Ahead of London-based estate agent Foxtons (LONDON:FOXT)’ full year results on March 11, Jasper Lawler looks at the state of the UK estate agency industry.
House prices and UK interest rates
The policy of close to zero interest rates from the Bank of England continues to give rise to record low mortgage rates which has kept the housing market buoyant and kept estate agents in good spirits.
The rate of growth in house prices has slowed since the summer but saw a slight pickup in January. The key differential is that London now appears to be an area of relative weakness when previously it was by far the strongest area for rising house prices in the UK.
Foxtons shares fell from a peak in March 2014 on the feeling that share prices had gone too far too fast after the company’s IPO in late 2013. It was only in the summer when it became apparent house price growth, especially in the capital was slowing that Foxtons shares slipped below their listing price. Foxtons’ business is concentrated in London so fewer houses being sold in the capital means a drop in income.
The slowdown in house prices in the capital whether it is because of tighter lending rules, excessive valuations or fewer Russian buyers has to a large extent been priced into Foxtons shares.
Two big changes within the housing industry, namely the launch of online property portal Onthemarket.com and the change in stamp duty rules are yet to be fully digested by markets.
Property portals and OnTheMarket.com
The record visitors to the Rightmove, the biggest property website in the UK reported for January would appear on face value to be unabashedly good news for estate agents. The rising visitor volume on Rightmove is a good proxy for interest in housing from the UK public and represents more eyeballs on the properties listed by estate agents.
Not all estate agents are blowing the party horns at the success of Rightmove. Rising fees and the lack of competition over where to place online property advertisements is a legitimate concern for estate agents. Zoopla has made eleven acquisitions to consolidate the classified ads market and in doing so has removed some of the pricing competition that could have kept fees paid by agents down.
Onthemarket.com was created by a group of estate agents led by Savills (LONDON:SVS), Strutt & Parker and Knight Frank as a non-for-profit alternative. OnTheMarkets contractual terms that force estate agents wishing to join from not advertising on one of either Rightmove or Zoopla may have to stop if it is found to be illegal by the Competition and Markets Authority.
Zoopla, as the newer entrant to the market after Rightmove has suffered the most number of estate agents defecting to OnTheMarket. If this trend continues, the success of OnTheMarket could necessarily mean the failure of Zoopla.
Whether Zoopla or OnTheMarket comes out on top, it still means a duopolistic market with Rightmove and could be a fairly neutral result for estate agents.
The sheer number of referrals produced and the reduced need for other advertising appears well worth the listing fees paid by agents to the portals.
The bigger long-term threat to traditional estate agents than the property portals is the rising popularity of self-listing services and online-only estate agents such as Tepilo, Hatched and Emoov.
The change in stamp duty
For estate agents in general; the change in stamp duty was like Christmas come early. This was evidenced by the highest number of buyers visiting estate agents in December for 10 years, according to the National Association of Estate Agents.
The stamp duty reform should not only be good news for house buyers who will pay less tax, but also sellers who were stuck just above the £250K price band who will can now feel freer to list prices at 250-270K. The result of the stamp duty reform could well reinvigorate buyers and give sellers confidence to list at higher prices.
The benefit to the change in stamp duty gets a lot foggier when entering London. In London the average property value was £458,283 in January 2015 with the highest concentration of houses above £1m in the country.
The mad dash of transactions by wealthy homeowners trying to beat the stamp duty cut off could mean a strong end to the year for Foxtons in 2014. The concern is over the outlook for Foxtons in 2015, especially the months leading into the election.
Buyers of more expensive homes will now be thinking twice given the higher stamp duty. The pain could again be piled on if the Labour party wins the general election in May and introduce an annual “mansion tax” on homes worth more than £2m.
While there are clearly more houses in London worth below £1m, the houses valued above £1m make a disproportionately large contribution towards estate agent’s commissions.
The number of transactions in £5m+ house sales will probably be fairly stable as the super-rich can easily afford the tax changes, possibly putting the likes of top-end estate agent Savills and Knight Frank in a stronger position. It’s the tax hit to the upper-middle classes occupying the £1m-£5m property range that could be the biggest headwind to London-focused estate agents like Foxtons.
CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.