Real Estate

UK estate agents need customers, but get short sellers


Even estate agents deserve a little sympathy now and again — after all, following journalists and politicians, they serve an important role as a target for sanctioned scorn.

And times are getting tough. The reality of the slowing housing market has begun to catch up with the listed property agency industry — if that is indeed the right collective term for the wheeler dealers that offer to help home buying and selling in the UK.

The interest rate rise by the Bank of England on Thursday is likely to cause further problems for housebuyers — and, in turn, the estate agents that act as the canaries in the coal mine for the long-term health of the market.

Interest rate rises are the thing that estate agents most fear. They know that the housing market can withstand many things: valuations wildly out of kilter with earnings; a Brexit-spurred stampede of international buyers out of the country; millennial ennui about home ownership; even the hot summer, which has kept potential buyers from knocking on doors.

But rising rates — and the knock-on effect on the cost of house buying — can quickly damp already waning demand. According to the Office for National Statistics, an average house in England and Wales costs almost eight times annual earnings — well above long-term averages. Affordability will be further pressured by higher rates.

Conditions for estate agents were hardly good before. The reason why house prices are not falling faster in the UK, according to some property experts, is a lack of houses for sale — and supply is crucial for the estate agency profession. Online agents are already driving down fees and high street overheads will struggle to be supported on lower commissions.

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Investors in estate agents should perhaps have seen this coming sooner then — but, regardless, they are now. Countrywide shares plummeted on Thursday, wiping out more than half the estate agent’s value, after it revealed plans for a heavily discounted emergency equity raising. Despite the backing of its largest shareholder, PwC, the company’s auditor, said there was a “material uncertainty” about its future if the share issue failed.

Shares were already trading near an all-time low of 49p ahead of the fundraising, about a third of where they were trading this time last year, with short interest in Countrywide jumping from a year long low of about 8 per cent of free float to 9.8 per cent in just the last few days ahead of the cash call.

Shares in Foxtons, its London-focused rival, have actually bounced off the all-time low they hit last week, even if at 61p they are almost half the level of a year ago. Analysts seem to take some solace in the strength of its lettings business — if people cannot afford to buy then this makes sense — but it will still be hard hit in any prolonged housing downturn. Unlike Countrywide, it at least does not labour under a penalising debt burden, but the shorts in Foxtons have more than doubled since the start of July — from about 2.2 per cent as a percentage of free float to about 4.6 per cent.

These listed agents are sensibly seeking to cut costs — for example, average headcount at Foxtons at the end of 2016 was 1,337, but this had fallen to 1,170 by the end of 2017. The high street is expected to see further closures of branches that no longer cover their costs.

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And this move, in turn, might have a knock-on effect on the previously unassailable Rightmove— not an estate agency, but a portal used by the agents. Shares are down 10 per cent from the all-time high hit in June: to blame, not its own mostly fine financial results but the prospect that it might be losing its market.

Analysts are worried over slowing growth — and in particular average revenue per advertiser. Rightmove charges by the branch, which means that office closures would become a problem. Membership numbers were flat at its results last week, but Rightmove could prove a lagging indicator of housing market health given its importance in the sales process. Advertising on such a portal will be the last thing that agents will want to lose.

Competition is also a problem for Rightmove, having long had a relatively cosy rivalry for online sales with Zoopla. Now, it faces stiffer competition for what could be a diminishing band of estate agents from the likes of OnTheMarket, which claims more than 10,000 branches have joined since its listing on London’s junior market in February.

Homeowners may at least take some solace after UK house prices showed a modest rebound in July, according to Nationwide, after falling in three of the four months ahead of a similar rise in June.

But whether house prices rise is not much of a concern to agents — who instead need high levels of churn to make their fees. Housing market activity is relatively subdued, and likely to remain so given wider economic slowdown and fragile consumer confidence — and now the burden of higher rates for a market that has long had it easy.

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