The British love to hate estate agents. A YouGov survey last year rated them among the country's least trusted professionals - less popular even than bankers - and any media attention given to the likely flotation of Foxtons this autumn is unlikely to improve their standing. Yet it may be wise for investors to leave their prejudices at the stock exchange door. Estate agents are in pole position to benefit from the thawing UK housing market.
Britain did not suffer a major housing crash during the credit crunch; house prices only fell about 20 per cent. But the impact of the downturn on market volumes was more drastic. Transactions fell from a peak of nearly 150,000 a month in December 2006 to a trough of 51,780 in January 2009 (see graph). They have since bounced back somewhat, but remain at historically low levels. Caught between low consumer confidence on the one hand and the balm of low interest rates on the other, households have been staying put.
Monthly property transactions
This has been a satisfactory outcome for homeowners, but a very difficult one for agents, whose fees are closely linked to transaction volumes. Not only do they earn a vendor fee per house sold, but major groups such as Countrywide and LSL Property Services also sell a host of complimentary products and services, such as lender valuations, which also depend on deal flow.
The valuations business has proved particularly troublesome during the downturn, as high street banks have picked through boom-time surveys in the hope of spotting mistakes and suing for their losses. Countrywide increased the amount it expected to pay out in professional-indemnity (PI) claims by £25.2m last year, bringing the total to £40.5m. LSL upped its provision by £17.3m.
Yet things are now looking up. PI claims have to be made within six years of the alleged negligence, so 2013 is the last year for claims relating to the high-risk boom era ending in 2007. More importantly, transaction volumes are finally showing signs of mounting a sustained recovery. Ignoring the artificial spikes of December 2009 and March 2012, which were both boosted by the imminent expiry of stamp-duty holidays, the May figures from HM Revenue & Customs were the highest since May 2008. The latest Bank of England data on mortgage approvals - a leading indicator for transactions - paint a similar picture.
The Osborne boom
Unprecedented government intervention is largely responsible for the improvement. Last summer the Bank of England introduced its Funding for Lending Scheme, which ties bank funding costs to loan volumes. So far it has failed to relaunch small-business lending, but it has progressively cheapened mortgage costs, making home-ownership accessible to more households. The average interest rate on a new mortgage was 3.27 per cent in May, according to the Bank - the lowest on record.
In his latest Budget, chancellor George Osborne consolidated this monetary stimulus with a number of high-profile fiscal boosts under the banner 'Help to Buy'. A £3.5bn equity-loan fund for new-build property, which means buyers only need a 5 per cent deposit, has supported nearly 7,000 transactions in just four months. From January, a second policy, involving up to £12bn of mortgage guarantees, will do the same for the much larger second-hand market.
With so much political muscle supporting the sector, it is hardly surprising that some estate agent share prices have rocketed in recent months. Countrywide's stock is up 74 per cent since its impeccably-timed flotation on 20 March - the same day of the Budget. But the optimism has rewarded the sector somewhat unequally, leaving buying opportunities further down the capitalisation spectrum. We give thumbnail sketches of the companies and identify a couple of bargains below.
| Share price (p) | Year-to-date performance | Market cap (£m) | PE ratio (2013) | Dividend yield (2012) | Net cash/ debt (£m) | |
|---|---|---|---|---|---|---|
| LSL Property Services | 394 | 52% | 405 | 15 | 2.4% | -35.3 |
| Countrywide | 614 | 75%* | 1,311 | 29 | nil | -203.2 |
| Savills | 619 | 32% | 780 | 17 | 1.6% | 91.6 |
| Rightmove | 2,300 | 60% | 2,271 | 31 | 1.0% | 7.1 |
| Winkworth | 129 | 47% | 16 | 16 | 3.8% | 1.6 |
| Belvoir Lettings | 141 | 3% | 29 | 16 | 4.1% | 0.6 |
Sources: Capital IQ & Bloomberg. *Performance since flotation on 20 March | ||||||
Six plays on housing recovery
Countrywide (CWD) is by some way the largest estate agency group in the UK, with brands such as Hamptons and Bairstow Eves. It was bought off the exchange by a private equity fund in 2007, restructured in 2009 by another, and finally refloated in March. That has allowed the company to pay off its debts, paving the way for profits and dividends. Selling the full range of agency services, it will be one of the prime beneficiaries of the recovery in market liquidity. Trading at 29 times earnings, however, its shares look expensively rated relative to those of LSL, its closest peer.
LSL Property Services (LSL) is a similar full-service, multi-brand agent to Countrywide - only smaller, and without its peer's strength in London. This emerged as a big weakness as the capital bounced back rapidly from recession, prompting LSL to buy London agent Marsh & Parsons in November 2011. Now that the recovery seems to be extending to the wider market, the company's focus on poorer parts of the UK may become less of a hindrance. LSL has nonetheless been strikingly resilient during the downturn, thanks to a textbook diversification strategy. Underlying operating profit of £35.1m last year was only marginally behind the 2007 record of £36.5m, despite a much smaller market. Trading at a hefty discount to those of Countrywide, its shares are a bargain.
Savills' (SVS) UK housing business is well-known and highly profitable, but accounts for less than a quarter of global profits. It is also focused exclusively on the top end of the market, which is not dependent on government support. Yet, even if Savills is not the best play on a housing recovery in the UK, it remains a well-run, well-diversified company whose stock is always worth buying on weakness. We downgraded our recommendation from buy to hold at 593p in March, after a very strong run, and at 619p we stick with that advice.
Rightmove (RMV) is the dream tech stock. With its near-monopolistic grasp on house searches - its website is Britain's sixth most popular - it is able to turn nearly three-quarters of sales into profit. These sales depend on the number of estate agency branches in the country, and how much they are prepared to pay for the visibility Rightmove.co.uk offers. That makes it an effective, albeit indirect play on the recovery in transaction volumes. But it remains perennially difficult to make a valuation-based buy case for Rightmove's stock, which is now trading on 31 times this year's earnings. That and competition from Zoopla (owned by Countrywide and LSL) explain why we have long stuck with an ambivalent hold-with-both-hands recommendation.
Winkworth (WINK) and Belvoir (BLV) are both tiny, Aim-traded franchise operations. The difference is that Belvoir is a pure play on the lettings market, while Winkworth is a London-centric brokerage catering to a reasonably affluent clientele. We rate both companies for their capital-light business models, which make for high dividends. In light of the housing market recovery, however, Winkworth now looks particularly attractive.
