplayer (the ‘go to’ people) in thetransaction because we controlcontent”. It states, “Ownershipstructure needs an industry wide‘buy in’” and lists arguments thatcan be made to get the industry onside as “fear factor” and “benefits ofownership”.

REIV CEO Enzo Raimondo sayshe doesn’t attend the meetings orknow what they talk about, realestate agents can book rooms in thebuilding. If he were there, as CEO ofrealestateview.com.au, there couldbe a commercial conflict of interest.But he said there is a national pushfor real estate agents to take backcontrol over their marketinformation – especially when it isbeing used by third parties to makeinroads on their turf.

“There’s definitely a groundswellfrom agents right around Australia,”Raimondo says. “They have hadenough of what is happening andare concerned about the gradualdisintermediation of their role withthis information going to otherpeople. The strategy is to makewebsites the experts whereas agentsare the local experts.”

Fairfax Media, publisher of theAustralian Financial Review, alsocollects agents’ sold priceinformation which it collatesthrough Domain and subsidiaryAustralian Property Monitors andprovides back to its real estateagent customers. Nic Cola, CEO ofmarketplaces for Fairfax Media, saidhe had no plans to actively seekdirect contact with house sellers.

“We’re here to help our agents sellproducts more effectively tovendors,” Mr Cola said. “In ouradvertising we do target vendorsand consumers but at the end ofthe day we believe it’s important forthe agents to have that relationship– everything from right up frontsetting price expectations, tomanaging the sales process.”

He said he had not seen any cut­back to the data fed by agents intoits systems.

However, for years APM hasstruggled to match the REIV’sauction clearance rate statistics inVictoria because many Victorianagents send their data exclusively tothe REIV.

Others like Tom White, CEO ofpricefinder.com.au and part of theextended Ray White real estatefamily, keep their informationexclusively for industry use. Hebelieves there will always be a placefor the real estate agent.

“In terms of a real estatetransaction it is one of the biggestdecisions a person would makefinancially in their life, and to nothave an expert involved is a highlyrisky activity. Technology will notreplace the agent, but will always bethere to serve as a tool.”

more trades? In effect, can brokersbe trusted to always put theirclients’ interests first?

Aaron Constantine is the head ofcorporate finance at PatersonsSecurities, a Perth­headquarteredbroker which specialises in miningfloats. Constantine tells hiscorporate clients he’s done morecapital raisings than anyone else inAustralia. In his view brokers are afilter against bad investments.

“Dealers [brokers] don’t makeshort­term decisions for a bit ofcommission lightly. If they don’tmake clients money, the clientdoesn’t hang around,” he says.

When it’s put to him thatfinancial planners feel they treattheir clients the same way,Constantine lets out a snort.

“Yeah, when they’re getting10 per cent [commission] for sellingsome illiquid tree product.”

It’s a point that underlines whatbrokers think is their trump card forexclusion from the commissionsban in FOFA: they are better trainedthan financial planners and theinvestments they sell, equities inpublic companies, are less risky.

The point doesn’t wash with MarkRantall, who runs the FinancialPlanning Association. He argues itis erroneous to think that brokerssell stocks and financial plannerssell something else.

“There are financial planners whohave a securities licence and whobuy and sell securities, generallythrough stockbroking houses. Thereare stockbroking houses whoprovide financial planning advice aswell, who advise on managedfunds, who provide more holisticadvice,” he says.

Rantall opposes any sort of carve­out for stockbrokers, partly becausethere ought to be a level playingfield. “If we’re going to havelegislation it’s going to beextraordinarily difficult to carve outany particular subgroup whoprovide general or specific personaladvice to retail clients.” In effect, acommission is a commission is acommission, he says. All need to bebanned together.

The legislation to enact FOFA isdue to be released in the next fewweeks; some last­minute andfrantic lobbying is about to getunder way.

@ Editorial, page 60

Brokers don’tmake short­termdecisions for a bitof commission. Ifthey don’t makeclients money,the client doesn’thang around.Aaron Constantine,Patersons Securities

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