UK’s big real estate agents face new challenge

Britain’s traditional real estate giants face threat from online real estate business

As online real estate agents take the ground in the UK’s real estate sector, big traditional estate agents face existential threat. As a result, these companies may be at the centre of mergers and acquisitions, according to industry experts.

Traditional high-street players like Foxtons and Countrywide face a stagnant housing market as they lose market share to their online competitors. Countrywide is UK’s largest real estate broker, while Foxtons is a bellwether of the London market.

Shares of investors have also tumbled in 2017 compared with a modest gain in the FTSE Small-Cap Index. While shares of Foxtons came down by about a quarter, those of Countrywide were down by more than a half in the past year. A senior market analyst at ETX Capital, Neil Wilson, says that the largest brokers need to look for ways to cut costs, and merging with another company or an investor is one option. He added that a merger of equals or takeover are definitely options that will make sense, given what the market conditions and share prices are. The more traditional letting agents must be looking for a way to cut costs in this environment. There is a clear rationale for M&A.

An analyst at Numis Securities in London, Christopher Millington said, from a private-equity point of view, Countrywide and Foxtons tick a lot of boxes. He added that the shares have underperformed, but they should be able to generate decent cash going forward. In the case of Foxtons, this will depend on how long the London market takes to turn around, and in the case of Countrywide, it will be about how they restructure management to improve the operational performance.

At present, low performance is predicted for Britain’s housing market due to political and economic uncertainty, tax changes, stretched affordability and the Bank of England’s rate hike in November.

The online companies have captured 5 per cent to 7 per cent of home sales in the UK market over the past three years, according to Paula Higgins, founder and chief executive officer of the HomeOwners Alliance. The consumer organisation said that the online option is viable for home buyers as it saves them an average of £2,500.

Countrywide issued a profit warning last month that sent its stock sliding by the most since the Brexit result, while Foxtons reported a drop in 2017 revenues and cautioned about challenging trading conditions ahead.

Share of online rival Purplebricks have also fallen recently in the general market downturn after a critical report from Jefferies Group, but they’re still up more than 80 per cent in the past year.

Now, both Foxtons and Countrywide are implementing changes to adjust to new conditions. While Foxtons has moved away from the high-end market and plans to announce new strategic initiatives in February, Countrywide has made changes in its management. While its chief executive and a board member, Alison Platt, resigned last month, it appointed an industry veteran with experience in online business adoption as its executive chairman.

Jefferies reiterated its hold rating on Countrywide on Wednesday, noting the company’s exposure to weakness in the domestic housing market as well as uncertainty over strategy. Analysts including Anthony Codling said they’re waiting for the broker to publish its results next month, when they hope to learn more about its measures to improve performance which may affect the share price.

However, Varde Partners’ Tim Mooney does not see Foxtons and Countrywide as attractive investments. He termed estate agents’ broker commissions as “just a joke” and added that there’s an analogy to travel agents as nobody books their holidays in a high-street travel agent’s anymore and it’s online.

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