Real Estate

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

U.K. Chancellor Philip Hammond's mini-budget statement on Wednesday had some good news for property. Well, only for one property in particular -- a posh face-lift is coming for the stately home that may have been the inspiration for Pemberley in Jane Austen's Pride and Prejudice.

For the rest, it was bad news: The government announced a ban on lettings fees charged to tenants, describing the size of them as "wrong," and failed to deliver a hoped-for tax cut to boost real-estate transactions. Talk about a rotten cherry on the Brexit cake.

This is probably bad news for real-estate agents, most particularly for publicly traded behemoth Foxtons Ltd.

Hammond Hit
U.K. Chancellor's Autumn Statement hit shares of establishment estate agent Foxtons hard
Source: Bloomberg
Intraday times are displayed in ET.

The average fee paid by renters to landlords or agencies was 223 pounds ($277) in 2014-2015, according to a government survey. Across 4.3 million households that are renters, it's a figure that soon adds up. The lettings business was supposed to be a relatively safe haven for U.K. real-estate agents, with Brexit set to dampen enthusiasm for actual buying and selling, but it looks like there's worse to come in terms of pressure on fees.

Tenant Squeeze
Average fee amount paid by private renters to landlord or agency
Source: English Housing Survey

The pain won't be felt equally, though. While online-focused, low-cost players like PurpleBricks aren't immune to fee pressures, it makes sense that they've taken less of a stock-market hit than Foxtons. If the market is set to become more competitive and focused on costs, more landlords will likely look for cheap alternatives rather than stump up more themselves or jack up rents. Real-estate brokers with window-shop listings, including Savills Plc and Countrywide Plc, have generous operating margins, at around 10-30 percent in some cases. That will likely have to absorb the pain.

Leaky Roofs
Foxtons shares have been hit hard by the Brexit vote but have also underperformed web-based peers
Source: Bloomberg

Hammond's announcement that he'll invest 400 million pounds into venture capital could easily find its way to encouraging new ideas to cut costs in property transactions, that might further nibble away at big brands.

Foxtons, the swaggering symbol of London's overstretched property boom, is hardly powerless to respond. It knows that clicks and mortar is a model that makes increasing sense. It recently launched the "MyFoxtons" website and app, which offers a range of after-care services for landlords and renters, in an effort to boost its appeal relative to its competitors.

And like established incumbents in the banking sector, it knows that having a network of snazzy stores functions as a powerful marketing tool. Start-ups may be asset-light but they have to pay a lot to get attention from the public in a crowded market. 

But this could be too much of a good thing. Foxtons said in July it was reviewing the pace of expansion of its outlets, reflecting the uncertainty following the Brexit vote. Today's news puts that even more in front of mind. It's one thing to have a strong physical presence but quite another to be adding to it in a tough market.

If there's one lesson from Hammond's Autumn Statement, it's that freebies from the government to support property prices are in short supply. Brexit and a slowing economy remain real threats to demand. New ideas from technology, rather than old ways to pass on costs, will be key.

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

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net