McGrath Real Estate - Strategic Business Plan 2006

MCGRATH REAL ESTATE

STRATEGIC BUSINESS PLAN

2006

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McGrath Real Estate - Strategic Business Plan 2006

EXECUTIVE SUMMARY
The purpose of this paper is to outline planned improvements to the existing business and operating
model, explore earnings growth opportunities and future options where the Real Estate product can
leverage its franchise and branch network to participate in emerging markets.

Over the last five years, Real Estate’s Gross Margin has increased by an average of 18% p.a. from
$18.8m to $41.6m. Over this same period EBIT has increased to $5.8m (F06 forecast $7.6m). Although
achieving satisfactory return on funds employed of 24%, there is significant scope to improve
profitability compared to the wider real estate industry operating around 50-60%.

Management proposes the following strategic objectives to increase EBIT to $41m over a 5 year
horizon.

Item Objective Implementation

#1 Improve Existing Business

1. Restructure Rural & Regional branches
1.1. Co-agentise rural sales team 2 yrs
1.2. Franchise regional stand alone operations & 4 yrs
divestment of rent-roll
2. Expand metropolitan franchise network 5 yrs
3. Integrated office concept (channel marketing) 3 yrs
4. Improve overall Real Estate brand profile 2 yrs
particularly on-line presence.

#2 Build Earnings
1. Franchise acquisitions – multi-branding 2 yrs
2. Provide Industry services capitalising on strategic 3 yrs
stakes in REALTECH (property management) &
Centernet (sales)
3. Establish alliance with utility providers
3 yrs

In achieving the above mentioned forecasts, Management would deliver a fully integrated Real estate
business operating in rural, regional and metropolitan areas right across the country. Operations would
be structured to drive profitability, rather than sales and capital will be deployed in areas of highest
returns and growth in the market place. The brand profile of McGrath would be significantly enhanced
with a greater profile in metro locations. Fully integrated McGrath offices will be established in regional
and metro locations that provide a suite of services, such as insurance, wealth management, banking
and telco, further reducing reliance on climate driven markets for the McGrath Group.

Multiple brands will allow McGrath to increase market share in areas reaching saturation, and provide
accelerated entry into areas with poor coverage at present. To support franchise operations, industry
services will be provided by McGrath controlled entities that ensure access to extensive databases and
provide reliable annuity type earnings.

Future options with uncertain profitability will continue to be explored as the market changes.

These objectives are discussed in terms of risk management, capital requirements, improved
profitability, implementation and resources employed.

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McGrath Real Estate - Strategic Business Plan 2006

The table below provides a summary of the financial outcomes expected from each stated objective
over a 5 year period.

fy06 Obj #1 Obj #2 fy10

$000's Actual Forecast

Sales 80,729 (41,627) 36,538 75,639

Direct Costs (42,896) 41,390 (11,411) (12,918)

Gross Margin 37,832 (238) 25,127 62,721

Overheads (32,650) 17,074 (6,150) (21,726)

EBIT 5,182 16,836 18,977 40,995

Funds Employed 23,000 (22,000) 65,067 66,067

ROFE 23% na 29% 62%

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McGrath Real Estate - Strategic Business Plan 2006

BACKGROUND
1.0 THE BUSINESS OVER THE LAST FIVE YEARS

In F02 the Real Estate product gross revenue totalled $50m which was primarily driven by broadacre
sales contributing 67%, residential sales 25%, franchise business 5%, and property management 3%.
Funds employed were some $5m with 267 Real Estate staff employed in the business.

At that time, management recognised the rural farming population would continue to decline. It was
anticipated that further consolidations and amalgamations of properties would see the number of farms
fall from 130,000 to less than 100,000. This trend has resulted in decreased volume of sales, although
this fall was largely offset against an increase in the average sale price. Also, the drive for further
efficiency would see major corporate and farming families acquire adjoining properties, becoming less
reliant on real estate agents to broker transactions.

Management embarked on a strategy to reduce reliance on broadacre sales and “drought proof” the
business. This involved improving efficiency and productivity of salespeople in the broadacre sector and
commencing an acquisition programme in major regional centres with large populations to leverage the
McGrath brand and capture a market share of residential and lifestyle sales. These acquisitions were
reinforced with the purchase of property management portfolios to provide additional income and to
support sales.

Finally, there was a renewed emphasis on developing the metropolitan franchise business. This
required the introduction of a new franchise agreement to provide for a revenue based fee card on
gross sales commission (in line with our major franchise competitors such as Ray White and LJ
Hooker), as opposed to the existing agreement which was restrictive by way of flat fees and a prime
marketing area (these restrictions made it difficult to expand the franchise network).

In addition to this strategy there was a requirement to retain and build market share in broadacre sales
due to prevailing drought conditions which resulted in existing competitors cutting their commission
rates in order to maintain market share. New competitors such as Ray White, Raine & Horne, LJ
Hooker, and (more recently) Harcourts, who were looking to expand their regional networks have now
entered the broadacre sector.

Offset against adverse economic conditions, the Real Estate product saw a boom in broadacre prices
for pastoral and cropping properties in WA, NT and QLD and achieved a steady increase in residential
sales in regional areas based on strong capital growth driven by higher prices in the major capital cities.

2.0 FUTURE MARKET TRENDS

Over the coming 5 years the number of farmers/farms will continue to decline. Inefficient farms will
either be consolidated, or in some instances bought back by the government where it is perceived that
the land will not support traditional farming enterprises. The trend of higher commission payments to
top performing sales people will continue while higher direct and indirect costs particularly in advertising
will continue to erode profitability.

As other large Franchisors, particularly Ray White, LJ Hooker and Raine and Horne continue to expand
into regional locations McGrath market share in broadacre sales will face increasing pressure. Our
competitors, as part of their drive in regional Australia have reduced their franchise fees below those in
metropolitan areas with a view to attracting either independent businesses or salespeople who wish to
establish their own businesses. The low entry cost and reduced franchise fees of 5%-7% are attractive.
These brands have relationships with receivers, managers, and administrators, whereas previously only
McGrath and Landwork were seen as alternatives for the sale of distressed property.

Landwork recently appointed a new General Manager, John Smith (previously Ray White) who has
already embarked on a drive to increase market share by reducing commission rates and paying
advertising costs. Landwork have appointed new regional managers and embarked on the recruitment
drive targeting our top performers offering franchises in major regional locations where they are aiming
to expand their network.

Despite the introduction of training initiatives and sales contact management software aimed at
improving productivity and reducing costs, margins continue to be eroded by increasing indirect costs.

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McGrath Real Estate - Strategic Business Plan 2006
Further, the business continues to face pressure from top performers to increase the commission split
to match that of our competitors.

There will be greater pressure on the business to provide better marketing tools, particularly E-
Commerce solutions i.e. Internet, and innovative point of sale material. This provides earnings
opportunities in the provision of these services along with channel marketing potential.

3.0 THE BUSINESS TODAY

In F05 the Real Estate product achieved $88m in gross revenue, broadacre sales contributing 36%,
residential 46%, Property Management 13% and franchise 5%. Funds employed were some $23m
mainly comprised of goodwill for acquired rent-rolls. The total number of staff employed in the product
is 557 FTEs, with a further 519 part-time positions (83 FTE’s) allocated to Real Estate from other
products.

Over the last five years, the market value of McGrath property management portfolio has grown to
approximately $30m, which is 30% above funds invested in acquiring the asset:

F02 F05

Staff (FTE) #
-Management 17 24
-Support 50 128
-Sales 180 314
-Property Mgrs 20 90
Total 267 557

Properties under mgnt 5,000 13,015

Funds Employed $ 4,720 $ 23,130

Rent-roll - Market Value $ 9,750 $ 30,585

Currently the Real Estate product can be clearly defined in to 3 areas of operation:

Rural Regional Metro

Location Branch (Agri Focus) Stand-alone / High Capital Cities
Street Address
Ownership Company Owned Company Owned Franchise
Employment Employee Employee Franchise
Management Matrix SGM SGM SGM
Software Provider Sales CRM / AS400 Sales CRM / AS400 / Sales CRM /
REALTECH REALTECH

Rural - (traditional branch network)

This is where Salespeople are employed on a commission only basis with Real Estate employees
working within a traditional branch environment supporting the other products such as merchandise and
livestock etc.

This model provides for the rural operation to work in conjunction with other products in a typical rural
environment, based on leads and/or referrals from either other products or existing clients utilising their
association with the McGrath corporate identity. In the majority of these locations it is not necessary for
the Real Estate product to be located in a high street address. These Salespeople are employees and
utilise the services of HR, IT etc, and are directly responsible to the Branch and State Management
Team.

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McGrath Real Estate - Strategic Business Plan 2006
The advent of Work Choice has resulted in each of these commission employees receiving a minimum
retainer of $29,750 offset against commission earned.

Regional (stand-alone address)

These businesses are located in high street addresses and are generally stand-alone businesses. In
the vast majority of these locations, McGrath Ltd carry-out non-Real Estate activities in duplicated
operations incurring additional fixed costs. This is particularly true in the case of the Insurance and
Wealth Management businesses, where there is potential to combine these products with Real Estate
in suitable high street addresses which would be preferable to branch locations generally on the
outskirts of town.

The location of these businesses is necessary to drive listings and buyer enquiries for
residential/lifestyle sales and need to be competitive with other real estate agents. As with rural
branches, salespeople are employees and are supported by the same management structure and
software. It is proposed that these businesses will utilise the CRM (Centernet E-system) and
REALTECH property management software platforms. These software systems will provide
consolidated databases to enable performance management and utilised channel marketing
opportunities with McGrath Ltd holding an equity stake in each service provider.

The regional network comprises 37 stand-alone locations employing 282 direct employees. These
regional stand-alone businesses have a direct manager as well as support from Product and State
General Managers. These businesses have provided a major increase in brand awareness outside
McGrath traditional rural footprint.

These businesses are substantially different from McGrath traditional branch business and require
specialist skill sets relating to residential sales and property management that are not possessed at
branch and state management level.

Metropolitan

There are currently 180 franchise offices operating in the metropolitan capital cities. This business has
continued to increase revenue over the past 3 years by over 20% annually, and it is anticipated that
revenue will increase by 30% to in excess of $5m in F08. This is by far our most profitable business
based on funds employed and gross profit margin.

Franchise operations provide a high level of brand awareness outside McGrath traditional rural
footprint, contributing in excess of $30m p.a. in advertising alone. State Management teams have little
understanding of the legal requirements of franchising and the need to deal with individually-owned and
operated principals as opposed to direct employees.

Cost Allocations (Are they driving the Right Behaviour?)

Given current cost allocation methodology, other products are able to allocate direct and indirect costs
to the Real Estate product whereas Real Estate sales and property management employees do not
allocate any costs to other products and are predominately commission based (65% of Real Estate staff
are commission based). Stand-alone locations are fully costed ($10.2m) but attract a further $4.5m in
allocated costs from the branch network. The product is allocated a further $4.2m of branch costs
where there are no full-time Real Estate employees (serviced by local branch managers and
salespeople in nearby branches).

As a result of the cost allocations and excessive IT infrastructure, many of these regional businesses
are no longer profitable. As part of the overall cost reduction initiatives within McGrath, some states are
looking to divest these non-profitable businesses without a clear understanding of the impact this may
have on developing a national regional network strategy.

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McGrath Real Estate - Strategic Business Plan 2006

OBECTIVE #1 – IMPROVE EXISTING BUSINESS

4.0 RESTRUCTURE RURAL & REGIONAL BRANCHES

Rural Regional Metro

Location Branch (Agri Focus) Stand-alone / High Capital Cities
Street Address
Ownership Company Owned Franchise Franchise
Employment Employee / Franchise Franchise
Franchise /
Co-Agency
Management Matrix SGM–Product GM Product GM Product GM
Software Provider Sales CRM / AS400 Sales CRM / Sales CRM /
REALTECH REALTECH

Co-Agentise Rural Sales Teams

Management recommends a co-agency arrangement to replace the retainer/commission model for

salespeople that would operate as follows:

• Salespeople contracted on a Conjunctional Agency arrangement, and be liable for a desk

fee (inclusive of rent, telephone etc.);

• Rent would be reflective of the current market conditions. Some branch businesses may
be influenced by McGrath 3-Crowns leasing arrangement, which may be above the
prevailing market;

• McGrath Ltd would remain stakeholder and be responsible for payment of disbursements
on settlement and commission to these parties;

• Both direct and indirect costs would be greatly reduced but this may impact elsewhere on
the business given the allocations would have to be distributed amongst other products;
and

• McGrath Ltd retains client loyalty and ensures cooperation at the branch level with
interaction between products such as Livestock and Merchandise which will continue to
drive the referral business.

The Co-agency model is preferred over franchising the traditional business to ensure:
• McGrath maintains a direct relationship with the client;
• Accountability for costs to the co-agent;
• Efficient behaviour is driven by the co-agent;
• Strong referrals from other products within the branch network; and
• Retaining acceptance from the broader rural community.

It is becoming increasingly difficult to recruit and retain dedicated managers for our regional
businesses. Our top performing salespeople are expressing an interest in alternative employment
options similar to those of our competitors which are seen as far more attractive than the current
commission employment terms.

Further, McGrath Real Estate must continue to reduce the cost of sale, not only by reducing allocated
costs, but through better management of direct costs (such as advertising) and more appropriate IT
infrastructure applications. The addition of principal management and responsibility will drive these
initiatives in a manner that cannot be matched from the current management structure.

Co-agency model addresses the emergence of new legislation that provides for superannuation (9%)
on the salesperson’s total commission up to $120k per individual rather than the base retainer. Based
on F07 commissions, this is expected to impact the bottom line by $1.4m.

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McGrath Real Estate - Strategic Business Plan 2006
Co-agency model would allow salespeople to act as a conjunctional agent through establishing their
own licensing credentials. This would be attractive due to the taxation benefits, however will involve
taking responsibility for accounting and direct costs etc.

The majority of McGrath salespeople are licensed and would see this model as an attractive
proposition. Prior to implementation McGrath would offer support and incentives to salespeople who
may wish to pursue a licence in order to pursue this option

There is 183 commission staff employed in the rural network. Management estimates up to 40% may
not take-up the co-agency model and would require redundancy payments of approximately $1.5m.

Adopting this model for the regional network will mean that allocated costs of $4.2m currently allocated
from non Real Estate network costs, would have to be absorbed by other products.

It is proposed under the basis of confidentiality arrangements, and subject to agreement with state
management and other products, that we engage in dialogue with a group of our top performing
salespeople over the coming month to discuss the merits of this initiative. Importantly, McGrath
Workplace Agreements expire at the end of June and we need to gage the level of interest from our
top salespeople prior to roll-out in July.

If the Co-agency model is adopted in the case of the rural business, as we believe to be the case for
our top performers, it will result in salespeople earning less than $100k p.a. in Gross Commission
leaving the business/industry. McGrath is then potentially faced with the challenge of backfilling these
positions either from adjoining branches, increasing workload for our existing co-agents and additional
resources from state product managers who will have additional capacity as they will no longer be
responsible for the stand-alone businesses.

Existing product managers will therefore have expanded roles, with greater emphasis on sales,
although only one manager does not currently list and sell property. Product Managers’ retainers
would be offset against commission, and they would be able to attract additional earnings through
referrals sharing of up to 10% of the gross commission based on leads generated by the company.

Forecast for Rural Branches

P&L FY05 FY06 FY07 FY8 FY9 FY10

$000's Actual Forecast
Gross Commission 45,066 51,049 22,682 23,042 23,408 23,781

Direct Costs
Commission (20,145) (22,461) 0 0 0 0
Advertising (2,329) (2,911) (291) (306) (321) (337)
Payroll On-costs (3,022) (4,380) 0 0 0 0
Total Direct Costs (25,495) (29,753) (291) (306) (321) (337)

Gross Margin 19,571 21,296 22,390 22,736 23,087 23,444

% Margin 43% 42% 99% 99% 99% 99%
% Growth 9% 5% 2% 2% 2%

Overheads
State Administration (744) (670) (690) (710) (732) (754)
State Product (2,360) (2,762) (3,038) (3,129) (3,223) (3,319)
Allocated Branch (5,055) (5,106) (1,276) (1,315) (1,354) (1,395)
Direct Branch (4,620) (4,666) (4,806) (4,950) (5,099) (5,252)
National (1,198) (1,234) (1,271) (1,309) (1,348) (1,389)
Total Overheads (13,977) (14,437) (11,081) (11,413) (11,756) (12,108)
EBIT 5,594 6,859 11,309 11,323 11,332 11,336
% Margin 12% 13% 50% 49% 48% 48%
% Growth 23% 65% 0% 0% 0%
Funds Employed 500 500 500 500 500 500
ROFE 1119% 1372% 2262% 2265% 2266% 2267%

Assumptions:
• 40% commission split earn rate for McGrath (60% for co-agent)

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McGrath Real Estate - Strategic Business Plan 2006
• $15,000 p.a. desk fee per co-agent
• Retain all direct branch costs due to uncertainty in removal
• 75% reduction in branch allocated costs reflective of expected head count reduction

Franchise Regional Operations

Management recommends franchising the regional stand-alone businesses. The current Franchise
Agreement would apply which provides for, amongst other things, the requirement to adopt McGrath
software platforms i.e. CRM (Centernet) for sales and Property Management (REALTECH), as well as
providing access to their client database. In addition, the agreement will provide that where possible,
other products such as Insurance, Home Loans, Telecommunications and Wealth Management could
lease space on commercial terms. Brand integrity safeguards would apply. The principal would have
their own capital at risk and this would ensure that revenue and efficiency will increase in future years,
providing normal conditions prevail.

This model may provide for some redundancies but should be minimised as the majority of employees
would be absorbed under the franchise model. Whilst revenue of $31m will be lost, this would be
offset by the reduction of $27m in direct costs in the stand-alone businesses that includes the
reduction of 282 FTE employees. Further, franchise revenue of $2m would be generated with only one
additional franchise manager and one support person required.

The regional businesses would be offered to the existing management team and employees in the first
instance. McGrath may be responsible for the payout of employee entitlements but this could be
negotiated as part of the purchase price. Given the size of the property management portfolio of these
businesses, there may be a need for McGrath Ltd to assist the financing of these transactions on
commercial terms over a 3 year period. McGrath would retain a lien over the property management
rights (rent-roll) until full payment was received for these assets. These businesses may take between
12 months to 4 years to divest, however, the sales businesses can all be franchised
contemporaneously with the franchise being held by McGrath Ltd until appropriate buyers can be
found.

Forecast for Standalone Branches

P&L FY05 FY06 FY07 FY08 FY09 FY10

$000's Actual Forecast

Branch Commission 31,623 32,572 25,162 17,278 8,898 0

Franchise Commission 0 0 356 780 1,283 1,878
Gross Commission 31,623 32,572 25,517 18,057 10,181 1,878

Direct Costs
Commission (12,742) (13,124) (10,138) (6,962) (3,585) 0
Advertising (1,386) (1,428) (142) (144) (144) (143)
Payroll On-costs (2,735) (2,817) (2,611) (1,793) (923) 0
Total Direct Costs (16,863) (17,369) (12,892) (8,898) (4,653) (143)

Gross Margin 14,760 15,203 12,626 9,159 5,528 1,735

% Margin 47% 47% 49% 51% 54% 92%
% Growth 3% -17% -27% -40% -69%

Overheads
State Administration (601) (619) (478) (328) (169) 0
State Product (1,555) (1,602) (1,237) (850) (438) 0
Allocated Branch (3,392) (3,494) (2,699) (1,853) (954) 0
Direct Branch (10,193) (10,499) (8,110) (5,569) (2,868) 0
State Franchise 0 (150) (305) (314) (323) (333)
National (480) (494) (382) (262) (135) 0
Total Overheads (16,221) (16,858) (13,211) (9,176) (4,887) (333)

EBIT (1,461) (1,655) (585) (17) 641 1,402

% Margin -5% -5% -2% 0% 6% 75%
% Growth 13% -65% -97% -3828% 119%

Funds Employed 22,000 22,000 16,500 11,000 5,500 0

ROFE -7% -8% -4% 0% 12% #DIV/0!

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McGrath Real Estate - Strategic Business Plan 2006

Assumptions:
• 10 branches divested and franchised p.a. (completed within four years)
• Organic growth of number of franchise offices at 3% p.a.
• Divestment of all rent-rolls at value $2,300 per property

5.0 EXPAND METROPOLITAN FRANCHISE NETWORK

The Metropolitan franchisees would continue to grow organically in metropolitan locations and there
would be further economies through revenue generated by providing industry services such as
software and training etc. Revenues would increase as a direct consequence of the Principals being
responsible for the leadership and management of these businesses.

Additional franchise recruitment and retention managers will be sought in high growth regions to drive
the increase in franchise numbers.

Forecast for Metropolitan Franchise

P&L FY05 FY06 FY07 FY08 FY09 FY10

$000's Actual Forecast

Gross Commission 4,040 5,262 6,451 8,130 10,442 13,442

Advertising (538) (525) (606) (714) (855) (1,026)

Gross Margin 3,502 4,737 5,846 7,416 9,588 12,416

% Margin 87% 90% 91% 91% 92% 92%
% Growth 35% 23% 27% 29% 29%

Overheads
State Administration (135) (122) 0 0 0 0
State Product (319) (329) 0 0 0 0
State Franchise (1,518) (1,632) (1,958) (2,105) (2,263) (2,433)
National (480) (494) (643) (662) (682) (702)
Total Overheads (2,452) (2,576) (2,601) (2,767) (2,945) (3,135)

EBIT 1,050 2,161 3,245 4,649 6,643 9,281

% Margin 26% 41% 50% 57% 64% 69%
% Growth 106% 50% 43% 43% 40%

Funds Employed 500 500 500 500 500 500

ROFE 210% 432% 649% 930% 1329% 1856%

Assumptions:
• Organic growth of number of franchise offices at 15% p.a.
• Growth in franchise earnings at average of 9% p.a.
• Transition to new fee card over 5 year period
• 75% reduction in branch allocated costs reflective of expected head count reduction
• 100% reduction of state product & admin costs

6.0 INTEGRATED OFFICE CONCEPT

At present McGrath has some 11 integrated offices operating from high street locations in major
regional and metropolitan locations under both branch and franchise management. The fixed costs
are shared between products such as Real Estate, Home Loans and Insurance with the potential to
expand with Wealth Management and Telco. These businesses benefit through the close interaction
of staff and cross referring clients from both Real Estate sales and property management transactions.

McGrath should explore the opportunity of establishing two pilot sites with one in regional and one in
the metropolitan locations to explore cross referrals and operating cost efficiencies.

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The two major driving forces are Insurance and Real Estate, and we should be working towards a
concept for both of these markets covering such crucial issues as location, size, visual impact etc, with
a view to exploring a McDonalds type approach in relation to procedures, systems etc.

A newly appointed Business Development Manager will have the responsibility for developing such a
program, focussing on demographic growth and incomes, etc. Management believes the ideal area to
start this development is Queensland.

7.0 REAL ESTATE BRAND PROFILE

The Real Estate product through its 400 branch network across Australia contributes significantly to
McGrath brand value. Sales generated through the branch network, which total over 7,000
transactions per annum result in advertising spend across all forms of media in excess of
approximately $11M per annum. Much of the advertising spend is recovered through vendor paid
advertising and the volume achieved supports discounted rates that are passed on for the benefit of
other products.

The Real Estate franchise network with its metropolitan profile invests over $30M in media advertising
and is involved in some 16,000 transactions per annum. Whilst the company benefits directly from
the profile which these businesses generate, no costs are borne by McGrath.

In addition to the media spend, franchisees contribute to a marketing and training levy which is used to
support the overall image of the brand in franchise areas.

In recent years there has been a shift from utilising print media to on-line marketing initiatives. The
major media companies have heavily invested in establishing real estate portals with realestate.com
having in excess of 34% market share followed by Domain.com, Myhome and Homehound. The
market dominance of realestate.com has seen internet charges escalate at 30% per annum with
Realestate.com now capitalised at over $600M. The business is controlled by Murray with the other
major equity participant the White family who own the Ray White real estate network. The Ray White
group also have a contractual relationship with realestate.com for referrals to their home loans
business Emoca.

Last year McGrath secured an equity position in Myhome which is a joint venture between RE Media
and M-corp. RE have now offered the industry a 46% equity stake in the Myhome portal. Eight
franchisors have expressed interest in participating in the equity earn proposition which is based on
contributed revenue over a three year period. It is anticipated that the other groups will be in a position
sign equity agreements over the next two months.

McGrath Limited has the opportunity of securing 5%-7% of equity in this vehicle. Some equity may
need to be provided to franchisees based on their financial commitment and spend on site. RE
believe that they will float the company within three years and they are of the view that the business
would be capitalised at $200M-$300M.

In addition to supporting the Myhome site the McGrath Real Estate web page which is currently
ranking in the top 10 (against competition from the major portals) and will be continually developed
with enhancements and upgrades completed every six months. The development of the Real Estate
site and its functionality will be used as part of the overall strategy for the website in delivering multi-
product offerings to our client network.

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OBJECTIVE #2 - BUILDING EARNINGS

One of the major challenges for the product is to build alternative earnings options. Management is
currently exploring 3 initiatives.

8.0 FRANCHISE ACQUISITIONS – MULTI-BRANDING

The divestment of our regional stand-alone businesses would free up some $25m of funds employed
based on current market prices, reduce direct and allocated costs, and provide an ongoing revenue
stream by increasing franchise revenue as well as attracting additional earnings through the provision
of industry services.

This capital could be used to pursue acquisition opportunities such as:

• R & H franchise network in Queensland, estimate cost $6m (100 offices);
• Stockdale & Leggo franchise network in Victoria, estimated total cost $12.5m (90
offices); and
• Century21 national franchise network $33m (300 offices).

The major cost benefit would be in providing a full range of services which provides additional
earnings whilst reducing direct costs to the franchisee via economies of scale.

We understand that Ray White and LJ Hooker may be considering multi branding as a means of
gaining market share where they have already achieved franchise saturation and as a means of
supporting their home loans and other businesses.

Forecast Financials for Multi-branding

P&L FY05 FY06 FY07 FY08 FY09 FY10

$000's Actual Forecast
Gross Commission 0 0 7,103 14,636 15,527 17,575
Advertising 0 0 (543) (1,153) (1,223) (1,384)
Gross Margin 0 0 6,560 13,483 14,304 16,191
% Margin 92% 92% 92% 92%
% Growth 106% 6% 13%
Overheads
State Franchise 0 0 (3,500) (3,605) (3,713) (4,917)
National 0 0 (163) (367) (378) (390)
Synergies 0 0 350 1,111 1,144 1,178
Total Overheads 0 0 (3,313) (2,862) (2,948) (4,129)
EBIT 0 0 3,248 10,621 11,357 12,062
% Margin 46% 73% 73% 69%
% Growth 227% 7% 6%

Funds Employed 0 0 38,500 38,500 38,500 45,067

ROFE 8% 28% 29% 27%

Assumptions:
• S&L's and C21 acquired in FY07
• S&L's $5.5m upfront (50%) and $7m in 3 yrs (100%)
• C21 $33m 100%
• 3% growth in average per franchise earnings
• 3% organic growth in number of franchisees

9.0 PROVISION OF INDUSTRY SERVICES

Industry Services

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McGrath Real Estate - Strategic Business Plan 2006

Real Estate businesses require sales (customer relations management) and property management
software solutions to improve efficiency and to provide greater management visibility and control of
sales team and staff. Numerous businesses have been established to provide such solutions to the
industry but have not achieved the necessary scale to reach material profitability. i.e. the number of
agents utilising their platforms to ensure a reasonable return on investment. A multi-brand approach
will support an investment in industry services as sufficient scale can be developed internally without
having to rely on external franchise groups and independents. Further, the use of software systems
provide McGrath with access to extensive databases for the marketing of products such as home
loans, telco, wealth management and insurance in new target markets.

Sales Customer Relations Management

A memorandum of understanding has been executed with Centernet (sales CRM) to take a 33%
equity stake. This requires McGrath to achieve parity with Century 21 in terms of number of
franchisees and branches utilising the Sales CRM. In doing so, McGrath will receive a free carry
equity position in the Australian licensing subsidiary and this has been driven by the necessity to
achieve scale on the Centernet E-System.

Further negotiations are continuing to obtain a 50% equity stake in the parent Company which owns
all intellectual property and overseas licensing rights. Ultimately this software could be provided to the
other networks and can potentially be used in other areas of the McGrath business such as wool
broking and livestock sales.

Property Management Software

McGrath Ltd has made a strategic investment in REALTECH Corp Ltd. Under the strategic alliance
formed, McGrath will move some 10,000 (from total of 13,000 managements) property managements
on to the REALTECH Property Management platform, effectively outsourcing all back office related
functions. This software will also be offered to McGrath franchisees and others interested parties.
Management has already established a degree of interest from some McGrath franchisees in utilising
the software at a minimum cost of $210 per management per annum.

Franchisees see value in the REALTECH platform due to:

• Efficiency in auto-link with external listing portals;
• Removes banking and transaction functionality from agent office, thereby reducing
transaction costs and potential fraud;
• Landlord login and property analysis functions; and
• Management analysis and evaluation functions for staff performance.

Given McGrath equity position this will provide additional earnings once scalability has been achieved
and could also apply to other brands under our control.

McGrath’ management is currently working on a strategy to allow REALTECH to divest its rent-roll
(valued at over $55m) under a franchise/management agreement. Ideally these rent-rolls will be
divested to McGrath franchisees (on commercial terms) and as part of this agreement, franchisees will
be required to bring their existing rent-roll on to the REALTECH platform. This will increase overall
scale and drive greater cost efficiencies and profitability. It is expected that subject to successful
divestment of the rent-rolls, REALTECH will be left with around $10m in cash and the REALTECH
software and back office business.

Establish NEWCO – Industry Service Provider

At present Management is exploring the incorporation of both the sales CRM and REALTECH Corp
property management software under a newly established entity, NEWCO. In the event a multi-brand
approach were pursued, McGrath would be in a position to offer services to between 700 and 800
franchise locations and would generate substantial annuity type earnings. Further, this new entity
could also supply industry services to the wider industry and may provide revenue based equity earn-
out options to external franchise groups to drive scalability.

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McGrath Real Estate - Strategic Business Plan 2006
Financials for Industry Services

P&L FY05 FY06 FY07 FY08 FY09 FY10

$000's Actual Forecast

CRM 0 0 139 761 1,007 2,011

RUN 0 1,791 3,461 6,841 10,868 16,952
Gross Commission 0 1,791 3,601 7,602 11,874 18,963

CRM Direct Costs 0 0 (52) (266) (352) (704)

RUN Direct Costs 0 (1,075) (1,990) (3,763) (5,977) (9,323)
Total Direct Costs 0 (1,075) (2,043) (4,029) (6,329) (10,027)

Gross Margin 0 717 1,558 3,573 5,545 8,936

% Margin 43% 47% 47% 47%
% Growth 129% 55% 61%

CRM/RUN 0 (669) (1,337) (1,859) (1,938) (2,021)

Total Overheads 0 (669) (1,337) (1,859) (1,938) (2,021)

EBIT 0 48 221 1,714 3,607 6,915

% Margin 6% 23% 30% 36%
% Growth 677% 110% 92%

Funds Employed 0 10,000 22,000 12,000 12,000 20,000

ROFE 1% 14% 30% 35%

Assumptions:
• REALTECH minorities in FY07 (additional $8m) with divestment of rent-roll completed
FY08
• CRM 50% in FY07 ($4m) and 50% in FY10 ($8m)
• Franchises on CRM doubled over 5 years (to c750)
• Properties on REALTECH 5x over 5 years to c90k

Proposed ownership structure for Service Provider model:

McGrath Ltd NEWCO

100% (Owns software IP)

McGrath Real Estate Service Provider Realtech Corp CENTERNET

(Owns franchise IP) incl. Back-Office Prop Mgt Sales

Equity stake in related service providers

McGrath network C21 network Others eg utilities, insurance, home loans, & telco,
Elders network C21 network Others
400 on preferred terms
400offices
offices 300
300offices
offices 300++offices
300 offices

REAL ESTATE INDUSTRY

(Services provided at price differential to Elders
)

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McGrath Real Estate - Strategic Business Plan 2006
10. DEVELOP ALLIANCE WITH ESTABLISHED UTILITY PROVIDER

The success of pursuing multi-brands, provision of software, would enable McGrath Limited to gain
access to a broad range of potential clients outside our traditional rural footprint.

At present the McGrath Real Estate network is responsible for some 23,000 vendor/purchaser
transactions per annum in addition to our property management portfolio which is approximately
13,000 properties. This client database has the capacity to deliver channel marketing opportunities to
some 25,000 landlords and tenants. As McGrath property management portfolio is transferred to the
REALTECH Property Management software platform there will be the potential to provide a full range
of utility options to these parties.

The REALTECH alliance provides scope to offer these services to REALTECH’s database in excess
of 50,000 potential clients. Already REALTECH are offering bundled packages covering insurance,
telecommunications, electricity, gas, pay TV etc. to their client base which is achieving additional
revenue for the business.

Utility One and Connect Now have already established utility portals and are able to deliver this
service to this target market.. The opportunity exists for the business to take an equity position in one
of these utility portals leveraging McGrath/REALTECH’s property portfolio. REALTECH is responsible
for a large percentage of referrals to Connect Now with discussions having already taken placein
regard to an equity position.

Development manager should be appointed to develop the strategy to maximise cross referrals and
cost efficient delivery of services for other McGrath products.

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McGrath Real Estate - Strategic Business Plan 2006

OBJECTIVE #3 – FUTURE GROWTH OPTIONS

114. MANAGEMENT STRUCTURE

In order to achieve the stated objectives it will be necessary for the existing national team, which comprises
a Product GM, and a National Franchise and Commercial Manager to be supported with additional
resources.

A new management structure is proposed to cater for the changing needs and greater focus on residential
and lifestyle sales within the Real Estate Product. The Product General Manager would continue to be
responsible for developing strategy and overseeing its implementation. A new Chief Operating Officer would
be appointed to take a greater role in the day-to-day real estate operations. A new Business Development
Manager who would have responsibility for working with the Product General Manager in the development
and implementation of each objective would be appointed and may in the future have responsibility for
implementation of, amongst other things, pilot programmes etc.

General Manager
Real Estate

Business
Chief Operating
Development
Officer
Manager
(NEW)
(NEW)

Commercial
Manager

National Franchise Manager Product

Manager Services

Manager Sales
Manager’s Metro
CRM

Manager’s Manager Property

Regional Management

12.0 FINANCIAL OUTCOME

The table below presents the overall Real Estate product financial outcome should all objectives be met
under the presumed assumptions.

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McGrath Real Estate - Strategic Business Plan 2006
P&L FY05 FY06 FY07 FY08 FY09 FY10
$000's
Sales
McGrath - Rural 45,066 51,049 22,682 23,042 23,408 23,781
McGrath - Stand Alone 31,623 32,572 25,517 18,057 10,181 1,878
McGrath - Franchise 4,040 5,262 6,451 8,130 10,442 13,442
Non-McGrath - Franchise 0 0 7,103 14,636 15,527 17,575
Industry Services 0 1,791 3,601 7,602 11,874 18,963
Total Sales 80,729 90,673 65,354 71,467 71,434 75,639
Direct Costs
Mcgrath - Rural (25,495) (29,753) (291) (306) (321) (337)
McGrath - Stand Alone (16,863) (17,369) (12,892) (8,898) (4,653) (143)
McGrath- Franchise (538) (525) (606) (714) (855) (1,026)
Non McGrath - Franchise 0 0 (543) (1,153) (1,223) (1,384)
Industry Services 0 (1,075) (2,043) (4,029) (6,329) (10,027)
Total Direct Costs (42,896) (48,721) (16,374) (15,100) (13,381) (12,918)
Gross Margin
McGrath - Rural 19,571 21,296 22,390 22,736 23,087 23,444
McGrath - Stand Alone 14,760 15,203 12,626 9,159 5,528 1,735
McGrath - Franchise 3,502 4,737 5,846 7,416 9,588 12,416
Non McGrath - Franchise 0 0 6,560 13,483 14,304 16,191
Industry Services 0 717 1,558 3,573 5,545 8,936
Total Gross Margin 37,832 41,953 48,980 56,368 58,053 62,721
% Margin 47% 46% 75% 79% 81% 83%
% Growth 11% 17% 15% 3% 8%

Overheads
McGraths - Rural (13,977) (14,437) (11,081) (11,413) (11,756) (12,108)
McGraths - Stand Alone (16,221) (16,858) (13,211) (9,176) (4,887) (333)
McGrath - Franchise (2,452) (2,576) (2,601) (2,767) (2,945) (3,135)
Non McGraths - Franchise 0 0 (3,313) (2,862) (2,948) (4,129)
Industry Services 0 (669) (1,337) (1,859) (1,938) (2,021)
Total Overheads (32,650) (34,540) (31,543) (28,078) (24,474) (21,726)
EBIT
McGrath - Rural 5,594 6,859 11,309 11,323 11,332 11,336
McGrath - Stand Alone (1,461) (1,655) (585) (17) 641 1,402
McGrath - Franchise 1,050 2,161 3,245 4,649 6,643 9,281
Non McGrath - Franchise 0 0 3,248 10,621 11,357 12,062
Industry Services 0 48 221 1,714 3,607 6,915
Total EBIT 5,182 7,413 17,437 28,290 33,579 40,995
% Margin 6% 8% 27% 40% 47% 54%
% Growth 43% 135% 62% 19% 22%

Funds Employed 23,000 33,000 78,000 62,500 57,000 66,067

ROFE 23% 22% 22% 45% 59% 62%

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