According to Savills, 2016 and the World Bank, the global real estate market is worth $217tr, 75% of which is residential property. Annual real estate trading has averaged $683bn annually since 2007 and reached $900bn in 2015. This represents turnover of around 0.3-4% of the capital stock. Inventory turnover in the S&P 500 company averages around 15 times, a multiple compared to global real estate of approaching 5,000. The global real estate market is huge – making up more than half the value of all mainstream assets in the world. But it is horribly illiquid.
Ignoring taxes on property transactions, round trip costs (legal, valuation and structural due diligence, contracts, investment advisory fees and brokerage fees) are likely to produce an average round trip trading cost of around 3-6% of the price of the real estate; and this estimate excludes abortive costs on transactions that do not complete. Annual fees of 5% on $1tr of property value would provide income for built environment consultants, real estate professionals, lawyers and accountants of around $50bn a year. Shaving 10% off that through greater efficiencies would release potential revenues of $5bn.
Clearly, the focus of endeavour will be on improving the efficiency of the transaction process, and the relative scale will encourage serious investment primarily in the residential market; commercial market applications are likely to follow behind.
In the UK, estate agents have traditionally operated on a ‘sole agency’ basis, and are reliant on instructions to sell properties on behalf of the owner for a success-only fee of around 1-3% of the purchase price. In the US, sole agency is less common than the pooling of instructions across groups of brokers through what is known as a multiple listing service. The listing data stored in a multiple listing service’s database is the proprietary information of the broker who has obtained a listing agreement with a property’s seller. Broker fees can as a result of this sharing model be as much as 6%, although the broker also facilitates exchange of contracts and legal professionals are less involved, saving fees elsewhere.
During an interview in his office in San Francisco, Jeremy Sicklick of HouseCanary told me that it takes on average over 100 days to sell or buy a house in the US, and a combined total of 11% of the price of the house is spent by both sides in fees and taxes. The HouseCanary mission and opportunity is to take a slice of that 11% while reducing the total burden of cost.
In most developed markets, where debt is used in the majority of house purchases, the bank or lending party commissions a valuation by a qualified professional. This inevitably takes time – form filling by the buyer, processing of the application by the lender, commissioning of the valuation, setting up the inspection, preparing, writing and returning the valuation and processing the information received – which can eat into a large proportion of the 100 days.
Uncertainty over the value of the property can also delay the initial sale process, risking gazumping and a long drawn out negotiation. The HouseCanary proprietors believe that they can develop intelligent AI algorithms which can be accurate for the vast majority of US homes to within a 2% error range. If this thesis were to be accepted by market participants and lenders, perhaps half of the 100-day lag can be taken out of the process.
Can we imagine a world in which prospective house buyers can go to one site where all houses on the market are listed, with an independent and public valuation discoverable by the seller, the buyer and lenders? We are getting very close. Meanwhile, the biggest game in techtown is blockchain, a new technology that may facilitate direct transactions between buyer and seller, cutting out the middle man. If the same site could list a house, value it, commission debt and execute transactions, the liquidity of this huge asset class would greatly improve.
The UK battleground
In the UK, an interesting battle is emerging between technology and tradition. Purplebricks is a tech-enabled estate agent which puts sellers together with local experts. Since its launch in 2014 Purplebricks has raised well over £100m in VC funding and through the listed markets. The Purplebricks model, which combines digital and human interfaces by cutting out the expensive branch network and replacing it with a cheaper website, and is replicated in the US by Triple Mint, is only mildly innovative and largely unproven. There are doubts about the business model (flat fees, and no immediate success incentive), and no immediate flood of me-toos. Its success in raising funding appears to be a sign of the pent-up desire of capital to access the residential brokerage market rather than a belief in the power of its technology or proposition. Meanwhile, traditional estate agents sit and – with good cause – worry. The online estate agents are probably the least of their worries.
The battle in the UK is increasingly between three groups of players: traditional estate agents, online estate agents, and the portals such as Rightmove and Zoopla. Online estate agents are grabbing market share from the traditional players, with a reduction in the number of estate agents widely anticipated. But an increasingly intriguing tussle is being played out between the traditional agents and the portals.
Less than four years ago, there were seven residential property portals in the UK; Rightmove, Zoopla, Primelocation, Globrix, Findaproperty, Propertylive (closed by the National Federation of Property Professionals in 2013) and Propertywide (used only by Countrywide Group agents). There are now three major property portal companies, the two leaders owned by Rightmove and Zoopla Property Group, and a third recent entry (Onthemarket) owned by Agents’ Mutual.
These portals rely for revenue mainly on monthly membership subscriptions paid by traditional estate agency firms, plus advertising revenues – much of which is also from estate agency firms – and an increasing array of add-on services, increasingly including data analysis services. The lifeblood of the portal is data about houses, especially those which are available for sale. This data, as well as the basic revenue lines, is provided by traditional agents.
ZPG, through its ownership of Zoopla and PrimeLocation, claims to have almost 300,000 leads to its agent members so far in 2017, up 31% compared to the same period the previous year. The total value of these vendor leads introduced over the past 7 months is worth an estimated £225m in fees to its members. In total, including applicant leads, ZPG confirms that is has delivered over 14 million leads to its members so far in 2017. In return, the estate agencies provide the bulk of the portals’ revenues.
This arrangement could be seen as a pact with the devil. As the value of the agent’s shop window declines – recent analysis suggests that 90% of sales leads are generated by portals – how do they defend their businesses? What is to stop the portal migrating from an information site to a sales platform?
Rightmove
Rightmove, the market leader, was launched in 2000 by the top four corporate estate agencies at the time: Countrywide, Connells, Halifax and Royal and Sun Alliance. The website was initially free to list but Rightmove was the first website to charge for property listings (charging was introduced in January 2002). The company’s principal business is now the website www.rightmove.co.uk where its customers – estate agents, rental agents and new home developers – pay fees to have their properties displayed on the website, which provides home hunters with property details to search. The company floated on the London Stock Exchange in March 2006.
Rightmove also competes in the market for classified property advertising. This market includes print advertising, internet sites of individual estate agents and new home developers, and other property portals. In 2016, 1 million UK residential properties advertised on Rightmove, which is a third more than on any other portal, and it now claims to have 90% of all UK agents listing properties on the site.
Rightmove made an operating profit of £162m on turnover of £220m, up 18% and 15% respectively from 2015. Rightmove’s market capitalisation is now £3.75bn.
In May 2008, HBOS, one of the founding investors, sold its stake in Rightmove and no estate agents are among Rightmove’s major shareholders, which are the usual institutional fund managers, led by Blackrock.
Zoopla
Zoopla, the second busiest residential portal in the UK, was initially owned by the Daily Mail and General Trust (still the major investor) and estate agent Countrywide. Zoopla Property Group shares are now much more widely held.
The Zoopla Property Group mission is to provide the most useful resources for consumers when finding, moving or managing their home. Zoopla focuses on providing users with access to information about residential property on the UK market but also data such as sold house prices, area statistics and current value estimates. Its brands include the property websites Zoopla and Primelocation and price comparison service uSwitch.
Zoopla has been very acquisitive, acquiring the Propertyfinder Group, consisting of the websites Propertyfinder.com, Hotproperty.co.uk and UK Property Shop, in 2009; property technology company Byteplay in 2010; and property information website UpMyStreet and property information website Globrix in 2012.
In addition, Zoopla and Digital Property Group, the subsidiary of A&N Media which operates property websites Primelocation.com, Globrix.com and FindaProperty.com, merged in 2012; and Zoopla then acquired Hometrack in 2017.
The result of this corporate activity has been to dilute the original owners down and, again, no estate agents are among Zoopla’s major shareholders.
The only property portal brands that the Zoopla group now operate are Zoopla and Primelocation. Through merger and acquisition, Zoopla has now effectively removed all effective competitor portals from the market. It is the fastest growing property website and its 2016 turnover of £198m grew by over 80% from 2015 and its profit of £37m was up by 44%, but Zoopla is still much less profitable than Rightmove.
Onthemarket
Onthemarket (OTM), the third most visited property website in the UK, is owned by Agents’ Mutual (AM), which was set up as a mutual, or member-owned business, by the original founders and original CEO of Primelocation. AM established Onthemarket in 2014 with the intention of disrupting what had become the corporate duopoly of Rightmove and Zoopla.
AM raised funds from a group of estate agents, including Savills, Chestertons and Knight Frank, and requires agents who want to promote properties on its site to choose between advertising on either Rightmove or Zoopla, but not both. This so-called ‘one other portal rule’ was formalised through five year contracts with member agencies.
According to website Estate Agent Today, the latest unverified accounts show turnover of £18m and a small operating loss, with a decline in both metrics over the previous year. There have been claims from Zoopla that a significant number of estate agency branches have left Onthemarket (OTM) to re-join ZPG over the past two years, and, following stagnation in growth and ongoing litigation between its members and the board, AM recently announced its intention to de-mutualise. On 4th August 2017, Agents’ Mutual announced its intention to list on AIM, seeking a valuation of £200m and £50m of institutional investor funds. The agents have lost control again.
What next?
Traditional estate agents have so far failed to control the data they generate and have been unable to capitalise on the value created by value aggregation. Are they at risk of losing further ground? Clearly, they face a very uncomfortable squeeze between the online agents on one side and the portals on the other.
Only the portals’ revenue model – largely agent-derived – keeps the portals in check. This explains why they remain information sites, and not transaction platforms. But will the logic of cutting fees and transaction times by investing in on line transactions eventually create the game changer? Or will the agents eventally succeed in controlling their own data aggregator? Technology is rarely resisted successfully for long – logic suggests that this battle is far from over, and I know where my money would go.
