Will the REA Group purchase of Mortgage Choice pay off?
REA Group is seeking to monetise its very large consumer base of people looking for property, but will the $244 million planned acquisition of Mortgage Choice pay off?
In a statement on Monday, REA Group said the decision to buy Mortgage Choice, will “accelerate REA’s financial services strategy to create a leading mortgage broking business with scale, supported by the group’s digital expertise, property data insights and high intent property seeker audience”.
Morningstar analyst Gareth James notes that the acquisition of Mortgage Choice is relatively small, given that REA Group is an $18 billion business.
But James also recognises that the acquisition for REA Group is part of its strategy to monetise a marketplace with not just real estate agents but financiers too.
In fact, REA Group CEO Owen Wilson said that each month 12 million Australians turn to realestate.com.au to search and finance their next property.
"Together with our Smartline business, having Mortgage Choice join the REA network will enable us to provide our audience with an even greater number of expert brokers to meet their financing needs,” Owen said.
Smartline is the other mortgage aggregator bought by the REA Group. It has also forged an alliance with National Australia Bank for a broking solution.
James also noted that REA Group bought iProperty Group, a listed firm in 2016 but has since then had to substantially write down the value of the business.
For James, REA Group could tap into the broker market by allowing brokers to advertise but instead seems to have adopted a strategy of “buying these channels entirely outright”.
Instead, he sees the acquisition of businesses like Mortgage Choice as potentially risky given that mortgage broking is a very difficult market.
“Banks have moved away from mortgage broking. Mortgage broking is a difficult and challenging industry. It is also a people-driven business, so it is difficult to scale,” he said.
Indeed, Mortgage Choice’s share price continues to struggle, reflective of a challenging market.
He highlights the example of Carsles which also also bought a finance company Stratton Finance only to put it up for sale in 2019.
For James, whenever a business uses ‘strategy’ to describe an acquisition, it doesn’t mean the financials stack up.
A bright outlook for Mortgage Choice?
James’s colleague, Morningstar bank analyst Nathan Zaia believes the acquisition will do well for Mortgage Choice.
“This is a great deal for Mortgage Choice shareholders,” Zaia said.
Zaia highlights that the short-term outlook has been positive for Mortgage Choice given the strong house prices and low cash rates.
“But profits probably won’t rise as fast,” Zaia said.
“With broker commission margins falling, Mortgage Choice is also sharing more of the commission with brokers.
“Mortgage Choice is also turning the corner in terms of investments in the business to retain brokers and attract new franchise owners, and I think that has probably played a role in attracting REA to the business.”