Property management: the next 12 months

It seems every other day someone will write about AI or VR as ‘the future of property management.’

While they rave breathlessly about agent-less inspections and facial recognition of the future, they miss the forest for the proverbial trees. The conditions for a colossal industry shake-up are already here.

Exciting as robots and machine learning are, they are not going to be what gets agencies through the next twelve months.

So let’s talk about what will.

We caught up with Macquarie Bank’s National Head of Residential Real Estate, Domonic Thompson, for his bird’s eye observations on the health of the property management sector in Australia.

Here are his thoughts on surviving and thriving in the market as it is right now, as it will be in the next twelve months—and beyond.

Let’s start with the softening market. There’s been a drop in buyers in recent months, particularly in Victoria and New South Wales. Does that affect the landscape for property management business?

In this environment, it’s agencies that rely heavily on sales revenue who will be the most exposed.

When a market softens and you see subdued buyer activity, businesses will only be able to stay competitive by offering higher quality service than their competitors, while lowering the cost to serve. That will be tough on smaller agencies with principals who will still have to drive the top line while staying on the tools.

Typically, property management has a lower ROI than sales. But in a softening market, property management is what’s keeping the lights on and the wages paid. So it’s crucial for agencies to be focusing on optimising that part of their business.

And are there any other factors affecting the property management sector?

Yes. If we look at where social media is going these days, we’re all about ratings. It would be untrue to say that agents aren’t subjected to ratings like Uber drivers, and that it doesn’t affect business.

What’s different of course, is that Uber is based on a purely transactional model, and property management isn’t.

Right, because once you get out of the car, the transaction is complete. But property management is an ongoing relationship between landlords and agencies. And yet we still have sites like Rate My Agent, which identifies and rates individuals.

We do. And the problem with those kinds of platforms that compare agencies and agents is that they eat away at the commission pool. Rate My Agent might be good for business, but it isn’t a free service. What’s more, that kind of comparison also forces downward pressure on commissions by consumers wanting a better deal.

So what’s your best advice for agencies to survive this period? How can they come out on top?

Firstly, we need to transition from a transactional-type business model to a relationship-based model. By that I mean, move away from property management as a series of transactions (as it generally is now), towards a property services business.

It’s certainly not a quick transition. But real estate businesses are in a position of advantage: they have real relationships with landlords, and they manage people’s biggest investments. Investments to which they are also emotionally attached.

They are in a great position then to do more than just rent out properties. They can offer a range of services related to that core business that can provide additional streams of revenue.

You’re saying that transitioning to a property services model means identifying what those additional services might be and incorporating them into your business?

Yes. It shouldn’t be about providing referrals to other businesses as it is now—such as recommending a painter or a surveyor or a tax accountant. If you were to be a property services firm, you would take care of that service, but you would also be saying things like, ‘Not only will we sort this out for you, but we’ll also be able to save you time here, here, and here.’

The idea is to become that one point of reference to the customer, by adding in other services that typically haven’t been provided before.

And you would bring in an additional revenue streams by charging for those adjacent property services?

Right.

So how do agencies do this, in practical terms?

We referred to McKinsey’s three horizons of business growth back at Macquarie Bank’s Perspective conference in June 2018. The three horizons were really about where we believed the industry needed to put their focus in order to not only survive, but thrive in a challenging landscape. And they’re a good blueprint for property management businesses as well.

Horizon one is really all about getting your house in order, and defending your core business. Horizon one looks at where your primary source of revenue comes from, and focusing on how to maximise your efficiency, and lower your cost to serve. It’s about managing and optimising your primary source of income.

And that’s always going to be an ongoing focus, as it should be for any business. So in practical terms, you need someone in your business whose primary goal is always going to be on the first horizon.

Horizon two looks at the immediate adjacencies.

The adjacent revenue streams you spoke about in terms of property services?

That’s right. So when you focus on the second horizon, you do that while you are also focusing on the first one. In the second horizon, you ask ‘Where can I find other sources of revenue to support my primary income?’

This is where agencies can start to grow.

There are clearly some adjacencies people have tried before here. We know they have tried incorporating finance and lending, as well as home insurance, utilities and connections. Some are looking into maintenance at the moment.

These are the logical adjacencies in property management. But they aren’t the only ones that you could investigate. For example, instead of simply incorporating existing services and suppliers under your umbrella, you could review prices of utilities or trade services or whatever might save your landlord time and money. You might help a landlord or vendor manage their investment by doing some extra legwork for them. This goes beyond the transactional model to a relationship-based model.

Ok. So what about the third horizon? What does it look at?

It looks towards the future of the business. It asks, ‘Where else could I find more income? How else can I make my business more profitable in the future?’ It’s all about research, experimentation, and keeping an eye on developments in the market.

The important thing to remember about horizon three, just as with horizon two, is that is must be worked on concurrently. For a business to grow, McKinsey argues, business owners need to be developing their business in all three horizons at once.

What might be happening in that third horizon now for property management businesses? What developments have you seen?

At Macquarie Bank’s Perspective Conference, one of the factors we looked at was market agitators (or disruptors), and the fact that the real estate landscape is changing. And some of it will change forever.

Client experience is what drives disruption. To be at the forefront of your agency’s future, then, you should focus on what you might be able to do to radically improve client experience.

Does that mean they need to ‘be’ the disruption?

Not necessarily. The message we expressed at the Perspective Conference was that principals should be trying to lean into these conversations about changing tech and business models, and show an interest in them. Show an interest in the change and evolution of tech.

The point is not to say ‘Until we see the holy grail, we’re not interested, and we’re not going to do anything.’

So, who are the disruptors?

They tend to be smart people, often with very deep pockets, who are experimenting with the current business model. Increasingly too, they’re from outside the real estate industry. This isn’t a theoretical group, either. They are already here.

The reason it’s attracting these people is because the real estate sector has a very large revenue and profit pull. That’s about $15 billion in Australia across sales and property management income, plus income from things like adjacencies.

Finding the business model that yields the best return in this $15 billion pool is the holy grail, in this sense.

Right now, people are looking at the data and asking, ‘What if we rethought this?’ and ‘What if we tried that?’ Whether they get the model right straight away makes no difference. They’ve got time to get it right. And they’re going to keep experimenting until they get it right.

How much attention should property managers be paying to this sort of experimentation?

These agitators don’t necessarily want to come and take the whole commission pool. They’ll be happy to take a little chunk of it. But for business owners, it would be unwise to get complacent about this change. Responding to drops in revenue by cutting expenses, and waiting for the market to change, is the wrong move.

That’s not paying attention to the third horizon at all, or perhaps even any horizon of growth. Agencies should be watching and listening, and experimenting with solutions. They should be keeping an eye on the disruptors, and then work towards finding what tech and other options might work for them.

In other words, if property management businesses wanted to follow the McKinsey blueprint for growth, it might look like this:

  • They should still focus on maximising efficiency and ROI in their core business.

  • If they aren’t already, they should also look for additional streams of revenue—by offering a broader range of property services (or adjacencies).

  • And finally, they should keep learning and experimenting with how they can grow and be more profitable in the future, particularly by focusing on property tech and market disruptors.

And is property tech (or proptech) doing enough to support property managers under that business model?

Proptech is a really big field and it’s difficult to pinpoint any one place where that investment money is going. But I do think we will get to a point where everyone is effectively working from the same operational platform or system.

Over the last few years, people have been buying small pieces of technology where it gives them an incremental benefit to their business. Some of these offerings are quite narrow and bespoke in their focus and the service they’re providing. But the scope is now broader. More is to be had.

At the moment, it seems everyone’s got 25 or 30 of these little pieces of tech, and none of them talk to each other (or at least, not very well). Arguably, the incremental benefit of those and the efficiency that each delivers is offset by the fact that there’s duplication, and new expenses and more logins.

That’s where I see the excitement and growth in the next twelve months. Those that challenge why we do what we do in the first place are the ones to watch, not just those trying to find the most efficient way of doing the same thing.

So you envision agencies picking a master system that plugs into a number of other apps and integrations?

I’m visualising agencies using one primary piece of middleware tech with plugins, rather than a different system or app for each task.

And finally, if you were to give agency principals one piece of advice for the next twelve months, what would it be?

Understand your financial position.

Know what position your business is in, financially. That’s not just about the next twelve months: that’s something you should always do as a business owner. But if you haven’t already, then now is the time. It’s critical to get to grips with your financials.

I would also say that business owners to need to have a plan, and a view on your business. As a financial institution, it’s one thing for a business owner to hand you their financials, but if they are able to articulate exactly what it means, and their views on it, that speaks volumes for their business acumen. In my experience, businesses that work to a plan and continually review it are able to adapt to changing operating environments. And they tend to be more successful.

Learn more about Macquarie Bank’s 2018 Perspective Conference.

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