ASX 200 better buy: REA or Domain shares?

As the Aussie property market cools, let's see how these two leading businesses stack up.

| More on:
Drawing of a rising arrow and home in chalk.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The current environment of soaring inflation and rising interest rates is having a widespread impact across the S&P/ASX 200 Index (ASX: XJO).

But it's not just ASX shares that are being hit. 

As the Reserve Bank of Australia hikes rates to curb inflation, the Aussie property market is also coming under pressure. 

House prices across the country are falling as home buyers see their borrowing capacity reduced and future mortgage repayments head north. 

This has ramifications for ASX 200 shares REA Group Limited (ASX: REA) and Domain Holdings Australia Ltd (ASX: DHG), which operate the two leading online property marketplaces in Australia.

Lower house prices could see fewer properties come to market, leading to lower listing volumes on sites like realestate.com.au. 

However, lower volumes could be offset by increased advertising efforts by agents, who could rely on more premium packages from REA and Domain to clear their properties.

While the outlook for ASX 200 property shares is mixed, let's take a closer look at REA and Domain to see which one could be a better buy.

Getting to know REA Group

REA is best known for its leading online property marketplaces in Australia, led by realestate.com.au. It also owns realcommercial.com.au and flatmates.com.au.

Sitting alongside these online advertising platforms is data insights business PropTrack, formerly ASX-listed broker business Mortgage Choice, and home loans business Smartline.

Rounding out REA's network are various equity investments across the globe. 

It has a majority stake in the number one property marketplace in India, along with minority stakes in the number one sites in Singapore, Vietnam, Malaysia, and Thailand.

Unpacking Domain

Domain is best known for its eponymous property platform, which goes head to head with REA. 

It also owns listings websites Commercial Real Estate and Allhomes, the latter of which is the top-ranked site in Canberra.

Complementing this core business is a range of agent solutions across property data, point of sale, inspections, and campaign management. 

Like REA, Domain also operates in the home loans space. But unlike REA which has a global network, Domain's operations are solely on Australian soil.

REA vs Domain – compare the pair

Now that we've laid the groundwork, here's a summary of how the two companies stack up against each other.

It's worth noting that for both companies, FY22 growth has been muddied by acquisitions.

While REA reported 18% revenue growth excluding acquisitions, Domain didn't provide investors with a metric for organic growth.

READomain
Market capitalisation$17.2 billion$2.3 billion
FY22 revenue$1.16 billion$357 million
FY22 revenue growth25%23%
FY22 profit growth19%3%
Trailing price-to-sales ratio15x6x
Trailing price-to-earnings ratio45x61x
Trailing dividend yield1.3%1.7%
Majority shareholderNews Corp (ASX: NWS) – 61%Nine (ASX: NEC) – 60%

The case to end your search with REA shares

The power of REA lies in its dominant market position. Realestate.com.au averages 124.1 million visits each month, a whopping 3.36 times more visits compared to its nearest competitor, Domain.

In fact, according to market research firm Nielson, realestate.com.au is Australia's seventh largest online brand, ahead of big names like Amazon (NASDAQ: AMZN) and PayPal (NASDAQ: PYPL).

As the largest player, REA experiences strong two-sided network effects. The more agents that join the platform, the more valuable the platform becomes to consumers on the hunt for their next (or first) property.

And the more prospective renters and buyers that join the platform, the more valuable it becomes to agents and vendors looking to get their listings in front of as many people as possible.

Benefitting from a first-mover advantage, REA has cultivated its position as the go-to online property marketplace for consumers. As a result, agents flock to the platform, spending valuable advertising dollars to get access to the biggest and widest audience.

After conquering the local market, the company hopes to replicate this success overseas. Emerging markets, in particular, will be a key growth driver for REA as online penetration only increases.

The case to knock the hammer down on Domain shares

The bull case for Domain shares centres on the company's evolution to a marketplace model, a strategy that was born during COVID.

This strategy is all about creating an ecosystem of services where Domain can support agents and consumers at more points on their property journeys. And, in turn, expand Domain's addressable markets.

To this end, the company's business model is evolving from a publisher model that supports a one-off transaction, to a property ecosystem that is responsive to the entire property journey. 

Building on long-term and trusted relationships, there are four key pillars to this strategy: core listings, agent solutions, consumer solutions, and property data solutions.

Underpinning each pillar is different initiatives, powered by a mix of internally-developed solutions, acquisitions, and joint ventures. 

For example, market segmentation and flexible pricing support growth in controllable yield for Domain's core listings business.

And its recent acquisition of Realbase adds to the company's end-to-end suite of workflow solutions that help agents grow their business.

Like any ecosystem, there's also value in how the different pieces of the puzzle come together. Here, Domain is leveraging its data and expertise across verticals to collaborate on new features and produce better outcomes. 

Better ASX 200 property buy

As a long-term investor with a tilt to quality, it's hard for me to go past REA.

The company is a proven performer with a dominant market position, strong brand power, compelling network effects, and promising global prospects.

The REA share price has tumbled 24% this year, underperforming the broader ASX 200 index which has dropped 7%.

But across a long-term investment horizon, REA shares shine. The REA share price has nearly doubled over the last five years. And it's grown more than 700% in the last decade.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Cathryn Goh has positions in PayPal Holdings. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon and PayPal Holdings. The Motley Fool Australia has recommended Amazon, PayPal Holdings, and REA Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Real Estate Shares

A business woman flexes her muscles overlooking a city scape below.
Real Estate Shares

Why is this ASX 200 share rising at nearly quadruple the rate of its peers?

This stock has shot the lights out over the past 12 months.

Read more »

Three smiling corporate people examine a model of a new building complex.
Earnings Results

2 ASX 200 real estate shares leaping higher on earnings news

ASX 200 investors are bidding up the two leading real estate stocks following their earnings reports.

Read more »

Smiling office workers fling a stack of papers into the air.
Share Market News

Here's how the ASX 200 market sectors stacked up this week

The ASX 200 gained 1.71% over the week and one market sector soared a whopping 5.9%!

Read more »

Real estate agent and client exploring property.
Real Estate Shares

Lendlease share price charging higher on $1.3 billion Stockland deal

ASX 200 investors are bidding up the Lendlease share price on Monday morning.

Read more »

Smiling office workers fling a stack of papers into the air.
Share Market News

Here's how the ASX 200 market sectors stacked up this week

The ASX 200 gained 0.5% and the real estate sector led the way this week.

Read more »

A man sits at a desk holding a small replica house in his hand, upset at the sale of his property.
Real Estate Shares

The 2 ASX real estate shares everyone's piling on to right now

Property stocks have been rocketing the past few weeks, and these companies are the ones investors are flocking to.

Read more »

Mini house on a laptop.
Real Estate Shares

'Clear path' to 20%+ earnings growth: The ASX 200 stock doing all the right things

Cutting costs while adding customer volumes could prove to be an excellent catalyst for these shares.

Read more »

A man in his 30s holds his laptop and operates it with his other hand as he has a look of pleasant surprise on his face as though he is learning something new or finding hidden value in something on the screen.
Real Estate Shares

I invested $2,000 in this beaten-up ASX share which had dropped 60%!

I’m aiming to build my wealth with this stock.

Read more »