McGrath Ltd flags treacherous conditions in Sydney’s property market

Is McGrath Ltd (ASX:MEA) the canary in the coal mine for Sydney’s property prices?

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Shares in Sydney-focused real estate agent McGrath Ltd (ASX: MEA) plunged 17 per cent to 50 cents this morning after it warned the softening property market means it won’t meet financial year 2018’s earnings expectations.

Bizarrely, McGrath uses the estimates of sell side stockbroker Bell Potter as a yardstick for its operating performance and informed the market today that it would not meet the broker’s estimates for $16.6 million in full year EBITDA.

The estate agent now expects annual EBITDA to come in 20%-25% below the $16.6 million estimate.

The group blamed the EBITDA shortfall on “lower listing volumes, lower agent numbers and a significant sell-down in the traditionally volatile project marketing segment”.

Project marketing generally refers to large off-the-plan apartment development sales that are often snapped up by Chinese or other investors, with around 1 in 4 property sales in NSW still made by foreign buyers.

McGrath blamed the softening new apartment market on “government policy changes around foreign buyers and developers coupled with tighter lending requirements”.

The softening of the off-the-plan apartment market is no secret with billionaire property developer Harry Triguboff of market leader Meriton also warning the new apartment market is sagging on the back of government policy deterring Chinese or buy-to-let apartment investors.

In response to the toughening conditions, McGrath’s management today flagged upcoming job cuts as among a range of ways to find $5 million in annualised cost savings.

The property group also acknowledged its time as a listed company has proven troublesome and flagged that it was considering its “future structural options” given the additional demands of operating as a public company.

Perhaps the board is considering taking McGrath private as the IPO has lead to an outflow of staff and giant devaluation of the company.

As such share market investors may want to avoid listed estate agents to focus on the upcoming IPO of online advertising business or rock-solid property management groups like the Westfield shopping centre business Scentre Group Ltd (ASX: SCG).

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. 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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