Who will be the winners in the “broken estate agency” market?

We know that the current and foreseeable UK macro property market position lacks stability with Brexit, affordability, supply and demand imbalance, knee jerk and short term Government policy all adding to the mix. However, people need somewhere to live and demand for accommodation means we are unlikely to see any huge price readjustments and transactional levels are set to continue at similar levels.

So why is the estate agency market broken too?

Quite simply, there are far too many estate agents and total fee revenues are not enough to support such numbers! No-one is able to say how many agents there are in the UK but there is currently estimated to be circa 25,000 sales and lettings “offices”.

There are simply too many agents fishing in a pond that isn’t growing and where new competition is winning business at lower fee levels and with new business models.

A cull is needed and is already underway, as agents lose volumes and pull the only lever they think they have – fees – to try and hold onto a share of the market.

With largely fixed cost business models involving High Street premises and salaried staff and with growing competitive pressures, technological and legislative change, it will only be those agents that are able to adopt, adapt and improve that will ultimately survive and thrive. Adopt, adapt, improve originates from a speech by, the then, Prince of Wales in 1927 – in my view it is just as relevant today.

Moving into lettings has enabled many estate agents to survive in recent years with annual growth rates in the private rental sector exceeding 20% and faster cash-flows than in sales. This market is now under pressure from increasing legislation and diminishing yields. The impending tenant fee ban will take some 15% of revenue away from the average agency and, alongside reduced sales transactions, could signal the end for many.

The appetite from investors for the new “online” agents has been staggering and growth in “online” and “hybrid” agency has been significant with latest reports suggesting that as much as 8% of the market is now under their control and this share is growing.

Purplebricks are the largest UK player and, despite showing nothing in the way of profit have a market capitalisation of around £900 million. Compare this with the business that was the largest UK estate agency up until a couple of years ago – Countrywide – who following a series of terrible business decisions in trying to reshape the operation has had to look down the back of sofas to find £140 million to largely repay debt and now has a market capitalisation of sub £70 million.

Countrywide, along with many others who have also failed, tried to market a retail orientated, lower cost, fixed fee, online model but to do so within and alongside their existing branch based business. This is confusing to consumers (and staff) and only succeeded in effectively taking business from itself, at lower fees, whilst retaining and indeed adding to the higher cost base. Brilliant!

YOPA has raised more funds (some £75 million in total) and has both LSL Property Services (Your Move, Reeds Rains and others) and Savills amongst its investors in the background, hedging their bets and testing the online and hybrid waters but without risking damage to their existing brands. Connells have done likewise with Hatched. 

Sitting rather more noisily in the wings is Russell Quirk of Emoov who have recently created the “Emoovment” by absorbing Tepilo and Urban into the group. Again, they have successfully raised considerable investment funds. Russell’s inimitable ability to “piggy back” on, seemingly, every news story in the industry has to be admired, although the whiff of BS is never far away.

Working with Russell is Adam Day, a positive “veteran” of the online agency world, who set up Hatched before exiting after the deal with Connells. He has subsequently worked for Easy and now Emoov.  

The aforementioned Easy Property, sold licences to “traditional agents” and then wonders why they have failed to capture any meaningful share of the market. Most of the agents have done little or nothing with their licences, simply accepting the annual cost as the price of keeping an “onliner” out of their market place. The cheap Easy brand does not sit comfortably alongside the image of “traditional agents” and so no traction has been gained. 

Of course, there will be winners and losers within any market and this will be true amongst the “online” and “hybrid” agents and I expect to see considerable consolidation take place alongside the blood-letting taking place in the industry.

My view however is that online agency will succeed and form part of a mix of offerings for consumers. It is however difficult to see how they will succeed other than through generating high volumes and operating with a low and flexible cost base. The old local estate agency model doesn’t work the same way in the online world due to the need for scale. Scale makes TV advertising a cheap method of communication and more effective than pacing streets pushing rainforests of leaflets through doors.

We are already seeing several of the online businesses look to raise fees. A back of a fag packet calculation shows that an additional £200 per transaction would, on the current annual level of 1.2 million transactions, generate around £240 million in extra revenue or c£12000 per office. This would help any business but would transform a business like Purplebricks who get paid on listings and so would see the equivalent of £400 on every unit sold. Assuming they have around 5% of the market, a £200 increase on their pricing would generate an additional £24 million of revenue, largely all profit and starting to reward the faith their investors have shown to date. From their current low fees starting point, the online and hybrid agents will probably find it easier to raise fees than their “High Street” counterparts.

There are however many great example of “traditional “agency business who will continue to prosper. Connells, where I spent twelve years, continue to deliver excellent results through a tightly managed business with a well-diversified range of services and who monitor and review everything and manage margins and leverage relationships.

Differentiation is key in a “sea of sameness” and this is one area where the online players have pressed home their message. The “High Street” operators need to identify areas of differentiation and sell these. Otherwise, if they are perceived as no different in service etc. to the onliners, they will be judged purely on price with inevitable results.

In short, now is not a time for sitting still and hoping things will improve. The world is littered with business stories of those who failed to recognise innovation and change and who didn’t plan to fail but failed to plan.

Blockbuster video ignored the emergence of Netflix. Kodak ignored the emergence of digital photography. HMV ignored the emergence of the digital download. Where are they now?

It’s not yet too late but change is gathering pace and a business action plan needs both planning and action!