Tied as they are to the fortunes of the housing market, estate agents are constrained in what they can do to mitigate the effects of a downturn. And while the UK housing market is more in limbo than decline, a cocktail of unpleasant ingredients suggests that the UK's largest integrated property services group, Countrywide (CWD), is in for a tough time in the year ahead, and analysts are already pencilling in a significant cut in the dividend payment.
- House prices are still edging higher
- Brexit uncertainty will clear at some point
- Transactional volume still falling
- Letting fees could be banned
- High levels of debt
- Dividend payments under threat
Transactional volume - that's the number of houses bought and sold - has been in decline because many existing homeowners are sitting on their hands rather than moving home. Uncertainty about the health of the economy, interest rates and employment have all generated a note of caution. On top of this, moving up the housing ladder has become an expensive business because of house price inflation, and many homeowners are constrained by how much they can borrow and how much they can afford. The fall in transactions is expected to continue in 2017. This is worrying because the level of housing stock on estate agents' books in 2016 was already at a record low. Some small comfort can be gained from projections that suggest that house price inflation will continue, albeit at a slowing rate.
This poses a problem for the traditional estate agent with a string of high-street sites, because whereas the fixed cost base ensures profit margins rise when revenue grows - so-called operational gearing - the opposite applies when revenue falls. This is especially relevant for Countrywide because its high level of debt could put pressure on loan covenants. Broker Numis suggests net debt could be edging towards three times cash profit by the end of 2017 if dividends aren't cancelled. In mitigation, Countrywide is undertaking a strategic review of its Lambert Smith Hampton commercial arm, which could include selling the business.
| COUNTRYWIDE (CWD) | ||||
|---|---|---|---|---|
| ORD PRICE: | 171.5p | MARKET VALUE: | £371m | |
| TOUCH: | 170.5-171.5p | 12-MONTH HIGH: | 393p | LOW: 164p |
| FORWARD DIVIDEND YIELD: | 4.4% | FORWARD PE RATIO: | 9 | |
| NET ASSET VALUE: | 235p* | NET DEBT: | 51% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 585 | 62.9 | 24.4 | 8.0 |
| 2014 | 702 | 102.4 | 36.1 | 24.0 |
| 2015 | 734 | 85.8 | 32.0 | 15.0 |
| 2016* | 699 | 56.3 | 20.4 | 10.0 |
| 2017* | 680 | 51.0 | 18.7 | 7.6 |
| % change | -3 | -9 | -8 | -24 |
Normal market size: 3,000 Matched bargain trading Beta: 0.04 *Includes intangible assets of £744m, or 344p a share **Peel Hunt forecasts, adjusted PTP and EPS figures | ||||
There are other potential headwinds to consider. Proposals to ban letting agent fees on tenants could trim as much as £20m off group revenue, according to estimates by Numis; that's nearly a quarter of forecast cash profit for 2016. And it can't be automatically assumed that these fees will simply be passed on to landlords. The latter may walk away and look for a better deal, and whatever happens, competition will increase.
Another area of concern is the steady erosion of business away from the traditional high-street estate agent to online and hybrid operators. This is still a small part of the market, accounting for around 5 per cent of all transactions, but it is likely to grow significantly. While Countrywide expects its transaction volumes to be down by around 6 per cent in 2016, online hybrid estate agent Purplebricks (PURP) doubled the number of instructions it handled in the six months to October 2016. The key differentiator here is that while Purplebricks charges a fixed upfront fee, conventional estate agents charge a commission based on sale price, and the difference between the two runs to thousands of pounds, depending on the property.
