Some ASX real estate stocks have struggled in the last couple of years because of the headwinds of high interest rates. However, whatever happens this year, I'm expecting REA Group Ltd (ASX: REA) to deliver impressive underlying growth.
I'm not suggesting what's going to happen with the REA Group share price; we don't know without a crystal ball. Plus, it has risen by more than 30% in the past 12 months, so it's sitting on a more elevated valuation.
But, share prices do follow earnings over time, and 2025 looks like it could be a strong year for the business for a few different reasons.
More listings
REA Group is the owner of realestate.com.au, Australia's leading property portal. It receives more visits by prospective buyers, which encourages more sellers to list their property on the portal, which then attracts more buyers – it's a helpful cycle.
The property portal business is seeing more listings on its portal in FY25 as some owners look to offload their real estate, which could help drive the company's revenue and earnings higher in this financial year.
In the first quarter of FY25, the ASX real estate stock reported that national residential listings were up 7% year over year, with Sydney listings up 11% and Melbourne listings up 9%. October national residential listings were up 14%. If the level of listings continues in the coming months, this could be an important driver for earnings in 2025.
If Australian interest rates reduce, this could also encourage more property owners to list their property if they think they'll get a better price.
Price rises
Not only is REA Group seeing a lot of listings, but the business is expecting to generate more revenue per listing.
The company has suggested its residential 'buy yield' is expected to grow in the "double-digit" in FY25, largely thanks to price rises. This should be a solid tailwind for revenue and earnings.
REA Group said its total revenue grew by 21% to $413 million in the three months to 30 September 2024, including the benefit of the buy yield benefiting from a 10% average premiere+ price rise.
The ASX real estate stock's revenue should continue to benefit in FY25 from the price rise, in my view.
Operating leverage
As a digital business, the company's profit margins can rise because there's a good likelihood its revenue can rise faster than its costs. REA Group has already built its digital infrastructure, so costs won't necessarily grow at the same speed as revenue, depending on what else REA Group is spending money on.
In the first quarter of FY25, REA Group reported total revenue grew 21%. While total costs increased 19%, it only increased 17% excluding the impact of the Realtair acquisition, with Australian expenses growing by 14%.
Operating profit (EBITDA) grew by 23% to $243 million, demonstrating the ASX real estate stock's operating leverage. I believe profit can continue to rise faster than revenue in 2025, despite the increased expenditure in India.
Indian growth
India is a massive market thanks to its huge population. REA India is taking advantage of the digitalisation of that economy, so I think it's worth the shorter-term investment to try to become as large as it can and entrench its market share.
In the long term, I believe REA India could become a sizeable contributor of earnings for the overall company.
In the first quarter of FY25, REA India reported revenue growth of 42%. If this segment continues to report strong progress in 2025 and beyond, it could be a significant pillar for the ASX real estate stock.
