Falling home sales and a letting fee ban: is this the end of the high street estate agent?
Isabelle Fraser
Updated
Foxtons' share price has dropped 72.5pc since June 2015
Step into trendy Sans Pere in London’s Shoreditch and you can pick up a flat white or a chia seed pot, and shop for scented candles, a Scandinavian-designed sofa – or even a home.
Described as a “lifestyle house”, the fashionable space has been designed to be Instagrammed, with a café – serving avocado ice cream – patisserie (complete with choux pastry workshops), interior design and architecture practice, homeware shop and estate agency.
As activity on the housing market continues to dwindle, particularly in central London, this is one of a new breed of property companies that is thinking laterally and having to work harder, and diversify, to get business. Much like the housebuilders, this is a sector that has changed little over the years and now faces an existential reckoning.
Estate agents have been under attack on many fronts: falling levels of transactions; the threat of digital upstarts chipping away at their market share; a ban on letting fees that will come into action next year. The Royal Institution of Chartered Surveyors has said that the number of properties on each estate agent’s books is at almost a record low. Property sales this year are around 1.2m, about the same as last year, and far below the pre-crisis peak of 1.7m; Rics has said it doesn’t expect there to be an increase in transactions next year. Could this toxic cocktail spell the end of the traditional high street estate agent?
Sans Pere, of course, is an outlier and could only exist in certain pricey corners of the capital. It is the brainchild of Barney Goff, whose father, James Goff, founded estate agency Stirling Ackroyd in the Eighties and was a pioneer in forging Shoreditch into the hipster haven it is today. When he opened his first office in 1984, the lofts and warehouses went for around £20 a sq ft; now, some luxury flats in the area are going for £1,550 per sq ft. Goff junior is hoping that his proposition will be similarly revolutionary. He says the café pays for itself and allows him to run the real estate business in the back room, selling £1m lofts and renting out commercial spaces too; it has just opened a second branch in Hackney’s London Fields.
Inside Sans Pere, a 'lifestyle house' in Shoreditch which is a cafe, homeware shop and estate agencyCredit: Anton Rodriguez
Estate agent Foxtons’ slick operation could be seen as a precursor to Sans Pere, with its glassy café-style stores, fridges full of Perrier and the Mini Coopers parked outside, all of which made it into something of a lifestyle brand. But the estate agent that everybody loves to hate has been struggling for some time, and its pre-tax profit sunk 54pc in 2016.
Investors had been concerned about the company even before the EU referendum hit its share price, which has dropped 72.5pc since June 2015, due to its exposure to the volatile London market, high commission charges and a lack of digital offering.
One of Foxtons' Mini Coopers
They worried about it overextending too, with those shiny offices creating some big overheads. According to Peel Hunt, between 2011 and 2016, as transactions were flat in the capital, it doubled its branch network, but average sales per branch fell by more than 60pc.
Countrywide, the UK’s largest estate agency, which operates more than 50 high street brands such as Hamptons and Faron Sutaria, saw its pre-tax profit fall by 40pc in 2016; its share price has also taken a battering, down 66pc since the referendum, and is 82.2pc lower than March 2015.
It is not a relaxing time to be an estate agent – unless it has no physical presence: online agent Purplebricks’ share price, by contrast, has risen 278.5pc since it floated in December 2015. But even this fledgling and brash company is not in the black, taking on an £8m pre-tax loss in the six months to October as it extends its reach to America and Australia. Its control over 73pc of the growing online sector has made the traditional agents very nervous, and many have jumped into gear by acquiring or investing in online offerings.
purp share price
But for some, it might be too little innovation, too late. Last month, Countrywide paused its £40m digital roll-out that offers a fixed price service, much like its online, more fleet-of-foot peers; at the same time it was failing to attract any new business, with a 6pc fall in new listings.
Analysts at Berenberg estimated that around 30pc of its branches have no digital offering; this is “dangerous given Purplebricks and other hybrids have had a near-monopoly on growth over the past two years,” they said. Analysts reckon that digital-first agents could take over between 25pc and 50pc of the market by 2025.
Traditional estate agents are facing competition from the likes of Purplebricks, run by Michael Bruce, pictured, the share price of which has risen 278.5pc since it floated in December 2015Credit: Rii Schroer
The assault of the burgeoning online agents has also prompted a soul-searching of more traditional companies. The popularity of lower-cost options such as Purplebricks has made many rethink the model, and the DIY method has increased the popularity of other, less corporate and more personal, premium offerings.
One is Brickworks, a London-based company that describes itself as an “ethical estate agent”. Every seller must be totally transparent about the property, from the Japanese knotweed to the damp in the basement, and the company has even rejected potential sellers for not adhering to the rules. Ellie Rees, one of the directors of the company, is a fine artist b y training, and provides packages – much like Sans Pere – offering interior styling and “house doctoring”.
The estate agency is a big behemoth that is lagging behind – there doesn’t seem to be a will to change the way it’s done
Ellie Rees, Brickworks
When founding the company she and her husband wrote a manifesto: agents are paid a salary, and 2.5pc of the profit is given to homelessness charities. And it is working – profits and instruction levels are up, and most of the homes it sells go for a premium, all for a 1pc commission. (Foxtons, by comparison, charges 2.5pc.)
Clients also like the way it is run, something like a private members’ club, which doesn’t have the usual patter of an agent. “The estate agency is a big behemoth that is lagging behind – there doesn’t seem to be a will to change the way it’s done,” says Rees.
Potentially bigger than the rather existential threat from digital agents is the forthcoming ban on letting fees, as part of a wider clampdown by the Government on property managers. Foxtons had been growing its lettings arm as a ballast against the volatile sales market in London; it stands to lose around £3m per year, offsetting its cost-cutting measures, while Countrywide could have around £15m wiped off in profits as a result, according to analysts at Peel Hunt. These agents are more diversified than others, and it could in fact be a huge hit to the profits of smaller agents, says Anthony Codling, an analyst at Jefferies. “You’re likely to see consolidation. I think a lot of agents with heavy lettings businesses might shut up shop or sell to bigger players.”
Will we still see this on the high street?Credit: Alamy
This crunch on revenues and investment in digital offerings to attempt to meet the competition has put some of estate agents under pressure. Begbies Traynor’s “red flag alert” research, which monitors the financial health of companies, found that 10pc of UK property companies were in “significant” financial distress in the third quarter of this year, and the number affected was up 32pc on the same period in 2016.
Countrywide has also been cutting down on branches, from 1,000 to 800, in a bid to restructure the company, which has an unwieldy number of brands covering the same locations. Codling adds that there is overcapacity in the industry, with far more agents than areas and activity to support them.
But even during the financial crisis, estate agents did not fold in relation to the steep fall in transactions. Codling says that during this time, when transaction levels fell to 850,000 a year and the fee pool from commission on sales fell by 60pc, the number of branches decreased by only about 20pc. “They’re resilient, because the overwhelming majority of agents are family-owned firms. Most agents have only one or two branches, and you just tighten your belts,” he says. “It’s a cycle; they have been through them before. This won’t be as bad as the global financial crisis.”
Estate agents are resilient, because the overwhelming majority are family-owned firms. Most agents have only one or two branches, and you just tighten your belts
Anthony Codling, Jefferies
Some high street agents are even bucking the trend: analysts at Berenberg said that Connells, a privately owned traditional agent, is holding sales volumes steady, showing that decline is not inevitable. Recently the big companies have boosted their financial services and surveying offerings, which can still bring in a healthy revenue stream. The slowdown in market activity is also limited to certain areas, particularly London, while in some places, such as Scotland, sales are picking up.
The lettings fee ban could even be a big opportunity, adds Codling. While only 40pc of landlords do not use an estate agent, according to a report by Vizzihomes, “there is a huge opportunity with ever-increasing legislation that agents can take more market share on lettings, such as with EPC certificates. It is putting more onus on the landlord to do things that might see them using estate agents”.
There are ways that the high street estate agent could stumble on, diversifying where it can and hoping that brighter days for the property market are around the corner. It will take some skilful management and more aggressive cost-cutting to begin to please investors. But ultimately the odds are stacked against them: thanks to the emergence of online property portals such as Rightmove and Zoopla, that high street shop window is largely obsolete.
