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Why the McGrath Ltd share price could be cheap

Residential property market data released today by SQM Research suggesting that residential property listings picked up nationally over the month of June may be helping the Mcgrath Ltd (ASX: MEA) share price today.

Shares in the Sydneysider real estate agent and lettings management business have bombed since its December 2015 initial public offering at $2.10 per share. Today the stock changes hands for just 64 cents and it has lost around two thirds of its value in 18 months, despite the continued strength of Sydney’s property market.

Factors hurting the business included unusually low property listings over the course of 2016 and the summer of 2016/17, with total property listings for Sydney city bottoming around the time of the IPO and only moving very marginally higher since.

The boom years for Sydney city listings were 2011-2014, with consistently around double the numbers of apartments for sale in 2012 over 2016 according to SQM Research data.

Since 2015 listings generally appear to have decreased in line with interest rates, which suggests many potential property investors and sellers are waiting for decisive confirmation that lending rates have bottomed before taking their properties to market.

Today, the Reserve Bank again kept interest rates on hold and offered no hint that it intends to cut rates again, which suggests the next move in cash rates will indeed be higher.

This could bring more property to market and help the likes of Mcgrath, or REA Group Limited (ASX: REA) and Fairfax Media Limited (ASX: FXJ) as the operators of Australia’s leading online property portals.

Notably, another listed business trying to take market share from established estate agents via a discounted pricing model in Ltd (ASX: BMP) has also struggled recently because of the unusually low listing volumes nationally. BMP shares are down 58% over 2017.

For bargain hunters, McGrath remains a profitable business on a cheap valuation, with a big dividend yield and as such could offer some strong returns over the next 18 to 24 months. Although I wouldn’t view a real estate agent as a classic bottom drawer investment for retirement riches…

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Motley Fool contributor Tom Richardson owns shares of REA Group 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.

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