Barclays has warned that cheap online estate agents, such as Purplebricks, are credible competitors within the industry.
On Wednesday, shares in Foxtons estate agents dropped for the second consecutive day.
Barclays questions whether Foxtons can justify charging fees and believes that online agents “will drive commission rates down in time.”
On Tuesday, shares in Foxtons declined by 4% and on Wednesday by a further 2.07%, ending at 236.80p.
Barclays is concerned about sales volumes, fee levels and the fiercely competitive London market in which Foxtons is mostly based.
Bank Says Online Agents are a Threat Within the Industry
Jon Bell, of Barclays, says that although the general election result removed the fear of a mansion tax, “the extent to which volumes have rebounded since then is unclear.”1
The bank’s analysis states: “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, and 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 doesn’t know whether Foxtons can continue justifying its high fees, as online agents charge much less.
It continues: “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.”1
Foxtons is currently opening five to seven branches per year, but several other agents are making their presence felt in London.
The Foxtons share price is currently down from a peak of 295p last August, but up from its 52-week low of 142.70p in November 2014.
But other agents have continued to perform well, despite negative activity in the first half of this year. All agents reported a fall in transactions.
Shares in Countrywide fell by 1.46% on Wednesday and LSL shares dropped by 0.28%.