Market Update

2017 has been a very challenging year for the residential property market and genuine pain is being felt by many businesses, particularly those who have been slow to plan and implement change in the face of increasing Government and legislative requirements, increasing economic uncertainty and increasing competition from new entrants and, in particular, new online budget operators, many of whom provide little service but offer very low fee options.

At the start of the year I predicted a lot of “blood on the carpet” in the estate agency industry and there has undoubtedly been a lot of rationalisation and reductions in staffing but perhaps not the number of complete business casualties that I anticipated as yet. This could, of course, just mean that many businesses are being unrealistic about their futures and are "hanging on by their fingertips" for longer than they should. Certainly there has been an acceleration in the number of sales and mergers in the latter part of the year, particularly the selling off of letting portfolios - often the one remaining "jewel in the crown" of many businesses.

The changes in stamp duty levels introduced in late 2016 have had a significant effect on reducing activity in the upper end of the market and on buy to let investment. The latter has perhaps enabled first time buyers to compete more effectively when buying and the recent 2017 budget announcement of the removal of stamp duty for first time buyers on purchases up to £300,000 and on the first £300,000 of purchases up to £500,000 will assist that section of the market. However, there were no moves made to assist people who might downsize and create more liquidity in the market were it not for the very high costs associated with that move.

2017 was the year in which Purple Bricks took over from Foxtons as the most hated competitor in the agency marketplace. I could fill pages with the merits or otherwise of both but the simple fact is that they exist and agents that compete need to get better at detailing their points of difference and winning customers hearts and minds. If the public perceive no difference between one offering and another it should not be a surprise when they choose their agent based on fee level only. Indeed, many agents have fuelled the flames of their own funeral pyre by pulling the “fee cutting” lever to try and compete. Average agency fees have fallen consistently over the last three years by around 0.1% per annum which, with an average house price of c £280,000 nationally equates to reducing average fees by around £280 per year or £840 over a three year period. This coupled with reduced transactional volumes (particularly in London and the South) has eroded margins to the point of making trading losses in many situations.

Reducing fees to win business cannot be a successful long term strategy. Agents will have to sell 25%+ more houses in 2018 than they did in 2015 to make the same revenue. Really?

For all the doom and gloom there are examples of great success. Agents who planned and took action early have, in many cases, been able to realign their businesses to succeed in a new environment. This has often involved reducing staff levels, investing in technology to aid service and productivity and tightly managing every aspect of their businesses.

I have one West London based client who took some difficult decisions two years ago but have improved their bottom line by over £400,000 over that period without actually generating any more transactions. They are now well placed to capitalise on any weaknesses in their competition and any opportunities for greater volumes that may appear. They are also already well placed to realign their lettings business in the face of the tenant fee ban.

New home construction is slowly increasing and therefore the sale of new homes is likewise. Again, I have a handful of clients who have taken advantage of this trend and invested in their land and new homes operations, in some cases with remarkable results, results not only in the short term but over the coming years as well.

Lettings has been the “cash cow” for many since the financial crash of around ten years ago but faced with reduced revenues from a ban on charging fees to tenants, many will move from profit to loss very quickly. Those agents that have been “buying” landlords with cheap fees and making up the revenue shortfalls by charging tenants will obviously be most at risk.

Forward looking agents have been building their managed portfolios (as opposed to let only deals) to ensure client retention and ongoing revenue streams. Really smart agents keep their entire operation under ongoing review and are taking advantage of a growing amount of technological and outsourcing solutions that can help increase productivity, increase service and reduce costs.

When things get tough it is natural to look to save costs but it is vital to ensure that, in doing so, one isn’t actually digging out the foundations of the business and precipitating a major collapse. Staff training is often an area that gets culled. I caution a sensible approach here. A small team of well trained, motivated and productive staff will probably generate far more for you than a larger team of poorly trained, demotivated and unproductive staff.

The cost of failing to understand and have sensible pragmatic systems and processes to comply with various legislation, including Consumer Protection Regulations and Money Laundering Regulations is costing the industry £millions unnecessarily in compensation and fines. This can largely avoided with well trained and well managed staff.

Marketing costs need to be controlled. Most agents don’t closely monitor where their business is coming from and they should. Moving expenditure from ineffective to effective marketing could help open more doors and opportunities.

As we leave 2017 we look forward to a year ahead where we know there will be many more challenges, not least the removal of chargeable tenant fees (which represent around 10-20% of letting agent fee income) and the implementation of GDPR (the General Data Protection Regulations) in May. This update to the current Data Protection Act will have a potentially massive impact on how we all maintain databases and ongoing relationships.

Negotiations over Brexit will continue and become more detailed. Interest rates are likely to be on an upward trajectory albeit with any increases being small and gradual in their implementation.

With changes in taxation beginning to bite landlords and with likely pressure on them paying higher agency fees we are starting to see some leave the market. If this trend continues we may see supply of certain types of property for sale increase and therefore aid affordability for purchasers but a reduction of supply of rented property will have the opposite effect on those looking to rent.

There is no one answer to surviving and thriving in a challenging market. I believe my predictions of “blood on the carpet” in 2017 are even more likely to come true in 2018. I also feel that there will be some serious winners, businesses that have planned and implemented new strategies to face the challenges ahead and who will steal a march on their competitors, competitors that are tired, devoid of ideas and unable or unwilling to change and change quickly.

As I enter my 43rd year in the industry I have seen many changes but have never become complacent or stopped looking for new and better ways to operate. I look forward to working with more winners in 2018.

Finally, may I take this opportunity to wish you a Merry Xmas and a Happy, Healthy and Successful New Year.

Managing Director