Don’t bet the house on struggling British estate agents – things could still get worse!
Recent weeks have seen British estate agent stalwarts Countrywide and Foxtons reveal the true extent to which they have been hit by the UK’s ongoing property market slowdown. Shares in these firms and their peers may be at extremely depressed levels, but this doesn’t necessarily mean they are cheap. Indeed, with UK interest rates being hiked to their highest level in years earlier this month, there could be more trouble to come.
For some time now, estate agents have struggled against a triple whammy of letting fee cuts, weak market conditions, and increasing online competition. For example, a recent study by Moore Stephens found 153 estate agents went insolvent in the year to May 2018, with an additional 7,000 currently showing signs of financial distress.
In its study, Moore Stephens said estate agents’ margins are at risk of being hit by the UK government’s plans to ban letting fees charged to tenants. Furthermore, the ongoing threat of additional stamp duty surcharges is severely damaging sentiment among potential buy-to-let investors.
In the wider housing market, conditions have been soft for some time now- despite a minor pickup last month. In May, house prices rose by just 3pc, their slowest annual rate of growth since 2013. Experts have repeatedly attributed slowing growth to economic uncertainty primarily driven by Brexit, an expectation of interest rate rises, and weak wage growth in the face of rising inflation. With prices typically moving in line with the number of transactions completed, estate agents are feeling the pinch as this dynamic looks set to continue. Indeed, in London alone, the number of property sales has fallen 20pc since 2014.
Finally, the traditional high-street estate agent model has faced an unprecedented amount of competition thanks to the rise of online alternatives. Businesses like Purplebricks, Hatched, and Yopa is believed to have stolen around 5-7pc of the market from high street players over the last three years. It is not hard to see why, either- HomeOwners Alliance has estimated that UK buyers save an average of £2,5000 by using these services.
Eye of the storm
Although conditions have hardly been great for some time now, these factors seem to have really started to take their toll on the UK’s listed estate agents over the last month or so.
Perhaps the best example is Countrywide, one of the UK’s largest estate agency chains, which saw its shares collapse by as much as 80pc last week. The business announced an emergency £111m equity raising at 10p per share, a steep discount to its 50p a share market price at the time. It will also seek an additional £28.6m in a proposed placing and open offer.
Countrywide, which has put out two profit warnings in 2018 and fired its former CEO, is struggling under the weight of £200m worth of debt and difficult broader conditions- particularly in its sales division. Given that it had already fallen by 58pc since the beginning of the year before announcing the placing, the sale of these shares will all but destroy its value. All that is left now is the hope that its three-year recovery plan, dubbed ‘back to basics’, can restore some strength.
After hitting a record low in June, Foxtons – Countrywide’s London-focused rival- has bounced so far this month. Investors likely took some solace in its H1 results, where CEO Nic Budden said he was confident in its prospects and revealed continuing strength in its letting arm. It also probably helps that the business is not drowning in debt, like Countrywide.
That being said, the fact remains that, at 56p a share, Foxtons has nearly halved in value over the past year. Likewise, according to the Financial Times, shorts in the company have nearly doubled since the start of July- they currently sit at around 4.6pc of its free float.
Even Purplebricks, the Woodford-backed online rival to Foxtons and Countrywide, has suffered in recent times. After a meteoric rise, investors have turned cold on the online player, and it has become a favourite among short sellers. As such, shares have fallen by around 39pc over the last year to 293.8p.
In its recent results, the firm said operating losses had quadrupled, although this admittedly resulted from expenses incurred from marketing and aggressive expansion into markets like the US and Australia. Furthermore, despite revenues doubling year-on-year to £93.7m, analysts don’t expect the business to reach profit until 2020. In this time, there is a risk that the UK property market could worsen. Furthermore, with Purplebricks’ international expansions still at the grass-roots level, who knows what will happen to its plans to take over the world with its alternative fee structure during this period?
Notably, Purplebricks has also faced criticism for not any including details on how many properties it has sold, something that previously led analysts at Jefferies to accuse it of ‘speaking in riddles’
So, are these depressed estate agent stocks worth betting the house on? Probably not.
Last week saw the Bank of England hike interest rates from 0.5pc to 0.75pc, their highest level since March 2009. This rise and a corresponding jump in mortgage rates are unlikely to hit the housing market in of itself, but growing fears of further rate rise risk damaging already waning sentiment in the sector. Even property portals, which were previously held up well, are starting to feel the pinch. Market leader Rightmove has fallen 6.7pc over the last month while smaller rival OnTheMarket has also seen its impressive growth rate slow.