Will a “Boris Bounce” accelerate the growth or decline of the online estate agency model

December’s General Election result might be seen as an endorsement of Brexit, a rejection of “Corbynomics” or simply a vote to “get on with it” Whatever the reasons, a significant Tory majority that will enable the Government to implement policy, has brought an improved confidence to the residential property market.

As I write (late January 2020) the stock market is up some 5% since the election and the levels of activity being reported across the country by estate agents is some 30-50% up on the same period last year.

Activity initially manifests itself as an increase in those looking at moving home, the visitor traffic to agency websites and portals (Rightmove, Zoopla and On The Market) are all up and this, in turn is seeing agents report higher levels of viewing activity, offers and sales.

The amount of property coming to the market is increasing but lags behind the initial “interest” activity.

Optimism amongst those operating in the sector has increased with expectations that the pent up demand released by the effects of the “Boris bounce” will see an increase in sales transactions in 2020 of 10% or more on 2019.

Increases in market confidence and activity tend to help all operators in the business and will act as a lifeline for some but the death knell for others.

Many businesses have been hanging on by their fingertips in recent months and an upturn would naturally appear to be like the cavalry coming over the hill but many will likely fall, as they lack the energy and resources to rekindle their operations, and get killed in the rush of the better equipped, hungrier and better resourced, who are able to take advantage of improved trading conditions.

In this respect the online estate agency sector looks set for its next set of major battles.

I have written previously in Property Chronicle that I felt that talk of the demise of the online models was premature and that high profile casualties such as Emoov, Tepilo, Hatched, House Network and Easy were likely just the end of the beginning rather than the beginning of the end. Two of these brands (Emoov and Easy) are now looking to re-emerge under new ownerships and with revised business models.

The market leader amongst the online agents is Purplebricks, much maligned by “traditional” operators in the industry but nevertheless the largest UK estate agent by listings with a market share of circa 5%. I have written previously that, due to its volumes, relatively small increases in revenue per customer would dramatically change its bottom-line position.

Purplebricks currently “suffers” from an acquisition cost per customer of around £380 but it has now increased its revenue per customer to circa £1250.

A recent report by Real Estate Analyst Mike Delprete showed that these acquisition costs, whilst down from around £600 per customer in 2016 were actually very similar to 2017 and 2018.

This may indicate that the cost of acquiring a customer is at “peak efficiency” which may limit the ability to grow market share which has remained fairly flat over the last couple of years.

The huge marketing spend has, however, created the only national estate agency brand and, whilst the business appears to have plateaued over the last two years it is actually profitable with gross margins at over 60% and operating profit of c£3.5million against revenues of £47.1 million.

Key to Purplebricks success is its scalability. Many of its potential rivals have gone out of business without ever scaling up sufficiently to reach profitability. With around 500 “local property experts” on the ground Purplebricks now dominates the online agency space and, having largely divested itself of its forays into “foreign” territories, will now be better able to concentrate its efforts on the UK market, which, with greater transactional volumes predicted as part of the “Boris Bounce” should enable them to see revenues and profits increase albeit in line with marketing spend and the number of people “on the ground”

Other online players in the marketplace are struggling for scale. Housesimple, with a £19.5million hole in their accounts (and burning cash) continues to push forward with a business model based on a free service with revenues based on commissions and referral fees from related services.

This entire approach is under threat as the Government through Trading Standards are due to announce at the end of February whether agents can even continue to earn from such fees. A negative decision will surely see the next casualty in the online marketplace.

Not only does the business model look flawed but there is simply not the scale of operation to bring it to profitability. The most recent accounts actually show staffing numbers down from 93 to 86 year on year.

A recent report from TwentyCi showed that, collectively, the online agents have around 10% of the market in sub-£200,000 price ranges but less than 1% in the £1million plus bracket. Total market share for the online sector is stated to be 7.9%.

Both Emoov and Easy have “relaunched” under new management but lack scale and both suffer from their recent history of failure.

It is a little over a year since Emoov went into administration and the first annual report from the administrators made uncomfortable reading in terms of whether the business had continued to trade and raise funds when it was clearly “dead in the water.” High profile TV property “expert” Sarah Beeney apparently lost around £8million “on paper” following the sale of Tepilo into the Emoov Group, although, by this stage, she had largely stepped away from her ownership position having sold much of her shareholding to Richard Desmond, former owner of Express newspapers.

In conclusion, an uplift in the volumes of listing and transactions will potentially help the online players but only if they have sufficient penetration of the market and enough people on the ground to handle the work.

Without scale, they look set to continue to burn cash and fail to make further inroads in overall and individual market share.

At the moment, Purplebricks look to be the best placed, and I seriously doubt that the others will be well enough resourced or fast enough to take advantage. Expect more blood on the carpet in the months ahead.

Watch this space!