I read an article last week on property website, Property Industry Eye titled “City shrugs off Foxtons sales woes as share price stays resilient” in a state of mild bafflement, as author Rosalind Renshaw passed comment on the stock markets reaction to Foxtons newly released results.
In a nutshell, the article was commenting on Foxtons collapse in profits (after costs, depreciation and tax) from £15m in 2017 to 3m last year, and given these trading results, the relative stability of the share price at 53 pence – despite falling dramatically from a high of £4 back in 2014.
Well I am no city analyst, but I do understand both the London property market (after 20 years of working in it) and the present trading climate, and you really don’t have to have an MBA in economics to understand what is going on both with Foxtons and other major competitors at this present moment in time.
Specifically, there can be no doubt that Foxtons have for many years now been an innovative market leading brand in London estate agency – both much imitated and much loathed in equal measure no doubt. Their high energy, high fees and blanket high-quality marketing endeared them to the capital’s home sellers, convincing them that no other agent could compete. Well, sorry to be the bearer of bad news – but that moment has finally passed.
Are they still potentially a potent force? Yes of course, but high costs, high fees and an over exposure to a sluggish London property market have all contributed to weaken their business model and more importantly perhaps, its effectiveness. Furthermore, the governments impending tenant fee ban will hit Foxtons more than just about any other UK estate agency that you could name. Why? Because it was Foxtons unreasonably high tenant fees that sparked the ban in the first place! So, if you have shares – sell now and don’t wait for city analysts to wake up to what is surely absurdly obvious.
What about the other major groups in the UK? Well, Countrywide (the largest group in the UK) are doomed to collapse, unless their new management team wakes up to the fact that they have far too many offices, far too many brands, and unfeasibly high fixed costs – which combined with uncertain market conditions, and a shrinking number of sales transactions across the UK can only spell disaster. On the positive side, they do have some good businesses and brands in their portfolio – but there can be no retreat from the break up and reconfiguration of this business, and with its share price languishing at only 9 pence, it is quite clear that investment analysts agree with me.
So, what of Purple bricks? Well, I have to confess that the jury is still out on their trading model, as there is no shortage of investment (the latest last month being £125m from media giant Axel Spring) but despite this massive injection of cash, they are still to turn a meaningful profit or pay a dividend. However, it is hard to argue against the fact that they are the best- known brand in their sector, and after much promotion (£42m last year) it has taken a not insignificant share of the residential market here in the UK.
But for a company that is still to make a profit – be warned that the stakes are high, as its expansion into Germany, Australia and the USA means that it burns its investment cash fast. Also, despite its relative success in the UK, on-line agents have only managed to capture 7.2% of the residential sales market nationally. So, invest if you wish with extreme caution, as whilst it could potentially be the next Amazon, it could also turn out to be the next Emoov – but this time with significantly higher losses.
There can be no doubt that trading conditions for many estate agents (large and small) have been extremely “challenging” across the UK – and BREXIT has certainly not helped. But in my view, city investment analysts need to look at the “bigger picture” and beyond the UK estate agency sector per se. The simple truth is that consumer behaviour has fundamentally changed in just about every other sector and is indeed still evolving. So, those that think that estate agency is just a victim of Brexit should think again, as both established convention and cost structures are changing, and the property market no matter how bigger player you are is no exception.