Read the comment sections of property sector news pages, and you’ll see battle declared between online and high street estate agents. Their troops are drawn up facing each other, with a clear and open battleground between. Only it’s not quite like that any more.
A number of ‘pure’ online agents have moved to add local ‘boots on the ground’ to their networks, while several high street agents have set up or bought online agency businesses to complement their traditional chains. Are they morphing into similar models?
WHERE WE ARE NOW
While the first generation of online ‘agencies’ were often little more than a front for DIY owner-sellers, agencies such as Purplebricks, eMoov, Yopa and Easyproperty have all adopted a hybrid model that sees them providing more services to their customers than simply listing properties. They’re now recruiting local property experts, most often on a self-employed, highly commission-orientated basis (which keeps their fixed costs low). Purplebricks already has a network of over 200 agents, and is looking to double that figure, while Hatched has more than doubled its staff since it joined Connells. Now traditional high street agencies aren’t just competing for customers – they’re competing for staff too; according to Alex Wiffen at Cherrypick People, while some staff with telesales or digital marketing backgrounds are joining the online agents, for the most part they’re headhunting out of the traditional agency sector.
Many agents are taking the view that online is the way of the future and reckon that they can increase their earning potential by making the switch. Daniel Attia, YOPA.
The new model could be highly attractive to experienced negotiators in the high street. Purplebricks local agents are expected to earn £60-80,000 a year, and Daniel Attia, CEO of Yopa, says many agents are taking the view that online is the way of the future, and reckon they can increase their earning potential by making the switch. That makes recruiting fairly easy.
BUYING INTO THE FUTURE
At the same time, some of the traditional high street agencies are getting involved in online operations. Countrywide has chosen the organic route, and is now rolling out its pilot online model across its branches, and will offer customers a choice of online service at low prices or the traditional service at a higher commission, Other agents have acquired online agencies, which will trade under their separate brands; Savills has invested in Yopa, Connells bought Hatched, and Martinco paid £15m for Ewemove – seen by many as a remarkably high price for a fast growing but relatively small business.
Where some of our sector competitors are very hands-off when it comes to negotiation and sales progression, we operate as a full-service agent. Russell Quirk, Emoov.
Emoov’s Russell Quirk isn’t surprised. “It is inevitably going to end up as a blend of the old and the new,” he says, “with the best bits of each being incorporated into one model. As the online sector was born through a dissatisfaction of the way traditional agents operate, we like to think we already have the perfect blend of the old and the new. Now, we’re finding some of the traditional guys are waking up to the change in the industry as a result of the hybrid/online sector gaining traction.” Not all of them are getting it right, he thinks – in particular ‘one large agent’ is getting the flexi model all wrong – but it shows that the larger firms have recognised the appeal of the business model.
He points out that eMoov’s service is far more comprehensive than some competitors give it credit for. “Whereas some of our sector competitors are very hands off when it comes to negotiation and sales progression, we implement and operate as a full-service agent”. It is sales progression in particular that is likely to differentiate the best of the hybrid agents – rather than the often more highly advertised valuations and listings.
THE VIEW FROM THE CITY
It’s interesting to look at what the City has to say, as analysts’ research notes, together with prospectuses and annual reports, give an interesting view of the economics behind the hybrid model. Peel Hunt’s analyst Gavin Jago says Purplebricks – now by far the largest of the online/hybrid agents – is now profitable in the UK on a monthly run rate; he expects it to make £24m operating profit by 2019. Because the vast majority of local property experts are self-employed, and property costs have been minimised, he says, Purplebricks has “a geared and scalable model”, meaning once instructions pass a certain level, a very high percentage of the fee comes through to profit.
Purplebricks has established a significant first mover advantage in its hybrid software-LPE model. It is significantly scaleable being software based. Mike Foster Hardman & Co.
Hardman & Co’s Mike Foster says, “Purplebricks has established a significant first mover advantage in its hybrid software-LPE model. The model is significantly scaleable being software and franchise based.” He points to Purplebricks’ 56 per cent gross margin as proof of its profit potential. This makes the hybrid agents powerful competitors against high street agents with massive amounts invested in expensive Zone A rental property and big monthly wage bills.
Not all the analysts are true believers, though. UBS’ research points out that Purplebricks’ local experts would need each to sell around three times as much as the traditional branch to make the model work. Online agents also have high national marketing costs (as do the portals) and some have sunk huge amounts of money into software. Second generation online agents aren’t like the man-in-a-garage first generation – they need large numbers of instructions fast in order to survive. Though UBS believes Purplebricks could do well, its research suggests the shares are too highly valued to deliver investors a good return.
PROFIT AND LOSS
At least Purplebricks seems to be well on the way to making a good profit. Easyproperty, on the other hand, had costs not far short of Purplebricks’ in 2016, but got very little for what it spent, according to Mike DelPrete at Property Portals Watch. He calculates its cost per listing at £12,000, or £14 per pound of revenue – so either it’s going to have to grow the business very fast indeed in 2017, or it’s going to lose substantial amounts of money again this year after last year’s £11m loss. Obviously the online model isn’t a magic bullet.
Looking at the share prices of Purplebricks and the portals against traditional agents tells us exactly what the City thinks of their prospects. The online operators have seen their share prices appreciate over the last year, while shares in the three major agents have all fallen – to the extent that Purplebricks, at £833m market capitalisation, is worth twice Countrywide at £397m.
Countrywide evidently agrees that hybrid agency is the way of the future, since it has introduced an online channel alongside its existing branch network. That can kill two birds with one stone, giving customers an additional choice while potentially reducing costs. Countrywide can also offer customers who choose the online package the chance to switch to full service at a later date without losing their initial payment (as would be the case if they paid the upfront fee for an online only player and wanted to bring in a traditional agent later on); in a market still somewhat distrustful of the effectiveness of online-only sales, that may well win it business.
Our focus is on building a business which is genuinely multi-channel and lowers our costs. The hybrid model is a major success. Alison Platt, Countrywide.
CEO Alison Platt refers to “our focus on building a business which is genuinely multichannel in nature … and lowers our cost of doing business,” and the early pilot evidently delivered, since rollout has been accelerated to over 25 per cent of branches by the end of 2016 and the majority of the business by the end of this year. The focus on cost is borne out by the fact that Countrywide has already closed 7 per cent of its branches; pushing costs further into the centre (call centres, technology) could make the cost model of major corporates look more like that of the online entrants, and less and less like that of the independents.
Connells has taken a different approach. Whereas Countrywide aims to offer customers the choice between fixed fee and full-service approaches at the same branch, Connells will be running Hatched as a separate brand. The value for Connells is that Hatched expands their reach to towns where they don’t have branches, without the cost of setting up a physical presence. CEO David Livesey says that while Connells is innovating, it’s not moving away from its traditional high street practices and values – but clearly, if the model works, expansion is likely to be through online sales rather than investment in new branches.
This investment (YOPA) enables us to take an interest in the high volume segment of the market, to which Savills has had little exposure to date. Jeremy Helsby, CEO Savills.
Savills, too, is letting online remain at arm’s length for the moment with its investment in Yopa. It’s a particularly interesting move since Savills has traditionally only been involved in the top tier of the residential market, while CEO Jeremy Helsby says that Yopa “enables us to take an interest in the high volume segment of the market”. Reading between the lines, is Savills expecting online and hybrid agency to take the lion’s share of the lower and middle market, leaving traditional agency only competing for higher value properties?
PRESSURE AND COMMISERY
One thing’s certain. The advent of online and hybrid agencies with fixed-fee models has put the squeeze on commissions. The figures quoted in Countrywide’s annual report show there’s a real problem – while house prices have risen substantially over the past four years, the fees sellers are paying have fallen. That’s one reason several of the major agencies have been looking into hybrid models – if commission rates fall further, they want to be able to cut costs very significantly.
Common sense says that introducing fixed fee business will cannibalise full-service business and reduce average fees. But Countrywide’s presentations to analysts show a different story. Introduction of the hybrid model has seen instructions grow 11-18 per cent at pilot branches, while average fees were flat to 6 per cent up.
That pressure’s not going to let up any time soon. In fact, it’s likely to get worse. Online has seen huge amounts of money invested in the last couple of years – esale’s £90,000 crowdfunding looks like very small potatoes indeed beside Yopa’s £16m, which is dwarfed by Easyproperty’s nearly £40m of funding so far, and that in turn by the £240m Purplebricks IPO. Money is being poured into online agencies the way it was poured into portals back in 2004-7. Some of those portals sank without trace, and we should expect some of the online and hybrid agents to fail – but portals changed the shape of the residential property sector for good. Even UBS, which had Purplebricks down as a ‘sell’ on valuation grounds, says that the online agents are “structurally altering the landscape of the sector”.
While the corporates have the budget to build their own technology and the advertising budget to support online operation, smaller firms may find it less easy going hybrid. However, tech firm Hystreet is now offering an online platform for traditional agents, which can link to existing CRM systems. And some smaller agents have already taken the step, for instance Kings of Surrey, which operates from out-of-town but offers all the services of a high street agent.
THE GREATEST THREAT
However the biggest threat of online hasn’t yet been widely recognised. The portals didn’t just change the way property was advertised; they also vastly concentrated the sector, consolidating it from hundreds of local papers and freesheets to a virtual duopoly. Purplebricks is already setting out for dominance, having grabbed a 70 per cent share of the online sector by March 2017 against 40 per cent two years ago. Peel Hunt’s Gavin Jago says, “We believe it will be the biggest agent in the UK within the next 12-24 months.” (Peel Hunt is the company’s broker, so it may be a little overenthusiastic – but brokers are not prone to outright fibs.) It took Countrywide more than twenty years to get to nearly 5 per cent market share; Purplebricks has got to three per cent within six years. The successful hybrids could prove to be far more effective consolidators of the market than the corporate chains and that could see independents getting squeezed unless they too adopt hybrid models.
Besides, it’s not high street agents alone who are under threat, the British high street as a whole is losing market share to out-of-town shopping centres and online retail. 5,000 high street shops closed down in 2016, and in some towns, a quarter of the independent retailers have gone in just six months. The forecasts are dire; ParcelHero’s David Jinks believes that half the UK’s existing shops will disappear between 2020 and 2030, while e-commerce will grow to 40 per cent of retail sales. As the high street attracts fewer shoppers, traditional agents are left paying higher rents and business rates for decreasing footfall. Worse still, many high streets now have a predominance of estate agencies – a triple whammy of higher rent and rates, decreasing footfall, and increased competition!
So just as supermarkets have moved out of town, hybrid agents are taking the plunge. Kings of Surrey, for instance, has its home in an elegant Queen Anne mansion, where customers benefit from free parking. Perhaps traditional agents need to reconsider just how important that window on the high street is.