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OPINION

Agents should beware Purplebricks. Should investors?

Agents should beware Purplebricks. Should investors?
June 22, 2016
Agents should beware Purplebricks. Should investors?

How sold is sold?

Jefferies is currently the only broker bearish on Purplebricks. "Getting paid whether or not a home is sold would appear to be the purple grail of estate agents," is the sardonic opening of its June note. Market newcomers such as Purplebricks charge a fixed fee upfront (Purplebricks offers the option to delay the payment for 10 months) for valuing a house, putting it on the market and managing the sale, with different levels of service on offer. In the traditional agency model, the commission will be paid once the house sale is completed. The question is whether Purplebricks cares as much about finishing the job.

 

What we know

The company reported an introduction to sales conversion rate of more than 77 per cent in its last financial year to April 2016. There is clearly upside from here, as those introductions closest to the year-end have had little time to go through. But 'sale' here can mean a sale agreed subject to contract. A proportion of such agreed sales will not complete.

 

What we don't

Purplebricks does not report the proportion of instructions that lead to completed sales, but does report the total capital value: £2.8bn of transactions completed and £1.7bn in the pipeline. "But what does that matter if they have a fixed fee model?" asks Michelle Ricci, founder of property analytics firm Propcision. "Really it is the number of transactions that is important." For those deals that do get to exchange of contracts, the average duration from date of instruction to that point is 56 days.

 

How local is local?

Purplebricks' 'local property experts' (LPEs) have come in for criticism due to the amount of ground they are expected to cover. But things have improved with growth. Its chief executive Michael Bruce cites its traffic light system for LPEs' capacity: if demand hits amber, they will appoint another expert in the area. "There are people in our business that have got one postcode," he says: "Twenty LPEs a month are being added." He also points to the impact of turnover and internal transfers on the local expertise boasted by longer-established agents.

 

Defending its corner

Purplebricks faces domestic challenges with competitor Countrywide (CWD) launching its own fixed-fee service, and Savills (SVS) taking a minority stake in its hybrid competitor YOPA. But Mr Bruce estimates a traditional agent would have to invest £100m in building a similar platform matching buyers and sellers, as well as raising customer awareness to his company's level. Purplebricks is also currently cheaper, with a fuller service, than Countrywide's trial.

The service will out

Traditional estate agents have work to do to demonstrate the level of their services, such as local expertise and relationships, and having a group of connected branches marketing the same stock. They also have an aligned incentive to get the highest price, rather than a quick sale. Compare that with a YOPA customer in a recent promotional video. "Fortunately for us, we only had one viewing, and the house sold," the customer says. The cynic in you thinks that house was just as likely undervalued as the seller was lucky.

I think Purplebricks will be tougher to catch up than rivals suspect. But if there is a sales gap in its estate agency business, it will soon become apparent. Other than customer service, its challenge is to expand its geographic reach (in progress) and revenue streams now that its domestic market has woken up to the hybrid model. Lettings will be key, as a liquid and higher volume business: expect acquisitions to complement organic growth.