RIDING THE BUBBLE

There’s room for growth in franchised real estate.

Sydney’s housing bubble is a prime example of how franchised real-estate companies can benefit from investment in residential and also commercial properties, writes Noha Shaheed.

While most franchised real-estate agents tend to focus on residential property, commercial property is also important. This involves the sale, lease and management of offices, retail stores and industrial sites.

Rising property prices have encouraged investors into the market, as increased equity in existing properties allows many owners to buy multiple properties, says IBISWORLD’s Real Estate Agency Franchises in Australia October 2016. Increased commercial property activity has also boosted industry revenue growth.

Real-estate industry revenue growth is forecast to slow to an annualised 1.1 per cent over the next five years, to reach $7.6 billion in 2021-22.

Four major real-estate agencies offer options for franchisees seeking to enter this market...

Harcourts

Harcourts is a privately owned real-estate brand that started in New Zealand in 1888 and now works in 10 countries. With 400 locations, Harcourts Group Australia is the master franchisor across Australia.

“We first stepped out of New Zealand 20 years ago,” says CEO Marcus Williams. “We are the third-largest real-estate group in Australia.”

Behind-the-scenes licensing arrangements are in place, but terms are tailored for each individual new franchise. Five-year terms are the standard.

“We insist on franchisees being owner/ operators,” says Williams.

While the licensee in charge must have the proper expertise to run the business, there are instances where there is a partner investor, but the licensees need to have a real-estate licence. Statutory regulations specify the qualifications and responsibilities for licensees.

“We want to be sure the person in charge is actively involved in the business, a former real-estate agent or someone who has worked in the industry,” says Williams.

A standard Harcourts territory equates to 10,000 houses, and depends on how close the franchise office is to others, and how many people work for the franchise. They are generally non-exclusive, but there are rules to govern prospecting.

To become a franchisee, buyers need to pay a joining fee of $5000 to $10,000 for a standard five-year term with an option to renew for another five years. To secure a lease and fitout requirements, costs range from $50,000 to $250,000. In terms of overheads, the average business owner has three to five staff members.

Support includes access to state leadership teams, problem solving, business planning, disputes support, marketing, training, a full technology suite of Harcourts One products and apps, annual conferences, leadership focus, and access to Harcourts Academy, a registered training organisation.

Franchisees need to be good listeners, financially astute and driven, says Williams. “They need to understand the why - why they are going into business.”

He has a positive outlook on the the $3 trillion housing market. “Australians love real estate,” he says.

His advice for potential franchise buyers is to really know what they are getting into. “You have to take your time to ensure the values of the leadership and franchise business are aligned with yours. Look under the bonnet to ensure the group has the value proposition to make you successful.”

Laing & Simmons

Laing & Simmons MD Leanne Pilkington says the boutique agency offers a variety of options.

“These include a traditional franchise, franchise partner (for a group planning to open multiple offices), virtual franchise for those who are not quite ready for the expense of an office, and a full partnership where we own half of the business with the principal.”

As owner/operators, franchisees are given territories. They cannot canvas for business in another franchisee’s territory. “Most of our franchisees are happy with this system as it prevents internal work disputes and confused brand messaging,” says Pilkington.

While she does not quote figures for initial investment costs, she says there are no upfront franchise fees, but a new business owner really needs to have 12 months’ worth of expenses set aside to be safe.

“Franchise terms are for five years, but most of our franchisees stay on for multiple terms.”

Overheads can vary widely depending on location and the size of business, and also on whether you are planning to buy a rent roll (a register of a landlord’s properties with the rental amounts).

Support includes marketing, training, technology, induction, on-boarding and a suite of shared backend services including bookkeeping, accounts, HR, technology and property management.

“Passion and enthusiasm for the industry” is the overriding factor when recruiting franchisees, says Pilkington. “But we do look for experience in real estate, if not necessarily previous business ownership. People who already have a network in the area they are looking at are also ideal.”

Regarding the current housing climate, she says it is not about the price of the property but more about the turnover. “When not much property is transacting, it becomes extremely competitive around listings.”

She advises prospective franchisees to do their research on the area they want to target. “Know your numbers, know the competition and also be very clear on what your expectations are from your franchisor.

“We believe that different franchise groups appeal to different people, so understand the values of your potential franchisor and make sure they align with yours.”

Ray White

Established in the Queensland town Crows Nest in 1902, Ray White has evolved to almost 1000 individual offices across Australia, New Zealand, Indonesia, India, Malaysia, Papua New Guinea, China, the Middle East and Atlanta in the US. According to its website, the group sold more than $25 billion worth of property last year.

Ray White is still a family-owned business spanning residential, commercial and rural property as well as hotels, marine, property management and property funds investment.

Andrew McCulloch, CEO for network development, says Ray White has “a traditional franchise model in the sense we provide systems, tools, training and marketing”.

Owner/operators are preferred, and businesses need to be run by experienced, ambitious property professionals. “It’s very unlikely for us to recruit anyone without experience.”

Franchise terms are five years with no charge upfront. Ray White helps choose sites, and no agreement is provided until a site is secured. Overheads include licensing cost, franchise fee, staff costs, technology ( subscriptions) and, in some state, a marketing fee.

Fitout costs depend on staff numbers. The average site size is 15 sqm. McCulloch says a franchisee usually has one staff member (often a receptionist). Franchisees are provided an onboarding support person.

The business is also territory-free. “We don’t provide territories as it can prevent growth,” says McCulloch. “Our model is very much designed around the consumer.”

He says that when the market is good, more people open independent realestate offices. “When the market is bad, they look for value and support from a franchise system.”

One Agency

One Agency is a real-estate business with a licensing model.

“We license an applicant to a group of suburbs that can comprise a population of 30,000 people,” says Australasian head of membership John Stewart. Licensees can engage in commercial, residential, industrial or any area of real estate they wish, but no prospecting is permitted in another licensee’s territory.

The model allows for buyers to run their own business and ask for support when needed. Stewart said most members are fully licensed, have had 10 to 15 years’ experience in the real-estate sector, have business acumen and are “quiet achievers while being professionally focused”.

The initial investment is $13,000 plus GST, and licensees pay a $12,000 flat rate licensing fee. Owner/operators, licensees can access support within the network.

Stewart says the business can be run from home by a sole operator for less than $5000 a year, which includes overheads, car insurance, phone and licensing fee.

He says it is important for potential buyers to work out what they are looking for from a system, whether it is a franchise or a licence, and understand what they are willing to pay. “There’s a right home for everybody, and you’ll know when you find it.

“Go into the marketplace and talk to everyone. Do absolute due diligence - don’t get side-tracked by just one system.”