Foxtons is among the day’s biggest FTSE 250 fallers so far, on concerns that a post-general election bounce may not turn out to be that strong for the London-focused estate agency.
Analysts at Barclays issued an underweight rating on Foxtons, albeit edging up their price target from 179.2p to 179.9p. They said:
Will 2015 be the mirror image of 2014? Last year started strongly before fading away; the start of this year was heavily election-impacted and could now improve.
But is it as simple as this? Ahead of the important month of September, we believe that the company’s post-election recovery is likely to be patchy, particularly for estate agency, for four reasons. First, there is a lack of available stock in the market. Second, last December’s Stamp Duty changes raised the tax on expensive properties – although some way above Foxtons’ average price point, there could be a ‘spillover’ effect on overall volumes. Third, the ‘normal’ level of annual transactions in the capital is likely to have fallen over time: we stay longer; we move less; we dig more basements. And finally, we believe there is some pressure on fees.
Barclays also raised concerns about online rivals, and questioned whether Foxtons could continue justifying higher fees for a premium service:
Online agents, such as Purplebricks, operate with little or no high street presence and charge much lower fees than traditional players. Growing quickly from a low base (we understand that online market share is around 3.5%), they are disruptors; new entrants changing long-established norms.
Foxtons has an unstinting belief that its fees – likely to be the highest in the market – are supported by a premium service that delivers superior net returns for its customers. Our view is that in a ‘commoditised’ London market, where visibility over prices (expressed in £ per square feet) is high, online agents could start to demonstrate that they can deliver equivalent returns. Should they do this, then operators’ ability to charge more is compromised.
We believe that new entrants will drive commission rates down in time, and that this will have repercussions for Foxtons, given that they underpin its very high (around 30% EBITDA) margins. This underlying attrition is in addition to that arising from a mix change: a greater proportion of new build sales (15% of its current pipeline, higher than 10%-12% previously) on which commission rates are relatively low.
The analysts also wondered about the company’s expansion plans:
Foxtons is opening around 5-7 new branches each year and believes it can roll out its business to around 100 branches within the M25. Although this confers some benefits, such expansion presents a number of issues – the need to ‘seed’ those that have newly opened through ‘zero offers’; the risk of ‘cannibalising’ existing branches in doing so; the dilutive effect on average transaction values from expanding away from the centre of London. There is little doubt that an opportunity exists to roll out the platform – we wonder whether the economics of doing so become less favourable over time?
Foxtons shares are currently down 6p or 2.3% at 246p.
