Is REA Group Limited the best way to profit from the property market?

The REA Group Limited (ASX:REA) share price is heading higher again.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Many Australians will have grown rich via the appreciating equity in their homes recently with the Sydney and Melbourne property markets in particular delivering some spectacular rises in wealth to homeowners and their families.

And while it's surprisingly popular to moan about rising house prices in Australia, I doubt you'll ever find anyone complaining about rising share prices for companies they own.

One listed company in Australia with a rising share price and exposure to the underlying strength of the Australian property price obsession is REA Group Limited (ASX: REA).

The operator of leading property trading website realestate.com.au has delivered share price gains of 350% over the past five years as its revenue growth is tied to the number of properties advertised for rent or sale across its websites.

Despite listing volumes being lower than normal in Australia for the six-month period ending December 31 2016 the group still managed to lift its earnings 13% to $200 million and half-year dividend 11% to 40 cents per share.

In total the group earned 92.5 cents per share for the half year, which means its payout ratio is less than 50% as this is a business that likes to re-invest profits for growth.

REA Group has been investing substantially in acquiring or part-owning overseas property businesses in North America, India, Malaysia and other high-growth Asian markets.

Importantly, REA Group is also majority owned by global media giant News Corp (ASX: NWS), which means it retains its business support and network of global influence.

REA Group's capital light business model in operating websites means it can generate consistent returns on equity of around 35% for investors and that's partly why shares ($60.33) trade at around 32x analysts' estimates for $1.87 in full year earnings per share.

Despite the company's attractive economics and my confidence in the excellence of its management team, I would prefer a price around 10% lower before buying shares.

A similar business that is also now trading on a marginally more attractive valuation is online recruitment marketplace SEEK Limited (ASX: SEK). It makes most of its money by charging recruiters or employers to advertise job vacancies on its website, which is a key part of the business cycle unlikely to be ever too disrupted by jobs and networking rival LinkedIn. In fact SEEK's core Australian business was its star performer for the half-year ending December 31 2016, which suggests its still the go-to site for employers looking to recruit employees.

Unfortunately, SEEK's share price has risen 10% in 2017 which means it's even outpacing Sydney's house price growth. However, I expect patient investors may soon get an opportunity to buy the shares for around $15.80, which I think is a reasonable entry point for a business with multiple growth levers and global operations.

Motley Fool contributor Tom Richardson owns shares of REA Group Limited and SEEK Limited. You can find Tom on Twitter @tommyr345 The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »