There has been much press regarding the cooling housing market; an interesting report examined the London property market through the eyes of Foxtons share price and offered an interesting perspective.
Foxtons was founded by ex-army man Jon Hunt 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.
A friend of mine a few years ago became the top selling agent in the Notting Hill branch, he performed top consistently and became a living legend in the Foxtons world for years to come. He was rewarded with a Ferrari for his efforts, which he declined in favour of another benefit. Though popularly known for its green Minis around London, the agents have a chance to elevate themselves to BMW 1 series and upwards; they are consistently targeted and given rewards as they hit their milestones from cars to holidays every quarter.
Needless to say my friend soon left to start his own property development business by selling in the patch he got to know well, breaking the ceiling prices of the streets he developed in. In this industry the staff turnover rate is high, retention is very low. Foxtons is a great place to get your nose dirty and learn the trade. In the course of business we have seen many negotiators come and go, they make their money and move on. Understandably in this type of environment the burn out rate is high and therefore not sustainable, very few people stay on long term.
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The firm is known for doing things differently, e.g. offering 0% commission to attract customers from other agents every time they open a new office for three months to woo business from other agents. Staff are worked hard 12 hours a day as well as weekends which gives them the edge on other agents.
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During the crash of 1989 to 1992 the company struggled for survival. It was at this point they started a letting arm which is just as aggressive as the sales arm, also offering short lets which can prove to be a very lucrative yield for the landlord in Central London, where many tenants prefer to have their own privacy and comfort in a flat, rather than a hotel, and are prepared to pay well for the privilege.
The firm was sold in 2007, just before the crash for £390m for only 20 branches to BC Partners. Many stated this was a ridiculous amount of money to pay for the company valuing each branch at nearly £2m. In the following years there followed a lot of press regarding the sanity of purchasing the company at this price, and BC Partners lost control of the company and was forced to restructure their debt. The company post credit crunch started to build up again and currently has 49 branches in the hot spots of London.
However the company was floated in August 2013, raising £55m in the process. At its peak in March this year the share price was 398p, giving it a market capitalisation of more than £1.1bn.
But since its high, the share price has been falling. And this week, the share price had fallen to 261p – a 52-week low, hence the market cap had slid to £740m, nearly at the level they were when they first started trading.
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The firm is renowned for its ability to get higher prices than other agents thereby justifying its no compromise fee of 2.5% for sole agency or 3% for multi-agency. This is good for sellers who clearly benefit from this type of model.
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Foxtons make serious profits when there is a large number of sellers in the market. When this declines the revenue decreases. In 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.
Let’s face it, 2013 was about a good year in the London property market and everyone made money. Foxtons had a 22.5% jump in sales. When the market declines in the hotspots of London, sellers tend to hang on to their properties; they are not faced with the same need to sell as the rest of the nation and can afford to hang on till the market picks up. A lack of seller spells a downturn in turnover and profits for Foxtons. It seems the city has cottoned onto this and this is reflected in the stock price.
A quick survey of transaction levels in London will reveal the transaction levels have decreased, therefore this will mean the bullish prediction for 2014 of £163m in revenue and £55m in profit is unlikely to be attainable. The rest of the city’s opinion is also in stark contrast to this prediction.
A cooling market means what exactly? The transaction levels will drop and there will start to be a nervousness in the atmosphere of where the market will go from this point on.
A point of note is a property is a tangible asset and its value does not drop to zero in the same way Foxtons’ share price can. So it’s important to keep things in perspective.
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If your focus is investing in rental yield such as those who specialise in purchasing HMOs, a slight temporary decline in property values will have little impact on your investment. However if you’re aiming to develop and are banking on values to carry on increasing you might f ind yourself in a hole.
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This is the kind of market where deals will surface, when the masses are scared to purchase is precisely the time to strike. The investors who recently have made the most money are those who piled into the market in 2009, when most were sitting on the fence.
No doubt a parallel cannot be drawn from 2009 to now. In 2009 the market was in pick up mode somewhere at the bottom of the curve, and currently we are in a phase where the decline is just starting at the top of the curve, therefore any purchase must be done with much discrimination and with the anticipation of a further dampening of price. However from my experience what happens in this type of market, in the key areas of London, is most owners simply don’t sell, they don’t need to. Many have purchased in cash or have very little mortgages therefore things like the credit crunch don’t really affect them as there is no credit to crunch. This is the same for areas which are heavily populated by Jews and Indians, who have the reputation of being more financially savvy.
In behavioral finance it known that psychologically investors weigh a downturn in price much more heavily than the equivalent upturn in price. This translated into the property market means everyone will be prepared to jump on the bandwagon when prices are increasing yet when they are faced with making a decision in a falling market most will end up just sitting on the fence. No matter which way the market is going three things will not go away: death, divorce and distress.
Very simply following the masses cannot make you money, if it did they would all be rich!
The Real Deal
West Ealing, London, W7
Purchase Price: £350k
- A large two bedroom mid terrace house
- Freehold
- Currently generating £1,300 per month rental income
- Similar properties are being sold for around £440k, so this property is coming at around 20% discount
- Very good buy and hold opportunity
Call us now to secure this deal!
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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!Tips of the Week
Be strict about what you’re looking for, if you want good rental yield you may be better off purchasing a property above a grocer’s shop close to a station rather than a property for the same price 15 minutes away.
Remember capital values may be affected but regular income in terms of rent can be expected in good as well as bad times.
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