Lettings: the hidden value in Purplebricks shares?
As should be clear from my experience letting out my London house, the Purplebricks platform is a big improvement over the manual process traditional letting agents use BUT Purplebricks doesn’t seem to be doing the job to actually let out my house.
In 3 weeks they’ve shown 2 potential tenants the house. Foxtons has shown 6 in 2 weeks and Orchards 1 in the 3 days since I appointed them. The PB advert is not the best one. The LLE tells me mistakes in the text are not important because tenants just look at the photos. Ok, but then they didn’t take the best photos (and are actually using ones I supplied to them). So there is validity in the argument I’ve heard from almost every traditional agent that the PB service looks good but they can’t provide the service, they get your house rented for a good rent. But here’s the rub, I’m not negative on PB’s outlook. Look at the details. At results a month ago, Purplebricks had 9 ‘local lettings experts’. Nine. For the entire UK. 6 of which are in London. It’s not surprising that they’re neither local nor expert as the competition are very keen to tell you. But the LLEs are motivated they are just doing an impossible task and that won’t always be the case. PB were planning to grow to 20 LLEs by about now and 50 by October. And significant growth in lettings doesn’t seem to be in any investor/analyst expectations which means potential upside PB for me. So when a traditional letting agent says they’re beating PB they mean “we’re beating the PB LLE who’s vast area covers ours”. Meanwhile the response of the traditionals is the wrong one. They seem emboldened to actually increase prices as they “charge more for better service” which will be ok in the short-term as PB isn’t delivering on lettings yet BUT over the longer-term PB looks like it’s getting much stronger. Not only more LLEs but they have a competitive advantage by being supported by the PB platform which is genuinely more pleasant to use as a customer. If I’m right, the advantage will show through over time starting soon with the growth of those LLEs. PB is beatable in lettings at the moment but nobody is attempting to beat it at its strengths, only on its weaknesses which it is already addressing. To me, despite being underwhelmed by my personal experience so far, I can see PB is on a good path with lettings and it represents hidden value in the shares.
And a point on portal listings. As I’ve said before, PB’s lettings listings have been stuck at 300 since the beginning of the year while PB sales listings have grown from 7,000 to 9,200 (+30%). What that doesn’t tell you is the number of new lets in the 300. PB had an average listing age of 5-7 weeks on Zoopla (many other letting agents are in the 7-15 week range). As the average private rental period in the UK is 4 years, new lets won’t appear as relets for some time so flat listing numbers, in the short-term, are no indication whether the portfolio of properties managed by PB is or isn’t growing. Also note with an average sales listing age of 13 weeks, the earnings potential of a lettings listing in terms of upfront fee paid is 2x-3x that of a sales listing, implying lettings is about 10% of PB’s sales but only delivered by 4% of agents. That shows the potential of the business stream. By the way, Belvoir which I consider one of the gold standards of lettings (disclaimer: we’re house broker) is at 7 weeks average advert age (note that’s not directly comparable and I would say the time taken to rent a property is probably about the same for each).
Shortly after IPO, Michael Bruce was open that he saw the best way to grow the lettings business was to purchase portfolios of managed properties. If you ask PB why they haven’t done that yet they effectively say “there’s nothing to stop us” but the real reason is they aren’t ready. You can’t buy a portfolio of meaningful size with 9 LLEs to service it without massive risk. That’s why we haven’t seen purchases so far – they will have the necessaries in place soon. And that’s when lettings at PB could step up even further. I don’t think any of that is in the share price– PB will likely meet analyst expectations from sales alone.
Belvoir remains my other bet in lettings
Speaking of Belvoir. Chairman Mike Goddard is adamant he’s monitoring the success of the hybrid model. He points out that when he started 20 years ago, he tried a no-bricks-and-mortar approach only to find serious landlords were put off if an agent didn’t have a – and is considering proptech solutions that can be developed or adopted in the face of customer preferences. Let’s see how the industry develops but these two names remain my bets to succeed in the current environment. Neither Hunters not Martins seem to be able to make another acquisition of size, leaving Belvoir in the driving seat of consolidation and agents trying to move into lettings don’t have a good track record. Foxtons reported growth of volumes but not profits from lettings in H1. (Disclaimer: I’m the house broker for Belvoir).
An interesting bit of fightback by Haart- they’ll refund half your hybrid/Purplebricks upfront fee when you switch to them
Haart has started offering to refund half your hybrid agent fee if you’ve paid upfront to a hybrid agent but also appoint Haart. You can see the logic – they’ll likely be the first traditional a hybrid customer will go to – but there’s the danger of a perverse incentive. I can now engage a hybrid agent for half the risk I could previously. It also highlights the high profit margins that Haart – and all traditionals – are charging. If it really wanted to compete with Purplebricks, why doesn’t it create a platform to organise the mundane interaction and reduce costs while providing a better and expert service at a lower price but higher profit? The 50% refund is fine for a short-term boost but is just hanging on the coattails of an industry trend. It’s still just competing with other traditionals.
Next one to focus on is housebuilding / house prices. Some signs of Brexit related price cooling but still nothing to ring alarms bells about so far which I’ll send later this week. Have a great day.