Shares in a swathe of domestically-focused companies rose following the election of a Tory majority government earlier this month. With Brexit uncertainty blamed by many of the residential and commercial property market’s participants for the slowdown in buying and selling over the past three years, it is unsurprising that among the biggest post-election risers were housebuilders and estate agencies.
While the former have managed to continue to attract investors with generous – although seemingly increasingly unsustainable – dividend payments, most UK-listed estate agencies have been unloved by the market since the EU referendum. Companies including Foxtons (FOXT), Countrywide (CWD) and Purplebricks (PURP) have suffered declining UK lettings and sales income, which has resulted from weakening transaction volumes. That is in addition to a ban on tenant fees, which came into effect in June.
Management at Foxtons is focusing on lettings activities. While those operations reported flat revenue during the first half, they outperformed a deteriorating sales business, which suffered a contraction in average revenue per unit. Meanwhile, Countrywide – which reported a pre-tax loss of £40m over the first half – is pinning its hopes on selling more ancillary conveyancing and financial services and in November agreed to dispose of its commercial business Lambert Smith Hampton to help cut debt.
However, Brexit bulls hoping for a sharp rebound in the UK housing market – and the fortunes of estate agencies – following the election, may have got carried away. “It’s not going to be a silver bullet to the market,” says Berenberg analyst Sam Cullen. “If you look at the areas where you have the biggest swing from Labour to Tory, those housing markets have been in particularly good shape for the past two years.”
The longer-term impediment to house price growth is affordability, which goes some way to explaining why markets in London and the south-east have stuttered more than elsewhere in the country. House prices in the capital declined by 0.4 per cent over the year to September, according to data from the Office for National Statistics, compared with an average 1.3 per cent rise for the country.
The 2014 Mortgage Market Review – which aimed to prevent a repeat of the boom and bust six years earlier – required lenders to undertake a more thorough assessment of a potential home buyer’s suitability as a borrower, for instance reviewing regular outgoings as well as just monthly income. That resulted in average income to deposit ratios increasing. Perhaps unsurprisingly, house prices began to weaken even before the referendum vote, in early 2015.
Winkworth (WINK) chief executive Dominic Agace says the estate agency did see some larger transactions complete the day after the election. However, given the market is typically quieter before Christmas, it is too early to tell whether there will be a big jump in activity, he adds. “Predominately the big issues are [house] price growth and stamp duty,” he says.
Homeowners hoping for a reform of the stamp duty regime were also left disappointed after prime minister Boris Johnson backtracked on a pledge to increase the threshold at which stamp duty kicks in to £500,000, from its current level of £125,000, and reducing the rate payable on homes valued at £1.5m and over, from 12 per cent to 7 per cent. The property tax – which was amended in 2014 to introduce a higher rate for the most expensive homes – has been blamed for paralysing transactions at the higher-end of the market, which has naturally impacted London more.
Pull effect strengthened
Yet property taxation will be reformed to introduce a 3 per cent surcharge for non-UK tax residents. However, the additional cost of purchasing a home should be outweighed by the continued "'London as a safety deposit box’ effect,” says Mr Cullen.
The biggest beneficiaries of an increase in overseas property investors are estate agents such as Savills (SVS) and Knight Frank, says Mr Cullen, which market to people in countries such as Hong Kong, who are attracted by the greater stability the UK market offers. “Now these investors are increasingly taking this as a death knell for a hard left government in the UK.”
Yet while the likelihood of the UK leaving the EU on 31 January has risen markedly, there is still a lack of certainty over the shape of any Brexit deal that may be signed up to by both parties before the end of the December 2020 transition period. That leaves the possibility of a cliff-edge exit from the trading bloc.
For the UK’s estate agencies, getting a handle on costs may require more urgency, against a potential stagnation in transaction volumes. “Double-fronted estate agency shops won’t work in all markets,” says Mr Agace.
That may have implications for property advertising services such as Rightmove (RMV) and OnTheMarket (OTMP), which charge estate agencies a subscription fee for use of their property portal. Those platforms have benefited from the shift from traditional media advertising by estate agencies. Despite the broader malaise, market leader Rightmove has managed to continue to maintain high operating margins – at 77.1 per cent during the first half – and increase the average revenue per advertiser.
The issue for Rightmove is not as much related to housing market transactions because it operates a subscription model, says Shore Capital analyst Roddy Davidson. “The issue is the extent to which it has managed to increase prices over a long period of time and the fact that’s increasingly hard to swallow for estate agents,” he says.
The shares have risen by almost half over the past 12 months and trade at 30 times forward earnings, according to Peel Hunt 2020 forecasts, a substantial premium to a 10-year historical average multiple of 23. “The valuation of the stock suggests that this is a company that’s going to keep growing ad infinitum,” says Mr Davidson.
