Real Estate

Duncan Mavin is a former Bloomberg Gadfly columnist.

House of Cards?
London leads house price gains in the U.K. in the past year
Source: Rightmove House Price Index

Britain's estate agents have a problem. They're encumbered by their own bricks and mortar.

For firms like Foxtons and Countrywide, the rise of online-only rivals like Purple Bricks is more than a headache. These upstarts charge lower fees and don't run branch networks. That leaves traditional players with a choice: cut fees too or lose market share.

Purple Bricks, which is backed by money manager Neil Woodford, went public in London on Thursday. The online estate agent charges sellers a flat fee of 798 pounds ($1,189) and a bit more in some pricier parts of London. On average, its fees are 1,080 pounds. (In Britain, the seller alone pays the realtor's fees.)

In Britain, traditional real estate agents typically charge about 2.5 percent of the sale price. In London, the hottest area of the market, the average asking price is 616,000 pounds, according to Rightmove data. That puts the average fee at about 15,400 pounds.

Purple Bricks has only been operating for less than two years. It's yet to record a profit, and whether it turns out to be another Uber remains to be seen. In the year through April 2015 it had 3.4 million pounds of revenue. In the five months after that, sales jumped to 5.7 million pounds.

It has a market value of 226 million pounds, less than half that of Foxtons and a quarter of Countrywide. Foxtons had a profit of 14.4 million pounds on 71.1 million pounds of revenue in the first half.

Asking Price
Foxtons shares have dropped since their IPO
Source: Bloomberg data


Purple Bricks has online competitors too, like eMoov and Tepilo, which have struggled to make headway. They all face the obstacle of who shows the prospective buyer around the house if the agent won't do it. Sellers may not have time or want to take the personal risk of inviting strangers around their homes.

Even if Purple Bricks remains a minority player, its model adds to the pressure on fees for incumbents, especially those with a big presence in London, such as Foxtons, which focuses on mid-market properties in the capital.

That's because the most expensive properties are largely in London. The price of a home in the capital is more than twice the average in the rest of the U.K. and more than three-and-a-half times the price in the cheapest regions of the country, according to Nationwide. That means the spread between the fixed fee and the percentage fee is at its widest in the capital.

Purple Bricks started its operations outside the capital and only moved into London earlier this year. Traditional real estate agents cite the power of their brands and knowledge of the market to defend their model.

"Our client base naturally places very high value on quality and is primarily motivated by the net proceeds of their transactions rather than the fee alone," Foxtons CEO Nic Budden said in July when reporting earnings.

They also have their lettings businesses to fall back on: Foxtons generated 47 percent of its first-half revenue from lettings, the same proportion as it gets from sales. Purple Bricks's own lettings business is still in its infancy.

But concern remains buyers and sellers will try to cut their costs, especially as the vast quantity of house price data now available to the public online undermines the traditional role of agents in helping clients value their property. (The exception to this might be at the very high-end of the market, where every property is unique and it's hard for buyers or sellers to find a comparable sale.)

Low cost, online upstarts have disrupted a whole raft of traditional business models -- just ask a London cabbie about Uber's impact. Even if Purple Bricks falls short of achieving that level of success, incumbent real estate agents need to be wary of the upstart on their doorstep.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net