Recent news for those operating in the property market has generally been negative with the effects of weak transactional volumes, falling house prices, lack of consumer confidence and increasing regulation all causing businesses to reappraise their operations in order to find a successful way forward.
A recent report showed that High Street estate agency offices are closing at a rate of knots, beaten only by the rate of closure of public houses. The report does not however clarify if these are businesses that are closing or simply that agents are exiting the High Street and adopting new ways of working. My view from inside the industry is that it is a combination of both.
The share prices of major agency groups and the property portals have seen billions of pounds of value removed from the sector. Some of this has been self-inflicted – Countrywide has seen its share price fall by over 90% in the last six months to around 10p per share – in part due to a truly disastrous foray into the online arena that simply ‘cannibalised’ its existing ‘traditional’ operations. Some of it has been the contagion effect of reduced confidence in the sector and markets.
The emergence in recent years of ‘online’ and ‘hybrid’ estate agents has been a disrupter with many ‘traditional’ operators failing to find sufficient points of differentiation and therefore losing out to the new low fee, execution only type services that have emerged.
The ability of these new business models to raise funds on the back of future expectations has been nothing short of spectacular with many observers describing this as a case of the ‘Emperor’s new clothes’ as none have yet shown an ability to produce sensible or sustainable returns on investment whilst spending fortunes on building brand awareness and customer acquisition.
The current market is one of change, of innovation and of new developing business models. It is inevitable therefore that there will be casualties, consolidation and remodelled offerings as operators seek to find the right path for a profitable future.
Nested – a relatively new operator that will provide an advance against a seller’s home (albeit at a discount) if they list and fail to sell in 30 days – have reportedly raised another £120 million. Their model clearly tends to secure motivated sellers and is certainly different and so is seen as a horse worth backing. Back in the late 1980’s Prudential offered a chain breaking service which was soon withdrawn in a market where house prices were falling and huge losses were made on an overvalued inventory. At the moment it isn’t completely clear how many transactions are actually made on their ‘buy in/advance’ model – they suggest around 40% but they are certainly gaining ground in capturing sellers who, if the price is right, may well sell on a normal private treaty model.
As I write, we are seeing the newly merged group of EMoov, Tepilo and Urban hit the buffers when only a few weeks ago it was lauding itself as a £100 million business (but seemingly without the £100 million). CEO Russell Quirk is currently blaming everyone but himself and their business model for its issues, in particular that monies expected from Tepilo failed to emerge. It is not quite clear who handled the due diligence in this merger but I would have expected rather more than an IOU on the funding arrangements. My expectation is that there will be some form of administration and pre pack deal done that sees the business able to move forward, having largely cleared its decks of debt and it will re-emerge fleeter footed and ready to relaunch itself on the public.
There has always been a faint smell of BS in much of what the new wave of operators have put forward but the ‘traditional’ players would be best advised not to remain as complacent as they have been and think that a few highly publicised difficulties means that the online revolution is over.
Yes some of the ‘rising stars’ are now ‘question marks’ but using the same Boston Box (Growth/Share Matrix) analogies, many of the traditional operators have or are rapidly moving from being ‘cash cows’ to being ‘old dogs’.
The online agents who charge a fixed fee for listing the property irrespective of outcome have been criticised for such an approach. Whilst I would criticise some of the lack of transparency in their service offerings they do offer an alternate that the consumer can choose to embrace or otherwise.
Taking Purple Bricks as the main protagonist, they charge around £1000 to list a property (the fee varies according to geography) and it is believed they sell around 50% of what they take on (despite unsubstantiated higher claims). This means they make around £2000 for every successful sale. In addition they charge other fees for viewings and conveyancing (whether you use their services or for not using their services!). In total I estimate that they make around £2700 for every successful transaction.
This is virtually identical to the income a ‘traditional High Street’ makes. With an average UK house price of circa £240,000 and an average fee of around 1.1% this equates to the same ballpark level of income.
Of course a combination of scale and lower costs makes the profit from each transaction significantly better in the Purple Bricks model were it not for the marketing spend currently being exerted in growing share.
Purple Bricks have also rapidly taken their offering into new territories such as Australia, Canada and America through a combination of acquisition and organic growth. This diversification could prove to be a masterstroke or simple a costly diversion. Time will tell.
The recent negative news about Emoov, coupled with concerns over some of their investment overseas and the UK market generally has seen the Purple Bricks share price take a hit recently and, along with others, it needs to, in my opinion, find ways of generating cash quickly.
When Jerome McCarthy invented his 4Ps of marketing model in the early 1960’s he could not have predicted the online world that the property industry now operates in but his 4Ps have now been extended to 7Ps – Product, Promotion, Price, Place, People, Process and Physical Evidence.
At the moment my view is that the ‘online and hybrid’ estate agents are not succeeding in all 7Ps with key shortcomings evident in people, process and physical evidence (the user contact experience). Pricing to the consumer may need to change to provide adequate funds to enable these to be fully developed. Whoever succeeds in all 7Ps will stand a good chance of establishing a high volume and highly profitable business model.
Gaining consumer trust is key – demonstrating that there is value in the offering, particularly showing that paying a fixed fee to list a property is good value and that the client is highly likely to get the result they seek, will be paramount.
At the moment with teams of self-employed local property ‘experts’ getting rewarded for listing property, the temptation to over-value rather than provide a quality service through to completion, is a perceived weakness that the online ‘low cost’ operators need to address.
My view is that the coming weeks and months will likely see some changes to fee models across the industry, the high cost of customer acquisition for the newest entrants cannot continue and a return on investment needs to be demonstrated.
Talk however of an early end to ‘online estate agency’ is, in my opinion, highly premature and I expect the winners will adopt, adapt and improve their offerings – the current scene may be the end of the beginning but it is not the beginning of the end for online and hybrid estate agency.
