T he nation’s estate agent franchises are proving a success not just for franchisees, but for shareholders too. There are now three franchised estate agents trading on the London Stock Exchange – Winkworth, Martin & Co (under the official name of Martinco plc), and Belvoir – making up a sizeable component of the listed agency sector.

The fact that they have to file detailed accounts gives us a chance to inspect their progress, though the one thing estate agents most want to know – how much revenue individual franchise branches are generating – is absent from the headline results. Instead, the companies report their own revenue, that is, the management service fees and other income they receive from their franchisees. That said, since their fees are calculated on a percentage of franchisees’ income, it’s possible to have a good guess at what’s happening at branch level.

GROWTH

The companies have achieved remarkable growth, even compared to other agents. For instance, Winkworth revenues grew 15 per cent last year, with a stunning contribution of 31 per cent growth from its country offices adding acceleration to a nicely motoring London market. City research house Edison says, “It is noteworthy that from 2009 to 2012 it grew its revenue by nearly 10 per cent every year, despite overall housing transactions being largely stable throughout.” Belvoir, rather staid in 2010-11, has seen revenue growth of 20 and 44 per cent in the last two financial years, while Martins saw growth coming in at 11 per cent last year after a rather disappointing 2012.

Those figures compare well with the corporates. Averaging growth for the last three or four years (some have a shorter track record on the Stock Exchange), the franchises definitely come in ahead – though admittedly that’s not conclusive; LSL has been one of the fastest growers (though LSL contains a fair amount of franchise business).

It’s also worth noting that LSL’s high growth rate has been helped by £62m of acquisitions, including Halifax Estate Agencies, in 2009, and Marsh & Parsons in 2011. That level of capital spending can put pressure on balance sheets. On the other hand, one benefit of the franchise business model is that increases in the branch network don’t require huge amounts of funding – increases in growth can be churned out using relatively little capital. That has left Winkworth – currently refurbishing a quarter of its branches, most of which will be paid for by franchisees – debt free; Martin & Co, too, is entirely equity funded.

While all three listed franchises share good growth in revenues, the growth of their networks of franchised branches varies markedly. Winkworth has grown from 86 branches in 2009 to 96 now, which is relatively low; the company has set a high bar to new entrants, preferring quality over quantity of new branches, and the result can be seen from the increase in revenue per branch, up from just over £39,000 in 2009 to £55,000 now.

That’s not the total revenue of each franchise added together, but only what Winkworth itself gets from the franchisees.

But Winkworth does, in fact, reveal the total sales of its franchised offices, which grew 19 per cent in 2013, from £39.1m to £46m – that’s about half a million an office. Its declared revenue of £4.94m amounts to about ten per cent of its franchised offices’ sales.

The Belvoir prospectus, dated February 2012, gave an interesting outline of franchisees’ experience, with figures for a typical franchise’s revenue of £50,000 in the first year of operations, £100,000 in the second, and £130,000 in the third, with growth typically at five per cent thereafter. It’s grown from about 120 branches in 2009, to 160 branches last year – half a dozen branches a year.

But it’s Martinco which has grown fastest. It has almost doubled in size since 2007, growing from 100 offices in July 2007 to 189 at the end of its last financial year – a dozen offices every year, or roughly 10 per cent annually.

THE FRANCHISEE

How are individual franchisees doing? It’s difficult to tell from the publicly available information, but there are a few pointers; for instance, Martinco says that 59 per cent of the network has been trading under the same brand for more than five years. Add this together with the fast rate of growth, with 47 per cent of offices younger than seven years, and it doesn’t seem that many are slipping through the cracks. Meanwhile, Edison estimates Winkworth may intervene in underperforming franchisees about 3 to 5 per cent of the time – which is fairly insignificant.

While some of the corporates also run franchisee operations, it’s interesting that Martin & Co’s small foray into owning its own branches, having bought a few offices back from 2011 onwards, has been brought to an end. Management has taken the decision to concentrate on the franchise model.

However, looking at recent annual reports and prospectuses suggests that matters aren’t quite as clear-cut as that might suggest. Chief executive Ian Wilson says that, “raising expansion finance through banks has not proven easy for franchisees in recent years”; so as an alternative, Martinco might buy up property portfolio management contracts, and appoint its franchisees to manage them. That’s a bit different from the usual franchise model. Belvoir has also decided to go down this route, supporting franchisees who want to buy up portfolios with loans of up to a fifth of the acquisition value.

More interesting is the evolution of all three franchises from pure sales or lettings towards a mixed model. Winkworth is the furthest forward, with 25 per cent of its revenue coming from lettings; that reflects the wave of estate agents aiming to improve recurring revenues to redress the lumpiness of residential sales revenues from 2005 onwards. But now, the lettings agents are keen not to miss the boat in a rising sales market – over half Martinco’s 189 offices now offer estate agency as well as lettings, and Belvoir has now established an estate agency pilot and will be rolling it out across the network in the fourth quarter of this year.

THE VIEW FROM THE CITY

So what does the City think of the franchises? Share prices have drifted a bit this year after a good run in the last couple of years, but anyone who bought into the initial flotations will have done well, with all three franchises trading well above their float prices. Their low capital requirements and strong cash flow has made them attractive investments, though since all three qualify as smaller companies from the point of view of institutional investors, they tend to trade at a slight discount to the market.

One of the big benefits of a franchise company’s strong cash flow is that it can provide a good dividend payout to its investors instead of having to plough money back into brick and mortar branch offices. Winkworth, for instance, is currently yielding 3.2 per cent, way above bank interest rates, and Belvoir yields 3.9 per cent, while Martinco, which aims to pay out half its total profits in dividends, yields 3 per cent. Contrast Rightmove, which only yields 1 per cent, and you can see the attractions of the franchise model – though the lower yield also reflects the fact that investors are more enamoured of Rightmove’s business model, and particularly its much larger size (£2bn worth of shares, against £30m for Belvoir, for instance).

City analysts certainly expect earnings to grow over the next two years, though interestingly, they don’t expect the franchises to beat the corporates, with both LSL and Foxtons expected to see fast growth. But the outlook certainly seems set fair for the three franchise networks.

However, there’s a new kid on the block – Estates Direct, whose online model and low entry capital could give it the chance to leapfrog the existing franchises. Its master franchise costs only £20,000, with a further £30,000 investment in marketing required, and entry level franchises cost only £10,000 (plus £15,000 marketing) – against a total cost of £120-170,000 at Belvoir, and £85,000 at Martinco. Of course with the existing franchises, investors know the business model works, and the brand is already well known – but if online agency is the way of the future, who knows? Estates Direct might, in a few years’ time, be joining the current trio of franchises on the Stock Exchange.