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BLOG: Property Portals and the Shoe Event Horizon

by Scott Fulton | 22nd February 2018

Recently, I started a small social media experiment. Recognising that time’s winged chariot was waiting at the gates, I replaced my Linkedin image with my eldest son’s “headshot” – he is an actor and needs to look his best.

The results were telling. My previous profile and associated posts attracted a small but loyal audience; immediate family and friends if I am honest. The new, dashing, image raised the bar. Views of my profile increased by a factor over a period of weeks and I had to stop going to meetings for fear of disappointing my new audience.

Then I posted a picture of my dog.

He is a new addition to the Fulton family household. While, in a world of soup, he is a fork and he has the brains of a month-old cabbage, he is undeniably cute.

In two days, this post has now received more “likes” than my last five put together. It has generated responses from old university friends with whom I have not communicated for years and several positive comments from people I do not know.

Cute pictures over insightful comment? Is this relevant to the UK housing market?

The UK’s largest “property portal”, Rightmove, will publish its 2017 final results on 23rd February 2018. It is a web site on which anyone can view details of homes for sale and link to the listing agent’s own site for free. Rightmove charges the estate agent a fee per office (currently less than £12,000 per year) to post these details in addition to providing advertising opportunities which, by all accounts, are increasingly taken up. Rightmove is not directly involved in housing transactions; it makes money regardless of whether the home is sold or not.

In the current debate over the efficiency of the UK housing market, this last point is important. Rightmove reported 2016 pre-tax profits of £161.6m on revenue of £220.0m; a margin of 73.4%. As at today’s date, its market capitalisation is £4.0bn, larger than all the listed estate agents combined and bigger than all but four of the largest house builders in the UK. According to Bloomberg, Rightmove trades on a 2018 PER close to 30 times and yields less than 1.5%.

Tomorrow, the company is likely to highlight the number of views it has received and the leads it has generated for its estate agency clients. As recently as last week, it was reported that January 2018 had been Rightmove’s busiest month ever, with 141 million visits (Source: The Times, 19th February 2018). Based on the latest census data (2011), this suggests that everyone in the UK visited Rightmove more than twice in one month. Historically, it is reported to generate over 50 million “leads” for its clients per annum. The total number of residential property transactions in 2017 is likely to be less than 1.2 million.

At the same time, UK estate agency, where earnings are determined by actual house sales, is under pressure. Countrywide, the UK’s largest estate agent, announced on 18th January 2018 that it expected EBITDA to fall by 45.0% because of the continuing weakness in the UK housing market. At the time of writing, Countrywide has a market capitalisation of £210.0m, less than 6.0% of Rightmove’s current value.

In 2014, Countrywide generated EBITDA equivalent to Rightmove (c. £122.0m). In 2017, this is likely to be £65.0m while Rightmove could generate three times that figure. While much of the former’s woes may be due to hybrid agents like Purplebricks, the fact that Rightmove has increased its fees per branch from under £700 per month to almost £1,000 in three years may be a contributing factor.

In any event, commissions charged are falling as the likes of Purplebricks can sell your house for less than £1,000 while the cost of posting the details on Rightmove for agents could be rising to £500 per completion given average branch sales rates. The agents are being squeezed.

It is not only estate agents that have suffered. At its stock market launch, Rightmove suggested that its addressable market was the then spend by agents on local media advertising; some £2,500 per month. It is moving inexorably towards that level while local media companies have suffered a material reduction in advertising spend from agents.

Thus, the growth of Rightmove and, to a lesser extent, Zoopla and OnTheMarket, has created a shift in the economics of UK residential property; from those supporting transactions and advertising locally to national web sites whose “audience” appears huge but does little to improve the efficiency of the market.

This recalls Douglas Adams’ “Shoe Event Horizon”.

This theory is summarized thus: as a society sinks into depression (think Brexit), people need to cheer themselves up by buying gifts, often shoes. As more money is spent on shoes, more shoe shops are built, and the quality of the shoes begins to diminish as the demand for different types of shoes increases. This makes people buy more shoes.

Eventually the Shoe Event Horizon is reached, where the only type of store economically viable to build is a shoe shop.

Replace the word “shoe” with “Rightmove” and the word “buy” with “view” and it is not difficult to see how the growth of property portals has disrupted the economics of the traditional UK residential market.

And yet it need not be so.

Hybrid estate agents have come under recent media scrutiny for their use of statistics justifying the new pricing structure. Commission on sale is not yet dead. Local media is investing in its own web-based offerings, providing local insights and data which, allied with news, may generate more traction with committed buyers/sellers and, possibly, the “property tourist”.

With the debate around UK housing intensifying, investors may have to ask where long term value is really being created, how sustainable the current structure is and whether it is now time to look to the traditional players (agents and local media alike) who could genuinely take the market back.

The image supporting this blog was chosen specifically and not ironically.


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