I think that REA Group Limited (ASX: REA) is a buy at this share price.
REA Group is the largest property portal business in Australia, it owns and operates various sites including realestate.com.au, realcommercial.com.au, Spacely and flatmates.com.au.
The REA Group share price has fallen 8% over the past month and a half, however I think its prospects look more compelling than in October.
Here are three reasons why I think REA Group looks like a good buy at this share price:
Property market continues to recover
The Australian property market has been roaring higher. In November 2019 we saw national prices go up 1.7%, Melbourne prices went up 2.2% and Sydney prices grew 2.7%. In the past quarter we've seen national prices rise 3.8%.
Not only does this give general sentiment support for everything related to property, but it supports advertising price increases for REA Group specifically. If REA Group maintains the same price to property cost ratio as in 2018 (when house prices were lower) then it would justify higher advertising prices for REA Group. Advertising online is a key part of the selling process, so REA Group could charge even higher prices over time.
REA Group has a very powerful brand, this should mean prices can go higher with little to no detrimental impact.
Volumes likely to return
If house prices are falling I wouldn't want to sell my house. With house prices now rising again I think it's quite likely we're going to see more property come onto the market.
REA Group has told us that September was a tough quarter, but I think there's a fair chance that the December 2019 quarter will have an uplift in listings.
My own suburb is not representative of the whole country, but I've seen more things come onto the market in the past couple of months.
Interest rates justify valuation
You've probably heard and read the gravity saying many times, but I think it's worth repeating again.
Interest rates act like gravity on asset prices. The lower the interest rate the higher asset prices can go. If interest rates go higher, asset prices should go lower.
With RBA interest rates so low I think it's clear that share prices should be a bit higher. I think REA Group's share price is justified to be at this level and arguably should be even higher. The question is how long interest rates will be this low (or even lower).
Foolish takeaway
REA Group is currently trading at 36x FY21's estimated earnings. I believe it has a very good future with growing profit margins and the investments in overseas property sites could be good for future profit too.
