Countrywide’s earnings are due to deteriorate in the face of flat transactions and pressure on estate agent fees as consumers increasingly turn to hybrid, fixed fee agents.
The forecast comes in a report by Scott Fulton of broking business Whitman Howard.
The firm has cut its earnings forecasts for Countrywide by 32.4% this year, by 31.7% next year and 25.4% in 2018.
Whitman Howard has also set a price target for Countrywide shares of 196p. They are currently 240p.
The report notes that Countrywide’s fees are already under pressure after falling by 3% in the first six months of this year, and hitting its EBITDA (profits after costs).
The report says: “While the company has been wary of ascribing this reduction in fees to the rise of hybrid competition, we believe that it must be a contributory factor.”
Whitman Howard adds: “Our own coverage of the hybrid sector suggests that it was making significant inroads to the traditional market.
“We believe that, in a less buoyant market, vendors may become more price sensitive. This suggests that the pressure on fees will continue.”
The firm expects Countrywide’s average fees in the second half of this year to be 1%, down from 1.2% in the first half. Coupled with a 7% reduction in transactions, this would produce a 35% fall in London estate agency revenue in the second half of this year.
Whitman Howard is, however, more upbeat about Countrywide’s letting operations because “hybrid competition is much less intense” in this sector.
Reaffirming its previous sell rating for Countrywide, Fulton’s report notes: “There are too few data points on which to base a sensible view of Brexit impact on UK housing.
“However, this has not stopped a range of UK estate agents warning that it will be both adverse and immediate.
“Countrywide is no exception.
“The company’s interim results highlighted a weak Q2 whose conditions are likely to persist for the remainder of the year and into 2017.
“On this basis we believe that the company is faced with a stark choice between investing for the longer term, and maintaining the dividend.
“In our opinion, the right course of action is to reduce dividends but … this could result in further share price deterioration.”
Whitman Howard says that the medium term outlook for UK housing activity is “opaque”.
However, it said: “We believe that the recent pressure on estate agency fees will increase as price-sensitive vendors demand lower transaction costs, utilising hybrid fixed-fee agents.”
The report is forecasting 5% house price inflation this year, down from its previous prediction of 10%, and static inflation next.
Whitman Howard is also forecasting a fall in transactions this year of under 0.5% but acknowledges “this is based on limited information at present” following the Brexit vote.
However, the report notes: “Traditionally, a slowing housing market is difficult to manage and the decline can become self-sustaining.
“Thus it is entirely reasonable to postulate that the likely modest slowdown in H2 2016 could prompt a more marked fall in 2017.”
Whitman Howard covers Foxtons, LSL, Purplebricks, Savills, Rightmove and Zoopla.
It makes recommendations on only two – sell, in the case of Countrywide, and buy in the case of Purplebricks.
Comments (4)
There used to be the saying, because it was true, property advertising is brand awareness and the high street provided a service. The revolution today is crowd funding to cover the cost of national TV advertising which High Street agents can never compete with, the public are more concerned with penny pinching, they have ignored the saying “you pay for what you get” and ignore service on the basis they are saving at least £45000 on agents fees (we’ve seen the ad) and smartphones replaced internet access to the masses via big web portals making most newspaper advertising redundant?
How very wrong could this man be.
During the recession, when the public NEEDED estate agents more so than ever, fee’s went up. In a market like we have seen on the last 18 months rightmove/zoopla did the job to the point you never even had to call your applicant base as you just knew as soon as property was launched onto the sites the phones would ring almost instantly.
With a depressed slow market, you need an experienced estate agent to craft a deal together and make things happen, these two bob internet companies will not be able to do this, people may initially choose the cheaper route but then will soon realise their mistakes of being over valued price was and given the cheapest fee – by this point they would have wasted weeks upon weeks of not selling and then choose an high street agent who will charge a higher fee but achieve the best price.
No wonder CW are going backwards so quickly.
I quite like the hybrid model and don’t necessary see it as a bad thing. I believe than you have a good opportunity to sign up new business through the cheap online platform and then reverse the client into standard agency when they realise just what is involved with doing it yourself.
My car is currently with the Mercedes dealer for new brake pump at a cost of £2500. Had I been offered a ” Do it yourself” package at £395 and been send a PDF of how to repair the system. I suspect on opening the bonnet I would have called up and asked them to collect the car and carry out the repair, price be damned.
Silly analogy I know. But my point is everyone thinks it’s easy and we know it isn’t.They will eventually ask you take care of it for them. The other bonus is that you have front end payment to credit against the final fee.
People want service. The lower price models as an agency business should only be as a hook, to lead to higher fees for better service.
Budget agency has a limited lifetime. The duration will be for as long as VC’s keep pouring money into buckets with holes in.
Budget will eventually become list only at £99-£199, then many of today’s budget models will have gone POP.
There’s cost to everything and budget models propped up by VC’s pouring excessive, unrealistic funds in is a road crash waiting round the corner. The only winners will be VC’s and the advertising companies sucking up the vast funds. The losers will be the later on investors.