UK managers backing estate agents for property...
Thu 07 Nov 2013
A recovering property market could see estate agent profits treble, according to John Ingram, head of the
European Dynamic Team at JP Morgan, just one of a swathe of managers investing in the sector. Government
intervention through Funding for Lending and Help to Buy have effectively triggered a house price boom: The
Council of Mortgage Lenders says there are 42% more mortgages being granted to first time buyer loans than
there were 12 months ago.
Ingram says estate agents are positioned to cash in, not only because their fees are based on a percentage of the
sale price, but because they are leveraged to increasing numbers of sales.
The successful floatation of Countrywide (the largest estate agent in the country) and Foxtons in March and
September this year demonstrated investor appetite for estate agents.
The continued presence of those funds in portfolios reflects the fact that fund managers believe their recovery
has only just begun.
Ingram explained why Countrywide is the third most active position in his portfolio: "Between 1998 and 2007, in
the ten years up to the peak, we averaged a million transactions a year - the peak was 1.1 million. Last year we
had only 600,000. So the estate agents at the moment are predicated on a much lower level of turnover than we
think is sustainable" He added: "What gives us confidence is just looking at the number of people in the UK. If
that number of 600,000 stays the same and does not increase it means that the average person will move to a
new house once every 27 years, which we think is too low. If it returns to a million transactions, this company's
profits will triple from last year, and we'll be looking at a very attractive valuation." Ingram also holds Foxtons,
while Richard Watts, manager of the Old Mutual UK Mid Cap Equity Fund explained his own support for the firm
as the fact it is "an exceptionally well-run company, with special strength in marketing. He added: The average
price of its house sales is 400,000, which puts it in the sweet spot in terms of transaction growth as the recovery
develops. It is the right section of the market for the second phase of Help to Buy, which will provide mortgage
indemnity for homes worth up to 600,000. In our view, Foxtons is in a position to increase its footprint potentially
to 100 offices and possibly more." Neil Hermon, manager of the Henderson UK Smaller Companies Fund, has a
holding in Countrywide, but also rates LSL Property Services - one of the largest operators of estate agents in the
UK, running over 500 branches, including brands such as Your Move and Marsh and Parsons. It is also a large
broker of mortgage and non-investment insurance in the UK and, through e.surv, they own the UKs largest
surveying and valuations platform. He added: "We believe that the company is in a strong position to grow into a
market leader in all lines of its business. Combined with the top-down government drivers of Help to Buy and
Funding for Lending, the companys future looks prosperous."