Real estate brokers may succumb to M&A in battered UK market

[LONDON] With no let-up in sight for listed UK real estate agents, the companies could find themselves the targets of a wave of M&A activity.

So say industry analysts and executives, who note that traditional high-street players like Foxtons Group Plc and Countrywide Plc face a stagnant housing market while losing market share to online competitors. Investors are running out of patience - their shares have tumbled by about a 10th and a third this year, respectively, compared with a roughly 5 per cent drop in the FTSE Small-Cap Index.

The largest brokers need to look for ways to cut costs, and merging with another company or an investor is one option, according to ETX Capital's Neil Wilson.

"A merger of equals or a takeover are definitely options that would make sense, given what the market conditions and share prices are," said Wilson, a senior market analyst at the finance firm in London. "The more traditional letting agents must be looking for a way to cut costs in this environment. There is a clear rationale for M&A." Countrywide is Britain's largest real estate broker, while Foxtons is a bellwether of the key London market; as such, the companies are at the center of the talk about mergers and acquisitions. Research by accountancy and advisory network Moore Stephens indicates that 19 per cent of estate agents in the UK show warning signs of becoming insolvent.

"From a private-equity point of view, Countrywide and Foxtons tick a lot of boxes," said Christopher Millington, an analyst at Numis Securities in London, with a buy rating on Foxtons and a hold rating on Countrywide.

"The shares have underperformed, but they should be able to generate decent cash going forward," he said. "In the case of Foxtons, this will depend on how long the London market takes to turn around, and in the case of Countrywide, it will be about how they restructure management to improve the operational performance." A spokesman for Foxtons and a Countrywide spokeswoman both declined to comment.

Britain's housing market is poised for a lifeless 2018, weighed down by political and economic uncertainty, tax changes, stretched affordability and the Bank of England's rate hike in November. The number of residential properties changing hands fell in December to the lowest since 2016, while London house prices dropped in the fourth quarter by the most since the depths of the 2009 recession, data from HM Revenue and Customs and research firm Acadata show.

Traditional brokers are under particular pressure to bulk up to share costs because of the success of online agents. These companies have captured between 5 per cent and 7 per cent of the UK home-sales market over the past three years, according to Paula Higgins, founder and chief executive officer of the HomeOwners Alliance. The consumer organization estimates that UK buyers save an average of £2,500 ($4,584) by using an online service.

Countrywide issued a profit warning last month that sent its stock sliding by the most since the Brexit result, while Foxtons reported a drop in 2017 revenues and cautioned about challenging trading conditions ahead.

Online rival Purplebricks Group Plc has also seen its shares fall recently in the general market downturn and after a critical report from Jefferies Group, but they're still up almost 90 percent in the past year. Foxtons has plunged 28 per cent in the past 12 months, with Countrywide losing more than half of its value.

Foxtons and Countrywide are taking steps to adjust to the challenging conditions. Foxtons, which is more focused on the UK capital, has moved away from the high-end market and plans to announce new strategic initiatives in February. Countrywide said last month that Alison Platt resigned as CEO and a board member. It appointed as executive chairman an industry veteran with experience in online business adoption.

While analysts praised that decision as the first step in the company's recovery, investors were less convinced, sending Countrywide's shares down 17 per cent since. Varde Partners' Tim Mooney is among the bears who don't see Foxtons and Countrywide as attractive investments.

"Areas that I think are going to get destroyed: real estate agents' broker commissions," which are "just a joke," said Mooney, global head of real estate at the alternative money manager, with about $13 billion of assets. "There's an analogy to travel agents - nobody books their holidays in a high-street travel agent's anymore, it's online."

BLOOMBERG