Take advantage of Osborne’s boom while it lasts

Chancellor George Osborne seems determined to stoke a pre-election house price boom.

The coalition has launched two separate schemes that are both designed to push up mortgage lending in the UK.

Potential homebuyers with a small deposit are now much more likely to get a mortgage. That in turn is already driving house prices higher.

I think the chancellor is making a mistake. Another property boom won’t help the UK in the long-term. But that shouldn’t stop you and I making money while the party lasts.

The fact is, Osborne will do whatever he can to keep house prices moving up for the next two years. He’s got to get and keep the ‘feel-good’ factor going until the election.

That means there’s plenty of time for investors to buy now and sell later at a good price.

And that means that – believe it or not – it might be worth buying into London’s most aggressive estate agency…

Why this year could be good for Foxtons

Shares in London estate agent Foxtons (LSE: FOXT) have jumped by 15% since the company listed last week. Yet, I think you could still make money from the stock. The main selling point to Foxtons is that it’s very much a London-based business. Nearly all of its 42 branches are located in the capital.

Land Registry figures show that London property prices rose by 6.9% in the year to June, whereas prices across England and Wales only rose by 0.8%. What’s more, London prices are 6% above their pre-crash peak, while in the rest of the country they are still 10% below that peak.

You could argue that prices outside London will have to catch up, which means that London won’t be where the biggest gains will be made in future. But I suspect that London will continue to outperform the rest of the country.

London’s market is very different from the rest of the UK. It’s supported by plenty of overseas buyers, not to mention City salaries (bankers still get bonuses, after all).

The biggest threat to the London market may be a strengthening pound, which would reduce overseas buying power. But given that Mark Carney is determined to keep interest rates as low as he can for as long as he can, we doubt the pound can get a lot stronger from here.

It’s also worth remembering that what really matters to estate agents is transaction numbers. It’s the number of sales going through the books that generates the commission ¬– house prices themselves are secondary.

And Foxtons is making good money now. Last year, it generated £33m of operating profit on revenue of £119m. In the first half of this year, profits jumped by 20%. There’s also plenty of scope for future growth as the chain plans to open up to 40 new branches by 2018.

On the downside, Foxtons isn’t universally loved by Londoners. The chain has a reputation for employing staff who are more aggressive or ‘pushier’ than some of its rivals. Then again, for some people (vendors who believe that this is the way to get the best price, for example) this can be a selling point.

The valuation does look a little rich at first glance. The offer price for last week’s float was 230p, and the price has risen since then to 265p. That puts the chain on a multiple of 21 times forecast earnings.

However, I’ve been keeping a close eye on both the sales and rentals market in London for the last year or so, and it’s very plain that the market is ‘hot’ – prices are moving up quickly.

Another plus point for Foxtons is that 52% of its revenues come from the rentals side of the market. This has been much more stable over the last decade than the sales market. There was no massive crash in rents in 2008. Indeed the number of rental properties in London has risen by 6% a year since 2000.

Other ways to play the pre-election rebound

If you’re not convinced by the case for Foxtons, there are some alternative ways to play the property market. You could look at Countrywide (LSE: CWD). This is another estate agency business and it owns the Hamptons and Bairstow Eves chains. It listed on the stock market earlier this year. It’s trading on a multiple of 17 times forecast earnings.

Countrywide is not a pure London business, so if you disagree with me, and think the London market has already seen its best days, Countrywide may be the one to go for.

Then there’s Rightmove, the UK’s leading online property portal. Rightmove has a lot going for it, but its valuation is even richer than Foxtons.

Housebuilders such as Barratt are another option. They’ve come a good way already, but my colleague Phil Oakley reckons they could have even further to go. (If you’re not already a subscriber, subscribe to MoneyWeek magazine.)

But for me, Foxtons is the most attractive bet. It’s a company with plenty of room to grow in a market that is on the up. Just make sure you sell up before summer 2015. Then you shouldn’t be hit by any post-election property crash.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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  • Arran Kerkvliet

    As the article notes London property prices have gone up by 6.9% over the past year. One can invest in companies or purchase London Investment Property in Boroughs like Wandsworth which has seen 9.12% Capital growth OR future stars like Royal Albert Dock which the government has pledged £ 1billion toward making it the next business district in London. By purchasing the direct asset one does not have to worry about the management of the company and with Osbourne motivated to increase house price growth for the next two years it certainly make sense. Interest rates could be something to consider in the future though.

  • Jonathan Tedd

    I want to invest in real businesses that makes things of high value, using highly skilled workers, are innovative, has a growing order book and has a moat around it.

    All of the above companies fail this simple test.

    Yes they don’t make land, but the final land-use is non-productive (I include financial services) usually seeking yield by rent.

    Osborne’s essentially socialist market manipulation will end badly – invest with great care.

  • PP

    “It’s also worth remembering that what really matters to estate agents is transaction numbers. It’s the number of sales going through the books that generates the commission – …”

    To an Estate agent, their extra commission from getting you the Vendor another £5,000 or £10,000 or more on the sale of your property is not really their focus or priority.

    Their objective is to get an instruction from you (to sell or rent ) your property,
    then to sell it or rent it and most important of all, to get their fees.

    ‘No instruction, no Sale, no Fee’ is the Estate Agent mantra.

    Different Estate Agents will have different approaches to their business – for example, some valuing properties at lower prices but emphasising how quickly they sell properties,
    whilst other Estate Agents will exagerate and over value the sale price or rental you may receive, to get the instruction.

    The problem is finding a decent local Estate Agent who will tread the middle path, giving you an accurate, up to date valuation – and builds their local reputation and repeat business through good service.

    “On the downside, Foxtons isn’t universally loved by Londoners. The chain has a reputation for employing staff who are more aggressive or ‘pushier’ than some of its rivals. Then again, for some people (vendors who believe that this is the way to get the best price, for example) this can be a selling point.”

    Ed – you have missed the point here – aggressive and pushy estate agents will turn on the Vendor and the buyer in order to get a sale.
    The aim is to get the sale and the fee. It is not to make friends with the Vendor.

    Foxtons has been the subject of TV investigation programmes in the London region.

    Personally, I would not go near them.

  • CKP

    When the founder of Foxtons offloaded his company onto an unsuspecting private equity firm a few years ago it marked the top of the UK housing bubble at the time. Northern Rock etc followed shortly after and it was a spectacularly well timed sale and sell signal on the entire UK property market. It’s amazing how short memories are that this IPO is being snapped up. I’m sure these private equity guys have learnt their lesson the first time around and getting out while the going is good.

  • Mark Szaszy

    On one hand MoneyWeek is warning us of a massive imminent financial crash in which property may loose up to 60% of its value, while then on the other hand MW is telling us to invest in the London property market via Foxtons. There seems to be a contradiction here. Why is that?

    I was recently on the verge of investing in property, buying a small flat in a great London location with cash. I had the survey done all ready to go and then decided to cancel the purchase because of the ongoing MW UK crash forecasts.

    What is going on here? Why the contradiction?