The UK’s three biggest listed estate agencies could have their profits hit by a combined £26m once the lettings fee ban is introduced.
A report by analysts Peel Hunt, looking at the prospects of listed agencies Countrywide, LSL and Foxtons, paints a bleak picture for them and the wider market.
Analyst Gavin Jago predicts the ban, expected in 2018, would hit Countrywide’s profits by £18m, offsetting any ongoing cost-cutting measures.
He said: “A cost-cutting/branch closure exercise is well underway, but the full effect on profits of a reduced presence on the high street is yet to be seen.
“A full ban on letting fees could materially impact profits from 2018. This will not help the leveraged balance sheet or the scope for dividends. We cut our dividend forecasts and target price, and retain our negative stance.”
Interestingly, the report was written when Countrywide’s share price closed at 123p on September 21 and showed a target price – the point at which a trader may sell – of 115p from 145p previously. But the share price has now hit a low of 113p.
Jago holds a similar stance with LSL, recommending investors reduce their holding. He predicts the agent will see its profits reduce by £8m from the fee ban.
He said: “To date, LSL’s branch closures have been small in number as management believes traditional agents will continue to represent the vast majority of the sales market until 2025.
“This remains to be seen, but what is more certain is the lettings fee ban that is now widely expected to come into force in 2018. Management has not provided a figure for the group’s exposure to lettings fees. However, we estimate that it could amount to around £8m per annum.”
Jago maintains a sell recommendation for Foxtons, predicting a £3m hit on lettings per year. He also warns its high commission fees are impacting the firm’s activity and may need to be reduced.
He said: “Trading remains challenging for Foxtons due to the low levels of housing activity in the capital.
“In our view, this is being exacerbated by the group’s relatively high commission fees, which are increasingly detached from average rates charged by its competitors.
“Self help could come in the form of a reduction in fees but, as yet, management seems reluctant to take such action. The lettings fee ban looks set to come into force in 2018, which will create a further drag on profitability.”
The report is kinder to Savills – and glowing about Purplebricks.
Jago recommends Savills stock as a hold, backing the diversity in the business, and backs Purplebricks as a buy. He claims profits from its US operations could eclipse the UK and Australia by 2022.
Jago said: “Against a backdrop of a slower UK housing market, Purplebricks’ growth has been very strong. Its market share of total transactions has doubled in the last year and it remains the dominant player amongst the online/hybrid peer group.
“The Australian business has been operational for a year and is trading ahead of the UK at the equivalent point of evolution. If Purplebricks captures only a small fraction of the US market, we estimate that US profits could be bigger than the UK and Australia combined by 2022.”
Looking at the wider agency market, the report says fees have fallen to 1% and are at 0.5% to 0.75% in some areas.
It claims the number of consumers using physical branches is diminishing due to the rise of hybrid and online agents, with Purplebricks the “clear winner”.
The report claims this is putting traditional agents under pressure and will mean more branch closures and less activity.