Rent roll expansion to underpin McGrath's desired recovery amid downturn

The ASX-listed real estate agency McGrath has commenced an expansionary push into rent rolls to underpin its desired recovery in the current downturn.

Its chief executive Geoff Lucas said the company had acquired two rent rolls. McGrath last reported almost 7,500 properties under management.

It has been reported that they were being bought "under market value."

Lucas indicated many agencies were trying to offload rent rolls as they focused their attention on securing sales during the downturn.

"Increasingly we are seeing real estate business owners seeking to return to a role of real estate sales agent without the attendant issues of running a business in a difficult environment," he said at the meeting.

"As a result an increasing number of rent rolls with sales businesses attached are beginning to come to market."

Lucas reportedly said McGrath had purchased the latest two new small rent rolls at below market valuation, although he declined to comment on the price paid or the number of extra rental agreements secured.

Fund manager shareholder East 72's representative Andrew Brown challenged the rent roll acquisitions, according to The Australian Financial Review.

"The performance [of the rent roll] is pretty disappointing ... the average return has gone down as well. Why are we acquiring more? What is the competitive advantage in managing rent rolls?"

New chairman Peter Lewis admitted the year was not "stellar" in sales or property management but said both those businesses were now stabilised.

It was time to achieve economies of scale, Lewis said.

Mr Lucas attributed the weakness of its rent roll previously to the falling number of agents over the years, which crimped referrals from landlords and the natural attrition of agreement expiration, both of which were no longer posing problems.

In McGrath's 2015 listing prospectus, the rent roll held by company-owned agencies made up 11 per cent of pre-tax and interest profits (EBITDA), while sales commissions from company-owned agencies were 71 per cent of the firm's profits.

In 2012 McGrath had 5500 rent roll properties.

Industry estate agents collect about five per cent of rents as their fee for managing properties, which is typically the licensee's most stable source of income.

Critics of the McGrath prospectus indicated the true value of a real estate agency was in the rent roll, not sales listings nor office fixtures or fittings. 

At the time of the float the value of rent rolls reflected ratios from $3.00 to $4.00 on a dollar income per annum, having jumped from $2.75 over the prior two years. 

There are variations as rent rolls in Queensland are more likely $2.20 to $2.80.

John McGrath, the founder of the company, told the meeting he was back helping with the listing of homes.

He has especially sought to assist agents struggling to get prestige listings from the eastern suburbs office.

He remains engaged with agent training too.

"My mandate now is to grow the marketing areas of the business, that's where I add the most value," he said.

"It wasn't always that way but I am enjoying it again ... I am starting to enjoy the feel of the business again."

McGrath told Friday's annual general meeting the worst of the housing downturn had passed.

McGrath said that prices would fall only a few percentage points further, 2 to 3 per cent.

The company endured a horror year in which it fell to a $63 million loss.

“Despite the fact that it’s been annus horribilis for us, no doubt, we are seeing a light at the end of the tunnel,” he said.

McGrath, who has been through five cycles in his 35-year career, said the market was one year into a correction period that would run for about two years.

“I think we’re getting towards the bottom of the market,” he said.

“It may get a little bit worse before it gets better but I think that most of the price correction has been seen already … you might see 2-3 per cent more in Sydney come off,” he said.