Foxtons Group – property buyers return to prime London areas

Property agent Foxtons looks well placed to benefit as buyers return to prime London areas, writes Mark Watson-Mitchell.

The rise in activity levels in the UK property market over the last couple of years has been staggering.

Prices have increased and sales times have decreased significantly in that period.

Obviously, the impact of the stamp duty relaxation has been massive.

Will it last?

The big question now is how long will it continue?

Some experts are reckoning that frustrated demand will still support UK housing market activity as the stamp duty holiday winds down.

Many observers consider that it will taper off gradually and come back to just above previous operating levels, despite the higher vendor prices.

We have seen the effect of this explosion in the housebuilding sector.

We have also seen estate agents across the country wallowing in the plethora of ‘Sold’ noticeboards outside their clients’ residences.

Did you know that across the UK there are over 10,500 estate agents?

It is a competitive market, with sales commission rates becoming highly negotiable and clients expecting good value for their fees.

The leading market in the UK is London – making up some third of all UK sales by value. It also accounts for around 35% of UK lettings in value terms. 

An article, in the Daily Telegraph on Monday of this week, declared that new data was showing that housing activity in the most expensive areas of central London reached a record high in June as the easing of Covid restrictions drew people back to the capital.

The ‘Italian Job’

London visitors and residents would have to have been blind not to have seen distinctive dark green and yellow logo liveried Mini-Coopers roaming the streets.

The iconic fleet of vehicles is operated by today’s profile company – the Foxtons Group (LON:FOXT). There must be well over 1,000 vehicles in the fleet.

Its ‘Italian Job’ inspired vehicle fleet was launched in 2001, and the minis are the ultimate urban vehicle – their compact size making it easy to manoeuvre through London’s heavy traffic.

The business

Foxtons opened its first estate agency branch in Notting Hill in 1981 and now with some 60 branches covers almost 80% of the Greater London area. 

Today, Foxtons is the leading London estate agency business, recognised as the number one brand in the Capital.

It operates through three segments: Sales, Lettings and Mortgage Broking. 

The Sales segment generates commission on sales of residential property. It operates on an average agency sales fee of 2.4%, compared to the UK average figure of 1.2%.

The Lettings segment earns fees from the letting and management of residential properties and income from interest earned on tenants’ deposits. In lettings its fees are 11%, against a 7% national average.

The Mortgage Broking segment receives commission from the arrangement of mortgages and related products under contracts with financial service providers and it also receives administration fees from clients.

Despite there being some 2,500 estate agents in the London area, the group considers that it has a unique market positioning, both in brand and reach.

It offers a premium customer service and achieves impactful results thereby creating customer loyalty.

Committed to its technology advancement

It also boasts that it is a leader in its technology and data science. 

Estate agents generally handle large numbers of buyer and seller leads, with the majority having little likelihood to transact. 

Agents manually identify prospects likely to transact and nurture them for long periods of time. 

Implementation of data science and continuing professional development helps to automate those tasks. 

It uses lead scoring, property identification, digital nurturing and cross-selling. 

That means that the impact increases the likelihood of its customers looking to transact to do so with Foxtons, while also increasing agent productivity.

It also, importantly, resulted last year in reducing its cost per acquisition.

Worth noting is the fact that the group has made a £3m investment in Boomin, the ‘next generation’ property portal that was recently launched by the Bruce brothers. 

We shall see whether that makes financial sense over the next few years as it builds up its operating size.

Future prospects

The group is now looking to target the South-East of England and the top 15 urban areas by way of its asset-light model utilising the high levels of its brand awareness.

It is set to expand into the Home Counties property markets, following its launch of virtual sales offices, the first being in Berkshire in Q3 last year.

For its Letting business it is also going to make an impact upon the ‘build to rent’ property sector and is already working with leading developers and operators like Grainger, Greystar, British Land, Residential Land and even Harrow Council.

Additionally, the company is building up its network of higher yielding ‘New Homes’ developments across the UK, helping to target London property investors.

On the international side its China and Hong Kong sales desk is partnered by the largest China agents. It also has relationships with overseas partners helping to source buyers, with its capability of its agents (as a group, not individually) in speaking some 56 languages in total.

Management View

The group’s CEO Nic Budden considers that the company’s business resilience has been proven in the most challenging of conditions over the last few years, especially with Covid-19.

Its reorganisation over the last year or so has left it leaner, more capable and highly scalable.

He reckons that the sector in which it operates, together with its customer dynamics, is favourable to its business.

As with its recent and ongoing programme of acquisitions, it has a clear plan for growth, and while having no external net debt it has the framework for further capital allocation.

The company has a unique proposition, is well invested and ready to drive its growth.

Ahead of its interim results due before the end of July, Budden has stated that trading momentum is very strong and that he and his team have real optimism for the current year and beyond.

A well spread professional investor base

There are some 324.9m shares in issue.

Large holders include Hosking Partners (11.2%), Platinum Investment Management (10.1%), Aberforth Partners (5.76%), Russell Investment Management (5.45%), SFM UK Management (5.14%), 3G Capital Management (5.08%), Franklin Templeton Institutional (4.97%), Highclere International Investors (4.97%), Capital Research & Management (4.89%) and Lombard Odier Asset Management (4.56%).

Analyst estimates

Andy Murphy at Edison Investment Research has noted that the group’s revenues have fallen for every year since 2016.

However, for the current year to end-December he is looking for some £130m of revenues (£93.6m) while pre-tax profits could rise six-fold to £9.5m (£1.6m), worth 2.5p (loss of 0.1p) per share in earnings and covering a 0.5p (0p) dividend.

Further into next year Murphy is going for nearly £140m of revenues and profits of £12.5m, generating 3.3p of earnings and a 0.8p dividend per share.

My View

On the face of it, this company’s shares, at 60p, may look too highly rated, trading at 24 times current year price earnings. 

However, I do reckon that it has massive recovery written all over this company and its prospects.

Its shares hit 76p in February this year and they can so easily replicate that price level again very soon. Perhaps the statement with this month’s interims can help spur them along.

I now set a target price of 76p.