MAGAZINE A troubled spot in the European listed sector  

Countrywide and other publicly listed UK estate agents are having a tough time as competition increases and housing sales slow.

It isn’t every day that a major listed property services company suffers a dramatic share plunge in just one day. However, Countrywide, the UK’s largest integrated property services group, suffered that shame in August when its shares collapsed 60% after it went cap in hand to ask investors for £140 mln (€156 mln) of fresh equity finance. The shares were offered at 10p each, a discount of as much as 80% on the 80p it was trading at.

It is fair to say that the owner of UK high street estate agencies such as Bairstow Eves, Spencers, Hamptons International, John D Wood and Abbots is in trouble. The most positive spin using the words of Countrywide is that it is a turnaround situation as it looks to get a solid long-term capital structure in place, supported by its largest single shareholder, private US alternatives firm Oaktree Capital Management, which took control of the company in 2009 via a loan-to-own strategy following Apollo Management’s highly leveraged £1 bn takeover of the company in May 2007.

Countrywide’s share price graph is scary. In August 2013, a few months after Oaktree organised a return to the London Stock Exchange, the value of the shares was nearly 600p. They have been on a downward trajectory ever since, albeit with some upticks, and now they stand at 16p. They have lost 97% of their value in five years. 

The company has four main business lines: UK sales and lettings, London sales and lettings, B2B, and financial services such as mortgage arrangement. Unfortunately, for the last six months of accounting, Countrywide has become loss-making to the tune of £205.8 mln. Group income has fallen 9% to £303.6 mln, while its debt burden has grown to £211.7 mln. 

Slower sales
The main problem seems to be a slower sales pipeline as well as the debt mountain. But behind that, there is also a sense that under a CEO who resigned in January this year, a strategy to run the business like a retailer has backfired. Hence, the centralised structure is being unwound and headcount reduced by a third. It is ‘going back to basics’ by re-building local sales expertise and staffing levels in sales, lettings and financial services.

The rebuilding of industry expertise started in the UK in the North of England in the fourth quarter of 2017; and in the South at the beginning of the second quarter of 2018. It is putting seasoned regional managing directors back into place after having stripped them out. It is also parachuting in regional managers, each responsible for 10 branches. Sales and lettings negotiators are being separated into specialisms. 

But the restructuring comes at a time when conditions in the UK housing market are not conducive to growth. Second hand housing transactions in the UK are down 3.5% for the year to May 2017, according to HM Revenue and Customs (HMRC). That backdrop is putting pressure on Countrywide, which has seen UK sales and lettings income tumble.  

Meanwhile, London and its suburbs are producing a mixed picture. Prime central London sales are low. Countrywide is blaming Brexit and stamp duty affecting homes over £1 mln and second homes. But a brighter patch can be found in Greater London and the Home Counties which are buoyant, and the London lettings market is resilient – Countrywide is even seeing fee income grow for rentals there.

However, there is more to factor in, such as an impending lettings fee ban upon agents.  Analysts such as Peel Hunt have also suggested the continued ‘tough trading backdrop’ will be a hindrance to its escape plan. These might ‘outweigh’ the benefits of Countrywide’s self-help programme, it said in a note in March 2018. When asked for a more recent comment on Countrywide’s rescue equity plan, Peel Hunt declined, saying it was still ‘assessing the business’ and therefore ‘unsure of its position’.

Online and hybrid agents
But Countrywide is not the only UK listed company to face pressure from a slowing UK residential market. Rightmove, which runs the largest online real estate website portal in Britain, is also feeling some heat. As an online business without the fixed overheads of Countrywide, its share price has been faring a lot better, It has climbed this year but in June its shares started to decline notably. That comes as a shock as Rightmove has been the long-term darling of the listed UK media sector – media because its business is online - providing growth each year and dividends.

However, analysts such as Peel Hunt think there are four reasons why it might suffer. One, the housing market remains challenged and margins are getting squeezed from the competition from hybrid models. Hybrids are touting themselves as ‘more than an online agent’ by being estate agents without the associated higher fees of traditional high street chains.

Purplebricks is the biggest example of a hybrid. It is estimated to command a 75% market share of all the hybrids. In Purplebricks’ case, it claims to sell more homes and more quickly than any of the traditional top 10 agents. It also says it is now the largest estate agency brand in the UK. It has four fee packages, but essentially offers a fixed one-off fee of £849 to homeowners looking to sell their property online, and says it can manage lower fees because it has removed the expensive offices and car fleets that traditional agents run. Its revenues have grown from £43.2 mln in 2017 to £78.1mln and it makes a small profit of £8.1mln.

Another hybrid is emoov which also advertises homes on one of the big portals like Rightmove’s. Customers pay a fixed £895 fee plus VAT. It doesn’t guarantee a sale, however. A second fee option is to pay £1,995 upon completion but there is no fee if the home doesn’t sell. 

A second objection to Rightmove’s continued progress is that new home developers are increasingly advertising directly to customers using social media. A third reason is an incoming letting fee ban will affect Rightmove significantly. Furthermore, Rightmove faces increased competition from the pure online portal market from the likes of OnTheMarket (OTM) and ZPG. OTM has around 10,000 estate agencies advertising on its portal and ZPG was taken private recently, which might increase its marketing spend or investment in technology.   

International expansion
The threat from hybrid agents is a little ironic, as Purplebricks - as the leading one - is not immune itself from coming under share price pressure. Generally, its shares have risen strongly. Since it went public in 2014 they have gone from around 100p to a peak of 498p in July 2017, a near-five-fold increase. However, in 2018 they have been falling and are now at 300p – a drop of 30%. Purplebricks is backed by German publisher Axel Springer, which owns a 12.5% stake, having injected £100 mln earlier this year, and its model stands out from others because it has expanded internationally into Australia, the US and Canada.

The share price fall might be partly attributable to Jeffries, the US broker, which said in a highly damaging note that it wasn’t sure of the prudence of such expansion, following this up a few months ago with a note saying that Purplebricks’ model had yet to be proven. It also found trouble verifying Purplebricks’ claims about it sales rates, having conducted independent analysis. However, Purplebricks responded to Jeffries’ doubts by asserting its sales claims were valid.

Coming back to traditional landlords, there have been other public companies coming forward with painful trading stories. Foxtons said in July it made a loss in the first half of 2018 because London was undergoing a sustained period of very low activity and sales were taking longer to complete. Its shares have moved down from 82p at the start of the year to 56p in August.   

Countrywide: from acquisitive powerhouse to languishing stock

1972 - 2005: Trades as a public company.

May 2007: Apollo Management buys the company for around £1 bn with the UK housing market having about five months left before the decade-long boom ends. Rival private equity group 3i also wants to buy it but its management buyout bid is rejected in January for being too low. Apollo’s offer is for 510p a share and 80p per share of Rightmove, in which Countrywide owns a 21.5% stake, so effectively 590p. The company’s share price is around 580p.

2008: First reports surface that Oaktree is buying debt in the company.

2009: Oaktree Capital acquires a majority stake in a debt-for-equity swap, injecting £110 mln of fresh capital. Countrywide is the UK’s largest estate agency, twice as big as its nearest rival. Alchemy Special Opportunities, hedge fund Polygon and Apollo Management are involved in the ‘loan to own’ strategy.  

2012: Things are looking positive as revenues rise despite a broadly flat market. The company is acquisitive and seeks to expand its business lines. Buy-to-let landlords are a rising force, and mortgage approvals are rising.

March 2013: Countrywide floats, marking a return to the stock exchange after Apollo took it private in 2007. It has 931 estate agency branches under various brands. It is expected to generate £200 mln to reduce its debt. Oaktree, Apollo and Alchemy owned 95% of the firm pre-flotation, which was diluted to 60% upon the IPO. None sole stock.

2015: Announces a 20% rise in income to £702 mln and record pre-tax profits of £102 mln, up 63% after acquisitions and various growth initiatives. But net debt has more than doubled from £48 mln to £103 mln. Ominously, it warns there could be a market slowdown.

2016: Experiences a difficult year amid at cost cutting, restructuring costs and ‘management delayering’. Brexit and rising stamp duty costs are leading to falling residential property transactions. Pauses all M&A activity after Q1.

January 2017: Reuters reports Oaktree has sold a stake in Countrywide of about 10% for roughly £103 mln and is no longer the majority owner but is still the single largest shareholder.

March 2017: Decides to raise money by issuing more shares. Net proceeds will go towards trying to strengthen its balance sheet and accelerate its digital rollout to boost website traffic and increase leads as it seeks to become more ‘multi-channel’. It wants to pursue fewer digitally enabled brands to become more sustainable. Countrywide says Oaktree owns 30% and that the US firm is expected to subscribe for around 6.5 million shares as part of the book build.

August 2017: Oaktree and Apollo reportedly sell shares equivalent to 16%, allegedly backtracking on a pledge to keep shares for six months after the stock exchange return. Oaktree and Apollo’s stakes are said to have gone to 44%. Alchemy respects the six-month lock-up pledge.

November 2017: Issues profit warning. Brexit, digital competition from online estate agents and a slower market is hurting the company.

January 2018: Countrywide issues a second profit warning amid low transactions, slow sales and restructuring.

26 June 2018: Shares plunge 30% after announcing it is seeking cash to reduce debt. Oaktree is still the biggest single shareholder. Debt stands at around £192 mln. The plan is to reduce it by half by selling more shares.

August 2018: At press time, shares are trading at 16p. In an interview, executive chairman Peter Long says CEO Alison Platt, who resigned in January, had pursued ‘completely the wrong strategy’. He said Platt sought to run the estate agent like a retailer, centralising and bringing together sales and lettings, with middle management leaving. He said the original problem was increasing the debt burden during an acquisition spree in 2014 and 2015.


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