The battle to disrupt estate agents

Online estate agent eMoov went into administration this month. Its demise is quite significant in the battle of the internet-based estate agents it was the only decent-sized rival to sector leader Purplebricks (Aim: PURP). Just six months ago eMoov had entered into a £100m three-way merger with rival Tepilo and online letting agent Urban.co.uk. However, part of the £15m in new investment pledged at the time of the deal never materialised, said eMoov's chief executive, Russell Quirk.

In effect, eMoov simply struggled to compete with established traditional agents against a backdrop of a challenging property market. In the 12 months prior to its collapse it had received 8,000 new instructions representing about 0.5% of the market in 2018, according to consultant TwentyCi (compared with 8% for online agents overall). Just more than half (53%) of those instructions generated sales, subject to contract.

Purplebricks steps in

eMoov's demise shows that the internet still hasn't revolutionised the way we buy property in the UK. Purplebricks now has an even clearer run at the market, and has offered to sell the houses of existing eMoov customers free of charge. But despite being the largest online agent by a long shot, Purplebricks has had a mixed few years itself.

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For the six months to the end of October, revenue rose by 75% from £40.1m to £70.1m (around £50m of which was generated in the UK, with the rest made by the Australian and North American arms). However, that was less than expected, while group losses were greater than forecast increasing to £25.6m, from £11.4m previously, as a £4m profit in the UK unit was offset by a loss of more than £30m at the other two businesses, driven by heavy investment in marketing. Markets were also concerned as the board reduced its predicted revenue for 2019 a little. The share price slid 11% on the day, taking them down to around 130p at one point, 68% below where they stood at the beginning of the year.

Analysts' views are mixed. Purplebricks spends a lot on marketing but it seems to have paid off in the UK, notes Lex in the Financial Times. The group does not disclose sales volumes, but based on its reported £5.4bn in house sales, Lex reckons it sold around 24,000 houses in the period, a bit more than high-street agent Countrywide. So it's clear the model can work, which bodes well for its overseas expansion, assuming it doesn't overreach.

But that's where the outlook clouds over. As Phil Oakley of Investors Chronicle notes, Purplebricks has a lot of fixed overheads, which means it has decent "operational gearing" a rise in instructions "can lead to a rapid growth in profits". But this cuts both ways. The UK property slowdown has hit all agents hard this year, but digital agencies could be the most vulnerable. For example, in September Connells Group (one of the UK's largest estate agencies) shut its online offering, saying the model wasn't "the right solution for the customer".

It's one thing to pay an upfront fee instead of a fat commission in a "hot" property market, but it's quite another in a sluggish market with no guarantee of selling your property. If the housing market deteriorates further, warns Oakley, consumers might shift back to "commission-based agents", hurting Purplebricks' profitability.