The REA Group - PropertyGuru Deal: An Online Marketplaces Deep Dive

The news that PropertyGuru has reached an agreement with REA Group to acquire the Australian portal giant’s assets in Malaysia and Thailand represents a fairly momentous shift in the region. Apart from seeing previously bitter rivals iProperty.com.my and PropertyGuru.com.my become stablemates the deal will have a number of knock-on effects for the companies involved as well as for real estate marketing in Southeast Asia in general.

The background - A deal maybe not so unexpected

As Online Marketplaces Chairman and former REA Group CEO, Simon Baker tells us, a deal between REA Group and PropertyGuru which capitalizes on both companies' scale in the region has been on the cards for some time...

"Back in 2012 there were advanced discussions between iProperty and PropertyGuru to merge the businesses.  It was clear then, as it is now, that scale is the most important element to win a market."

“This is an obvious deal for the REA Group. Managing international assets is a challenge for any business and even more so in the property portal world. Therefore, the sale of SE Asian assets to PropertyGuru in exchange for equity provides several benefits - it removes the need to remotely manage the businesses (and most likely a headache), it creates the opportunity to take an equity stake in a locally lead market leader, and creates scale and therefore an immediate uplift in the valuation."

“It is good to see the right deal done, even if it did take a decade!”

What does the deal mean for PropertyGuru?

Although the amount of money changing hands has not been disclosed, the deal to acquire not only huge rival iProperty Malaysia, but also data platform Brickz.my in Malaysia and Thai portals thinkofliving.com and Prakard.com is easily the biggest deal in PropertyGuru’s 14-year history. The task now is to integrate the new acquisitions and take advantage of the huge opportunities presented by companies with enormous potential synergies.

In an initial press release, PropertyGuru was keen to welcome staff from its newly acquired businesses but as in all of these types of mergers, there may well be jobs that are rendered obsolete and investors looking to PropertyGuru to trim the balance sheet before a potential liquidity event. Whether the likes of the recently appointed iProperty GM Shylendra Nathan are kept on long-term remains to be seen.

One thing that is no longer up in the air is the claim to be Malaysia’s #1 property portal. This was, to put it mildly, a bone of contention between iProperty.com.my and PropertyGuru.com.my for some time. Between them, the two portals will have combined website visitor numbers totalling over 6 million according to similarweb and a very healthy market dominance.

That dominance is likely to look very attractive on any potential PropertyGuru prospectus. The Singapore based company pulled back from an IPO filing in October 2019, a couple of weeks after REA Group had announced its joint venture with regional rival 99 Group. According to company CEO Hari V. Krishnan in comments made to Bloomberg though, PropertyGuru is constantly weighing up its options and will go public “If the opportunity is right and if we feel our assets would be valued by public market investors”.

Newly established Malaysian market dominance to go along with leading positions in Thailand, Vietnam and Singapore could be the missing piece in the puzzle. With Southeast Asian companies such as Gojek and Tokopedia making headlines with their recent public debuts and more than one ex-portal-boss-lead SPAC still searching for a candidate, we may well see PropertyGuru take the public plunge sooner rather than later.

What does the deal mean for REA Group?

REA Group will be taking 18% equity in PropertyGuru as well as a seat on the company’s board. All of the PR back and forth between iProperty and PropertyGuru around their Malaysian portals in recent months may just have been posturing by both sides looking to drive a hard bargain and troll journalists in the process. 

For its 18%, REA Group has received an undisclosed amount and has divested from a business in iProperty Malaysia that has seen declining relative brand strength for some time:

The company has never been confident enough to break out its Southeast Asian operations in its reporting to the market and has been including a perfunctory couple of lines about “exciting long-term opportunities” or “long term growth strategy” in its annual reports for some years. According to their own press release, the businesses being sold to PropertyGuru are expected to add A$15M in revenue to REA’s balance sheet in FY21 but are also expected to account for A$11M in EBITDA reduction over the period.

REA Group still has “exciting” interests in India in the shape of Elara Technologies (Housing.com and Makaan among others) but the potential of its interests in Southeast Asia was evidently not exciting enough to withstand the temptation of a deal with PropertyGuru and the company may privately be pleased to have sold off businesses that are taking off gains in its balance sheet while waiting to truly take off.

As part of the deal, REA Group must also divest from its other Southeast Asian portal interest, namely the 27% stake it owns in 99 Group the operator of rumah123 in Indonesia as well as the eponymous 99.co portals in Singapore and Indonesia. Talks here are said to be ongoing and at an advanced stage. Again, the effect on REA’s balance sheet will be a positive one with REA Group saying it expects to recoup A$10M from the divestment, roughly the same amount it put into 99 Group on the formation of the joint venture in October 2019.

Apart from removing 99 Group and iProperty from its balance sheet, REA Group is getting a decent share of what looks like being, if not a total monopoly, then at least a very very dominant position in a market where underlying meta-trends are all leading to increased profitability. REA Group no longer has to worry about so many spinning plates and can sit back and help PropertyGuru from the sidelines.

What does the deal mean for 99 Group?

The most obvious impact on 99 Group might be the loss of an investor in REA Group that provided not only capital but also experience and expertise in the sector. On forming the joint venture with REA Group in 2019 Cheung said “Our innovative DNA plus REA’s unrivalled experience and resources makes this partnership a lethal combination Southeast Asia has not seen before”. The problem for 99 Group is that a similar lethal combination is now the company’s main rival in the region.

On the other hand, it is also true that newly free from REA oversight, 99 Group can look to new opportunities and horizons. Chief among these may be a move into Malaysia to provide some competition for the newly minted dominance of PropertyGuru, a move that Cheung alluded to in comments published by Bloomberg this week:

“This move allows us to free from the shackles of having our most significant shareholder being a public company”

99 Group still has a position of market leadership in Indonesia and is the #2 player in the lucrative Singapore market. To go any further than this through the portal company will have to go cap in hand to VCs to take on the financial clout of a rival now backed not only by KKR and TPG but also indirectly by REA Group’s majority shareholder Newscorp. With heavyweights like Sequoia Capital and 500 Startups already on board as investors and a burgeoning interest in Southeast Asia from international funds, however, the conversations with VCs are not likely to be fraught.

In a statement, REA Group confirmed that 99 Group would maintain control of iProperty Singapore and Rumah123 in Indonesia which were previously fully owned REA assets before the 2019 joint venture handed operations over to 99 Group. The upshot is that Southeast Asia will now see the strange scenario where iProperty Malaysia and iProperty Singapore will be owned by two different regional rivals despite having the same name and branding.

What does the deal mean for the region?

REA Group shifting the furniture around a bit in the regional property marketing industry is just a smart business play and not an indictment of the pace of progress towards mature-market profitability.

Southeast Asia remains a very attractive region with 40 million new potential customers coming online throughout 2020 according to Google research. Increased digitalisation and property markets which are starting to mature are what made the region so attractive to REA Group and Newscorp in the first place and this is only set to accelerate. Although events in Myanmar have proven that the region is by no means uniform or totally developed, the amount of venture money pouring into tech companies like Gojek, Grab and Carousell shows that there is great expectation for the region.

There has been similar consolidation in regions on a similar trajectory within the last 12 months. One dominant property portal is worth more than several competing ones; the deal made between OLX Brazil and Grupo ZAP and the deal which saw Dubbizle and Bayut join forces in the UAE are analogous examples of deals that made sense for all parties because they created insurmountable market dominance.

As long as there are no antitrust pitfalls, joining forces in the real estate marketing industry makes sense. As Adevinta is finding out with its acquisition of eBay Classifieds, regulators of mature markets are more likely to object than those in emerging markets. The only real losers in these scenarios, it could be argued, are the agents now paying fees to one combined entity instead of two competing ones.

As our investigation into portal profit margins showed, by and large, the higher the country’s GDP, the higher the fees in its property market and the more profit made by portals. In consolidating the Malaysian and Thai markets, this deal will mean that down more money will be made by fewer companies in those countries. Like in many emerging property markets, the question seems to be who has the money and the patience to wait for Malaysia’s property industry to yield truly big margins. In this case, you can bet that REA Group and Newscorp do.