Real Estate

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

Hipsters rejoice. Fears of the tell-tale green shopfront of a Foxtons realtor invading every London neighborhood look increasingly unlikely to come true.

The property agent's latest trading statement suggests the British capital's real estate market is set for yet another year of slowdown, after last year's Brexit vote and tax hikes dealt it an overdue blow. The company reported an 11.3 percent drop in 2016 revenue and warned of "challenging" conditions in 2017.

Last year was the first time in eight years that London prices grew more slowly than the rest of the U.K. Analysts reckon transaction volumes could drop another 9 to 10 percent this year. Shares of London-centric Foxtons Group Plc slumped as much as 10 percent on Wednesday.

This is surely a sign that Foxtons's post- IPO strategy of lavish empire-building must switch to one of penny-pinching if it wants to ride out the slump while keeping shareholders sweet. It talks of keeping a tight lid on costs, but still opened seven new branches last year with another two due in the first quarter of 2017 (one in Peckham, which will likely disappoint the edgier denizens of "hipster central").

Between the end of 2012 and last autumn, Foxtons opened more than 25 new offices, according to Barclays, with existing and planned branches totaling 100 by mid-2016. Yet putting more green flags on the map hasn't created more profit: adjusted Ebitda was about 25 million pounds in 2016, the lowest in at least six years.

Growth Mode
Foxtons' branch network has swelled in recent years, though slanted towards the outer areas of London
Source: Company filings

It will need to take the ax to capital spending first, while staffing may need to be reduced too.

In fairness, Foxtons' rental business has been more resilient. Revenue there was flat year-on-year. But it's feeling the pressure too. More competition, low-cost web rivals and a ban on lettings fees charged to tenants won't help profit.

You'd need to be an optimist to assume the property business can't get any worse for the bricks-and-mortar crowd. In the past six months, the share prices of real estate listing sites Zoopla Property Group Plc and Rightmove Plc -- which have a broader exposure to the U.K. market -- have risen 26 percent and 8.8 percent respectively. Those of Foxtons have dropped 18.4 percent.

Brexit Bet
Foxtons has heavily underperformed other property services stocks, such as listings websites
Source: Bloomberg

Foxtons isn't defenseless. It's debt-free and has the muscle to pay a dividend yielding 6.3 percent in 2017, according to Numis analysts, although it did shelve a special dividend last year after the Brexit vote. Still, this should limit any too drastic retrenchment that might leave the company bemoaning a lack of market share when buyers reappear. It's also trying to tackle the upstarts by investing in tech such as an app for real-estate services.

But given that the London market probably won't bounce back quickly -- and with Theresa May likely to pull the Brexit trigger within months -- Foxtons must do more to convince investors of its attractions as a cost-controlling dividend play, rather than a flashy bet on the housing market. The company managed similar after the collapse of Lehmans. But this downturn is already looking more prolonged. The go-go days are over.

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:
James Boxell at jboxell@bloomberg.net