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Could startups hurt REA Group Limited’s profits?

Credit: stratman

REA Group Limited (ASX: REA) released its half-year results in mid-February and the market loved them! Since the results were announced, REA’s share price has improved by over 7%, compared with a 2% return for the ASX 200.

Struggling to grow?

REA group reported a 16% jump in revenue and 6% increase in profit, indicating it is spending more than ever to increase its top line.

To boost its bottom line, the group recently divested its interest in European property websites and invested some of the proceeds in India’s PropTiger website. However, I wonder if there’s a chance that REA Group’s dominant Australian website could come under pressure from nimble startups back on home soil, while management look for opportunities overseas.

A new way to buy property

Market commentators have noted that ‘rentvesting’ might be the ideal way for Generation Y to get into their first home, however in blue-chips areas in Sydney and Melbourne many of these young would-be homeowners are still unable to get into the market because of a lack of savings or lack of income to service the potential loan.

To counter this, and make investment property ownership less daunting, services are popping up everywhere that offer fractional property ownership. One listed ASX micro-cap providing this service is Domacom Australia Ltd (ASX: DCL).

Fractional Ownership?

Fractional ownership works by purchasing a single property in a unit trust with a nominal amount of units, which means that an individual can buy a small fraction of a blue-chip property (at a fraction of its price), while outsourcing the research and negotiation to a professional.

This is essentially turning property ownership into a sharemarket-esque experience, and is creating a secondary market for property purchases away from realestate.com.au.

Impact on REA Group

Invariably companies offering the group buying service will never completely erode traffic to realestate.com.au because home owners will always need a marketplace to sell and buy for homes, but I can see a future where more and more investing is done through these new platforms.

Having tried both methods, obtaining fractional ownership in a blue-chip property in Melbourne’s Port Melbourne, just minutes from beaches and cafes, was far simpler and less time consuming than buying an investment property just down the road from my house in Adelaide. Plus, I can choose whether to include gearing in my strategy to boost returns and my units are re-valued every three months, similar to the stockmarket.

Time to worry?

This is just one of the concerns about investing in REA Group. The company’s profits and dividend are surely tied to the housing market, especially in Sydney and Melbourne, and while they’re still going strong it’s hard to believe we’re closer to the bottom than the top of the market. I would look for companies with more dividend and profit upside.

Big, Fat, Dividends

This company’s dividend is almost the stuff of legends. Its reliable cash flows support a high payout ratio, and the company’s stash of franking credits are the cherry on the top of the dividend cake. Based on the last 12-months of dividends, shares are offering a fully-franked 6.5% yield, which grosses up to a whopping 9.3%, when those franking credits are included.

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. 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.

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