Foxtons a 'sell' for Peel Hunt as it warns estate agents face long-term headwinds

2nd Jun 2015 16:12

Peel Hunt initiated coverage of the UK estate agency sub-sector with a 'sell' rating on Foxtons and 'hold' ratings on Countrywide, LSL and Savills.The broker said the decisive result in the general election has provided a welcome fillip for the UK estate agents, removing uncertainty over mansion tax, controls on rents and the banning of tenant fees, and noting that comparatives figures from last year are set to ease in the second half of 2015."While the near term news is positive and the listed players have diversified into areas with more stable revenue streams, we believe the sector faces longer term headwinds," analysts wrote."It is still largely exposed to the highly cyclical nature of housing transactions and the growth of fixed price online estate agents is likely to lead to downward pressure, possibly significant, on industry fees and profits."The broker sees a good medium-term outlook for growth in transactions and house prices, but believes downward pressure on fees will hold back the recovery in profits."The key issue is the pricing structure offered by the online estate agents which have been expanding rapidly and where the difference in fees is material - especially in higher value areas of the SE/London. The big debate for us is how far and how rapidly will fees fall."On the upside, the latest RICS survey highlighted that estate agent stock levels stand circa 40% below the long run average, with low housing stock levels, particularly in London, providing a decent foundation for further modest price growth, analysts believe.However, while the sector looks roughly fairly valued, Foxtons shares have bounced 77% in the year to date to now stand on demanding valuation multiples of around 20 times forward earnings, meaning a positive rating was difficult despite its higher margins, debt-free balance sheet and healthy yield.