Estate agents should be quivering in their boots. Giants Tesco and Google are muscling in on their industry and are about to change it for good.
For an industry already in difficulty it's bad news. If you're selling a house, it's great news. And for investors it presents a one-off opportunity. Let me explain
The Office for Fair Trading (OFT) wants to loosen the traditional estate agent's stranglehold on the UK property market. They want to get rid of legislation that has protected the industry from competition.
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For estate agents, the OFT's timing could hardly be worse. It's been a torrid couple of years. With transaction volumes way down, agencies have been shutting at a rate of 150 per week. The only bright spot has been the success of the agents' website - Rightmove (LSE: RMV). The Rightmove website is widely used and shows about 90% of houses for sale in the UK.
But now Rightmove is itself under threat. The OFT wants new competition and it wants it to come through the internet. Effectively, they want rivals to take on Rightmove's near-monopoly position.
This is where the likes of Google and Tesco come in.
The internet has transformed industries already
Just look at what happened when Amazon entered the book industry. It decimated high street book sales. Stores have been disappearing to the extent that today, they only account for about half of all book sales.
And books are products people like to thumb through and browse before they buy. If the internet can transform book retailing, just imagine what it can do to house sales. After all, agents really only provide 'details' on houses for sale. This information can be delivered more easily and in a far richer format online.
Google already has local area images (Google Earth), details of schools, shops, takeaways, etc frankly as much information as you could possibly want to help you choose where to buy.
Changes could come sooner than you think
Both Tesco and Google have powerful brands, and either of them could launch something really quite sensational. Google is said to be working on plans for an online assault and "is expected to launch as soon as this year" according to The Times.
Tesco launched a house sales service back in 2007, but shut it down because of burdensome regulations. These are exactly the regulations the OFT is proposing to lift. Back then, they were offering to sell homes for a one-off fee of £199, a pittance compared with the thousands of pounds estate agents charge. Expect them to be back with a similar offer soon.
Of course, the estate agents aren't taking this lying down. Their trade body put out a statement arguing that buying a house is so important that you need trained agents to advise on matters. They say that we should be prepared to pay up for their expertise.
But estate agents are nothing more than sales people. They only make money when they sell a house. Do they really hold the buyers' interests above their own i.e. achieving a sale?
With estate agents asking between 1% and 2% commission for a sale, they don't come cheap either - £2,000 to £4,000 for the average UK home. More expensive houses can easily return agents £20,000. Not bad, especially in a bull market when a house practically sells itself.
With the new online offerings charging around £200, it's clear that traditional agents will lose a lot of clients. Agencies will continue to shut up shop as commissions tumble. And don't expect politicians to fight their corner. Estate agents have consistently been voted as one of the trades most distrusted by the public at large. No one will mourn their passing.
Rightmove: a stock to avoid, or short
Rightmove is trading at its all-time high. Results out recentlt were better than expected as they achieved some profit growth through cost cutting. Interestingly, revenue fell 6% - they're going to have to do a whole lot more to cut costs in the future!
Rightmove has done a roaring trade as internet penetration has boomed and rivals have been kept at bay. Its fees come from estate agents, rental agents and developers. With agencies in terminal decline and developers able to sell property at competitor websites, revenues must fall.
Given that Rightmove already has 90% of house listings on their books, it's hard to see how they can achieve growth anyway their results confirm these suspicions. The risks to the downside are considerable.
If you hold stock, it may be time to think about taking profits. If you don't, and you fancy a punt, you could consider a short position.
Shorting the stock at £10 per point will earn you £10 for every penny the stock drops. So if Rightmove falls, for example, from £6.50 to £4.50 you could make a profit of 200 points multiplied by ten, i.e. £2,000.
Of course, if the price moves up, you'll lose. A move from £6.50 to £7.50 at £10/point will generate a loss of £1,000.
To learn more about how to short stocks, the risks involved, and how to open a spread betting account, take a look at here.
This article was written by Bengt Saelensminde and was first published in the free daily investment email The Right Side on 26 February 2010.
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