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Purplebricks causes a stir

An attack on traditional estate agents has prompted a vociferous response
April 12, 2017

A war of words has erupted in the estate agent sector after a damning report from hybrid estate agent Purplebricks (PURP) was roundly condemned by the Charter for Independent Estate and Letting Agents (CIELA). Accusations about over-charging were countered by question marks over completion ratios. Yet it's clear that the traditional estate agency model has a fight on its hands.

However, the key to the gloomy outlook for the traditional high street estate agent is not competition from online agencies - these account for only 5 per cent of all transactions - but the slide in transactional volume. With a largely fixed cost base, estate agents embrace a high degree of operational gearing. So profits rise much faster than costs when transactions are high, but fall significantly when transactions are weak because the cost base is largely fixed.

London-focused estate agent Foxtons (FOXT) recently slashed its dividend and warned that unless business picks up, profits this year are likely to be lower again. Countrywide (CWD) skipped the final dividend altogether, but is trimming costs and closing branches while also offering a fixed fee online service. On the other hand, Purplebricks has expanded into Australia and recently raised funds to start a US operation.

Performances this year will also be up against some tough comparatives as business positively boomed in the first quarter of 2016, reflecting a rush to reach completion ahead of the rise in stamp duty. Yet business in the second quarter fell off a cliff.

We can see some positive aspects of making house conveyance possible online, while at the same time a lot of potential buyers and sellers like to have an estate agent's office where they can deal more on a face-to-face basis. The obvious difference between the two models is that dealing online is significantly cheaper. The downside is that the fee has to be paid upfront, whereas traditional estate agents only collect when the sale is completed.

All in all, it would be disingenuous for either side to claim the moral high ground, and any attempt to increase competition and drive down costs has to be welcomed. Trading verbal blows is more likely to benefit Purplebricks as it amounts to free advertising, but the big challenge for the online operators is to change the perception of house buyers and sellers who have for so long had little choice but to embrace the traditional high street model.