The REA Group Limited (ASX: REA) share price could rise today after the property advertising titan announced it had purchased a majority stake in mortgage broker Smartline, and established a strategic broking partnership with National Australia Bank Ltd. (ASX: NAB).
The move will give REA an 80% stake in a business with 300 advisers and a $25 billion loan book. The remaining 20% of the business will be retained by current management, although they may elect to sell their shares to REA in 3 years’ time if certain performance conditions are met. If not, REA will acquire the remainder of the shares 4 years from now.
Later this year, REA Group will launch REA Home Loans, making it a one-stop shop for property buying, selling, and financing. The move is reminiscent of Carsales.Com Ltd’s (ASX: CAR) move into vehicle financing, although that has so far had mixed results.
REA’s move into finance could put the pressure on conventional mortgage brokers like Australian Finance Group Ltd (ASX: AFG), Yellow Brick Road Holdings Ltd (ASX: YBR), Mortgage Choice Limited (ASX: MOC), and Homeloans Limited (ASX: HOM).
Each of these brokers will soon be competing with a super-broker that is fed leads by an advertising titan that gets millions of eyeballs on its website per month.
It sounds pretty bad when I put it that way, but like many other things in investing I’m guessing that REA’s expansion into mortgages will be a slow burn over years. If successful, the company could continue to grow market share and the remainder of the sector could end up consolidating over the next decade. However, Carsales’ experience suggests that the addition of financial services to an advertising platform isn’t an automatic winner.
Still, I think today’s announcement is good news for shareholders.
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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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.