Michael Day's Market Update

We certainly live in interesting times.

As I write, it is the political party conference season and it has been with some trepidation that I have listened to the plans of both major parties for both the economy and, in particular, the housing market.

Labour;'s plans might appeal to anyone who does not own a property and who doesn't realise that "the public purse" can only be filled through taxation, borrowing or printing money. Jeremy Corbyn, John McDonnell and Diane Abbott are a Marxist triumvirate with an approach that could, in my opinion, set us back to the dark ages. I'm surprised they haven't promised that everyone will get a free unicorn for their birthday yet! 

Rent controls, greater public ownership, higher taxes on business will result in a lowering of responsibility, less investment and the need to tax, borrow and print more.

The Tories, losing the PR battle with their incessant infighting are trying to pander to certain groups as well as bolster their home owning ideology. They have already raised stamp duty to levels that are damging parts of the property market whilst feeding the drive for more first time buyers with tax cuts and Help 2 Buy. The latter of which could, as interest rates rise and house prices potentially adjust downwards, see another negative equity crisis looming.

The drive to increase stamp duty on second homes and foreign buyers will not solve the problems of availability, affordability or homelessness as is being portrayed. I'm not sure who advices the Treasury but I haven't heard a single argument to support this latest nonsense.

The tenant fee ban must seem like a vote winner as there are circa 8 million tenants and only 2 million landlords. It is likely to result in reduced supply as, alongside reducing tax benefits, many landlords are leaving the market and the shortfall in income for agents will be recovered by a redistribution of charges to landlords and increasing rents, leaving tenants no better off at all. It is true that I think there will be some new products and services develop and new innovation to help improve productivity and drive down costs but I do fear that Government interference in a free market will, as history has shown many times before, simply rearrange the deckchairs rather than create lasting and positive change. 

Of course, all plans are being clouded by the spectre of Brexit and our apparent lack of any coherent agreement or plan. In reality, as with any negotiation, I expect there to be a lot of brinkmanship with major compromises and agreements all falling into place at the last minute. It is simply not realistic for either the UK or the EU to be revealing their hands at this stage.

What we do have therefore is uncertainty and that tends to result in people sitting on their hands and keeping their powder dry – love a good mixed metaphor!

The property market is certainly not in the best of health although overall transactional sales volumes will likely still be somewhere in the 1-1.2million for the year. The percentage of new home sales as a percentage of the total is increasing, largely due to the Government sop to developers and encouragement to first time buyers that is Help 2 Buy. Removing most first time buyers from stamp duty has also helped.

For estate agents the issue of too much competition, stagnant volumes and the ever lowering of fees has reduced margins and many businesses have only survived to date off the back of handling lettings rather than sales.

The majority of lettings businesses are now facing the removal of tenant fees which, on average, makes up around 15% of fee income. For many this is the profit margin and, coupled with a difficult sales environment will, in my opinion, see many casualties and blood on the proverbial carpet.

Many agents have seen their lettings business grow significantly over the last ten years – relatively easy when the market size was growing at 20% per annum. This is much less easy now with a largely static market size and increased competition.

Many agents are selling off their lettings portfolios to other agents in order to realise some value and keep the proverbial wolf from the door. In many cases this is an act of desperation, a short term cash fix but, like the selling off of the family silver, once it’s gone, it’s gone. An alternative might be to remove most of the costs from a business and outsource the portfolio so that one still benefits from a revenue stream and also retains the equity value of the book.

Of course I am generalising and there are many excellent agents who have adopted new ways of working, adapted them to suit the market and are continually improving them in order to stay ahead of the field. But there are far too many who seem to be hoping for a miracle, are continuing to plough worn out furrows and using marketing, technology and business practices that should be confined to history.

We are in a period of change and change tends to accelerate innovation. Not everything new will work or be desirable. Not everything old is defunct and useless but change is happening and agents need to be planning and implementing strategies for the future not for the past.

Technology is moving forward and Proptech has become a much overused word to describe a myriad of new products and packages, many of which have been designed in isolation from the industry and only serve to solve problems that, in reality, don’t exist!

Again there is some great technology out there but sorting the wheat from the chaff is key and ensuring that it adds value and helps differentiate is absolutely vital.

Much is made of the growing volume of online low cost operators in the market and they have certainly generated some impact, if not any profits. It is becoming clear that these models can work but only if operated on a large scale and from a low cost base. Agents who have tried to run similar offerings alongside their “traditional models” have ended up “cannibalising” their existing businesses by confusing the public (and their staff) and driving down their existing fee models. Madness!

One or two of the major estate agency groups have made investments in online but have sensibly kept these entirely separate from the existing business models. Connells investment in acquiring Hatched has already been consigned to history with the damning view that “it couldn’t make a commercially profitable return.”

I believe there will be successes and failures in the online model as there is in any other and we are likely to see two or three key players, operating on a national basis establish themselves for the longer term. At the moment the race is for market share and awareness but investors will want to see this turn into commercial returns, a somewhat more difficult thing to achieve.

There has never been a more critical time for business to take a deep breath, analyse everything and develop a new action plan for the way forward.

There is no room for complacency and agent’s largely fixed cost bases need to be challenged and renegotiated. If it isn’t adding value, stop it or change it.

There are new income streams, new ways of working and new points of differentiation but they need to be planned and executed well.

They say that when the going gets tough, the tough get going and that cream rises to the surface. In essence these sayings are, and will be, true but not without the drive and determination to innovate and challenge existing norms.

I cannot see anything in the immediate future that is going to provide a magic bullet for the property sector so the sector is going to have to create its own ammunition, load its own gun and fire it at the right targets.

A lot of my work at the moment is developing new strategies for businesses. My wide industry experience and awareness of what is happening across the market is helping businesses see the “wood from the trees” and enable them to survive and thrive into the future.

I am always happy to talk on a confidential basis. It could be the best call you ever make!


Managing Director