City brokers Peel Hunt have issued a report which warns investors of a thoroughly bleak outlook for traditional estate agents, saying that 2017 will be “another year of structural change” for the industry.
The report, which looks into listed developers and agents, is damning about Foxtons, Countrywide and LSL, but is glowing about Purplebricks.
Peel Hunt also warns that an increasing number of high street agents will close this year as “capacity” comes out of the industry.
It says that the business model for traditional agents is unsustainable if there are further cuts in commission rates, and also forecasts that a ban on letting fees will be the death knell for some agents.
However, it picks out Purplebricks as “the dominant player in the hybrid estate agency industry and well placed to become the largest agent in the UK in the next few years”.
The firm’s inaugural report on house builders and estate agents broadly concludes that developers will do well, but that the outlook is “tough” for high street agents due to the lack of stock and high levels of Stamp Duty.
It goes on: “However, we expect hybrid agents such as Purplebricks to make further share gains as a growing number of consumers are attracted by a full estate agency service for a low fixed fee.”
The brokers point to last year, when shares in Countrywide and Foxtons fell 56% and 46% respectively, while Purplebricks “was the best performing stock in our coverage”, rising by 47%.
Peel Hunt said that “estate agent activity was and remains much more muted due in part to a serious lack of houses for sale”.
The brokers have issued a Buy recommendation for Purplebricks, Sell recommendations for Foxtons and LSL, a Reduce recommendation for Countrywide, and an Add recommendation for Savills.
It says of Foxtons: “We forecast no profit growth over the next two years and our 80p target price implies c. 20% downside.”
It is also gloomy on LSL, saying that the group’s profit per branch targets look “increasingly unachievable”. It cites a backdrop of slowing transactions, pressure from fixed price agents, and the proposed ban on letting fees.
Peel Hunt is relatively upbeat about Savills, giving it a target price of 750p, above its current price of 688p, as it likes Savill’s commercial property business.
On residential transactions, Peel Hunt forecasts sales volumes to be 5% lower this year than last, and house prices to grow at somewhere between 0% and 2%.
For last year, it estimates transactions at 1.2m.
Countrywide expects its 2016 transactions to be down 6%, while Peel Hunt forecasts a 24% drop in sales at Foxtons.
“Conversely,” Peel Hunt continues, “Purplebricks reported a 108% increase in instructions in the six months to October as it continues to take share from the traditional agents.
“We expect this trend to continue in 2017.”
Peel Hunt says estate agents’ commission fees will continue to come under pressure: “With limited price growth and weaker transaction volumes, competition will likely intensify and 2017 will see more of the same.”
The firm also forecasts that a ban on letting agent fees will see agents losing over 10% of net income. It does not believe costs will be passed on to landlords.
The Peel Hunt report claims: “The number of consumers using a physical estate agency branch is diminishing as technology plays an increasing role in property searches and transactions.
“The last few years have seen a rise of hybrid and online agents with no high street presence (hence low overheads) but a full service offering through a network of estate agents who use home as their offices. Over the last 18 months we estimate that the market share of hybrid/online agents has doubled to c4%, with Purplebricks the dominant player with over 60% of this market.
“We are confident that the growth is set to continue.
“Due to the relatively high fixed costs of running traditional agencies, we do not believe that these are sustainable if there are further reductions in commission rates.
“We expect capacity is set to come out of the industry. The proposed ban on letting fees could be the death knell for some agents and we expect there to be an increasing number of high street estate agents closing in 2017 (a trend that began at the back end of 2016).
“In our view, the businesses that have adopted new technology and accepted that consumer attitudes to estate agency are changing fast have the potential to thrive, even in a market of slower transactions.
“However, those that don’t accept that change is afoot are likely to fare much worse.”
In further analysis in a report which runs to almost 190 pages, Peel Hunt says of Countrywide that it is no longer an advantage to have so many branches, and that this year will be tough. Of Foxtons, it says that its growth is being “stymied” by its high commission rates.
Of LSL, it says that its targets of at least £80,000 per branch took a backward step in 2015, and it expects further reductions for last year and this.
Urging investors to buy shares in Purplebricks, Peel Hunt says its growth continues apace, and that it will become the largest agent in the UK within three to four years.