Real estate, alternative real assets and other diversions

3 Things I learnt about the UK Housing Market this week.

The Analyst

Housebuilders Make Money

This week saw three of the biggest housebuilders in the UK deliver increases in the number of homes they built and the profits they made. Bovis sold 3,759 homes; Taylor Wimpey 15,275 homes and Persimmon 16,449 homes generating profits before taxation of £168m, £857m and £1,091m respectively.

The scale of these profits added fuel to the fire of the Help to Buy debate: Does it lead to more homes being built or is it a Government subsidy propping up housebuilders’ profits. The simple answer, in my view, is that yes it leads to more homes being built (the policy objective of the UK Government) and if a housebuilder sells more homes it should generate more profit. But I don’t think it is a subsidy propping up profits – that is probably a post for another day.

Estate Agents Lose Money

The main debate in the UK estate agency market over the last three years has been the ‘bricks vs clicks’ debate or online estate agents vs traditional high street agents. Many believed that online estate agents would hurt high street estate agents as much as Amazon has hamstrung high street retailers.

This week Foxtons, the London based high street estate agent, announced a loss before taxation of £17.2m which is ironic really when many believe the prices of the products they sell (houses) are priced too highly. Could this be because of the Amazonification of UK estate agency?

I think not, because last week Purplebricks had a profit warning cutting revenue guidance by 20%, so perhaps online agents are not the force many previously reckoned them to be. It seems to me that what online agents save on high street office costs they spend on marketing (perhaps to make up for a lack of presence on the high street..). I also believe that whilst the ‘pay whether or not you sell model’ is great for the online agent it isn’t so great for the homeowner who doesn’t sell their home, but still has to pay the agent.

The simple reason for the losses is that estate agents are facing a shortage of homes to sell. This is a difficult problem to solve. Housebuilders have a ready supply of homes to sell, estate agents require a steady supply of people ready, willing and able to move. Political and economic uncertainty is causing wannabe home-movers to sit on their hands, and if they do that, it doesn’t matter what model the estate agent chooses to deploy. If there are no homes to sell, there are no profits to be made from selling them.

Property Portals Print Money

Come rain, come shine property portals make money, lots of money. Portals are free to use for the end user, but this ‘free’ comes at a significant cost to a property portal’s customers who pay a subscription fee to list their properties on the portal (Rightmove charges just over £1,000 per branch per month). Property portals are the most profitable and most robust businesses I have ever analysed. Whilst the majority of their customers are feeling the pinch (see Estate Agents Lose Money – above), Property portals’ profits are growing.

In 2018 Rightmove had revenues of £267.8m (up 10% on 2017) and generated a staggering profit before tax of £198.3m (up 11% on 2017), which means that for every £100 an estate agent or housebuilder pays Rightmove £74 is pure profit. Nice work if you can get it.  

Rightmove is a member of the FTSE100 which means that it is one of the 100 largest companies listed on the London Stock Exchange. Most of its clients are one or two branch estate agents and therefore have very limited bargaining power when it comes to pricing and Rightmove has been the number one UK property portal for more than 10 years. 

Portals charge a monthly subscription fee per estate agency branch and are therefore one step removed from movements in house prices and housing transactions, the very movements which are causing estate agents to make losses.






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