Everyone loves an estate agent.
And in today’s Money Morning, we consider the prospects of the nation’s favourite – the company behind the green Mini brigade, Foxtons – and what it suggests for the London housing market.
The story of an incredibly effective estate agent
Foxtons was founded by ex-army man Jon Hunt. I remember meeting him around 1994. He turned up at a friend’s house in a red Ferrari.
With a rugby player’s physique and a flash suit, he was nothing if not determined. And he had the confidence to do things differently. He offered my friend, who was born to be an estate agent, the job of managing the Notting Hill branch. Hunt didn’t care that he was just 22.
Hunt founded Foxtons in 1981, with £30,000 from school friend Anthony Pelligrini. He was 28. The company started with a two-man office in Notting Hill. And as luck would have it, 1981 was not far off the bottom of the market.
Straight away, Hunt set about doing things differently. Foxtons offered 0% commission to attract custom from other agents. Staff worked longer hours – nine till nine and at weekends – meaning properties could be viewed in the early evenings on weekdays and at weekends.
In 1983 a second office opened in Fulham and in 1986, a third in South Kensington.
Then came the property crash of 1989 to 1992. The company barely survived. “We were close to going bust every day”, said Hunt. The experience encouraged him to expand the company into lettings, to ensure some income in any future downturns.
With great timing once again, Hunt began opening more offices, starting with Chiswick in 1992. The company continued to grow through the 1990s.
Whatever you might think of it, Foxtons has always innovated. It started with the longer hours and 0% commission in the first three months of an office opening in a new area.
Then there was the distinctive branding (the first ‘F’ logo came in 1991), not to mention the dramatic improvements in the ways property was presented on paper. The photography, the write-ups, the brochures, the magazines – Foxtons has consistently taken property porn to new levels.
It was one of the first agencies to embrace the internet in 1999. It was the first to do 360° virtual tours. The branded cars (love them or loathe them, they stand out), the café offices, the persistent, commission-hungry sales force, the websites, the apps – it never stops.
Where Foxtons led, other agencies followed. In many ways, it has forced improved practice on the whole sector. Yet the company is not loved – far from it. Why is that?
Sellers are in the minority – but they’re the ones Foxtons appeals to
London has, for the past 35 years, been a sellers’ market. There have been a few exceptions – 1989-93 and 2008-09 – but that’s it. And Foxtons has always appealed to the seller.
I don’t know about you, but I’d have no hesitation in selling my house through Foxtons (they’ll probably get me a better price). But buying one through them? Ugh.
Foxtons’ business model has been simple – be aggressively bullish in a bull market. Price properties 5-10% higher than your rivals, secure the instruction, then lure in the buyers with the property erotica. Bull markets being what they are, sometimes the excessive asking price will get hit, sometimes it won’t.
The strategy has worked. And it will keep working for as long as there are more people that want to buy in London than sell.
But during those two brief periods when London has been a buyers’ market – 1989-93 and 2008-09 – Foxtons has come a cropper. In 2007, Jon Hunt sold the company – now 20 offices strong – for £390m to BC Partners. His timing was impeccable once again. It famously signalled a peak in the London property market.
In the wake of the credit crunch that followed, Foxtons saw its debt re-structured and BC lost control of the company. But things have since turned around again, and there are now 49 Foxtons offices.
The company went public in August 2013, raised £55m, and entered the FTSE 250. At its peak in March this year, the share price hit 398p, giving it a market cap of more than £1.1bn.
Foxtons’ share price bodes ill for the London property market
But since March, the share price has been falling. And by Monday this week, the share price had fallen to 261p – a 52-week low. The market cap had slid to £740m.
Foxtons’ listing price was 230p, but the shares opened almost 20% above that when they began trading in August last year. In other words, they are back where they were on their first day’s trading.
Here’s the share price chart of the year to date. I’ve drawn two black tramlines around the current price action – the direction this one is heading in is fairly clear.
The trend is clearly down – and as am I forever saying about trends, they are powerful things that can go on for much longer than anyone expects (look at the US bond market).
Even at this level, Foxtons is hardly compellingly cheap. It’s on a price/earnings ratio of 20. Now, for 2013, it saw strong growth on the previous year: revenue was up 16% on the year at £139m, while pre-tax profit was up 57% at £39m.
But 2013 was about as good as year as you will ever see in the London property market. Foxtons had a 22.5% jump in sales. So 2014 forecasts for £163m in revenue and £55m in profit might be too bullish.
A quick survey of Rightmove shows that transaction levels in London and the surrounding areas – where Foxtons mostly operates – have almost come to standstill. Whether it’s down to tighter lending, excessive valuations, no more Russian buyers, or whatever reason you care to attach – property is no longer selling as it was six months ago.
It doesn’t make that much difference to Foxtons whether a house sells at £1m or £900,000. The important thing is that it sells. So the biggest threat to Foxtons isn’t falling house prices – it is falling volumes. Turnover is more important than price. But the turnover has vanished – and that is what this falling share price trend is all about.
And encapsulated in Foxtons’ price is everything you need to know about London property. When London is in a bull market, it’s good for Foxtons. But when London turns – this is what happens.
If there’s one thing my 44 years as a Londoner has taught me (though it’s a lesson I have learnt and forgotten many times), it’s never bet against London property.
What we are seeing just now in London is a backing off from extreme valuations. But will it turn into something bigger? Foxtons could be our omen.
I’ll be keeping a close eye on the share price. There is bound to be a lot of support between the IPO price of 230p right up to the 270p price where it closed its first day’s trading. But many of those early investors will be trying to grab profits while they still have them – which should cap rallies.
If we slip below 230p, you might see a wave of buyers come in – but you might also see a wave of stop losses (ie selling) get triggered. And that could signify deeper problems for the London property market.
It’s very exciting.
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