Here are the articles posted on Facebook over the past week - short, spontaneous insights and observations which I felt needed immediate discussion and didn't warrant long-form articles written.
The property portal space in the UK keeps getting more interesting as the #2 challenger in the market Zoopla signals it's decision to float as a public company. The changing competitive landscape in the UK portal space as well as the approach to the IPO is interesting and has pointers for the NZ market - here are some of my thoughts
The UK real estate market is in many ways very different to New Zealand. For a start the structure of the industry, offering a different degree of service and a lower commission fee structure of around 1.5%. Equally the process of purchase (certainly in the England) is a lot more tortuous with the system of accepted-offers on property purchases amounting to no more than an intention to buy right up until the settlement date when as a buyer or seller you get to know if the process will all go through.
When it comes to marketing of real estate the landscape is also somewhat different. Firstly the industry has moved almost wholly to online with the dominant player Rightmove growing into a highly successful and valuable company.
Rightmove was founded in 2000 by the top 4 real estate companies as a free to list service, fully industry owned. The site and the business grew in size, relevance and value as firstly subscription fees were introduced in 2002 and then premium advertising products in 2007. In 2006 the founding sahreholders decided to float the company with an IPO which listed the company on the London Stock Exchange in March of that year at a initial price of £3.35 valuing the company at £425 million. The IPO raised £76 million representing 18% of the company with the balance retained by the founding shareholders.
Over the following 8 years the company has grown in scale and financial performance from revenues of £18 million to over £140 million (an increase of 670%) and at the same time the value of the company has grown to over £2,360 million ( an increase of 450%).
At one time around 2009, Rightmove seemed to have the market sewn up as the competitive threat was fragmented with competing sites such as PropertyFinder, PrimeLocation and FindaProperty as well as innovative property information sites like Globrix fighting it out for a weak number 2 position. It was through smart acquisition of these competing sites that Zoopla came striding through the market to become over the space of 8 years a real challenger to Rightmove. From the latest stats as measured by SimilarWeb the traffic to Zoopla is around two thirds of that of Rightmove with an estimated 16.7 million visits per month.
The financial backing for Zoopla came largely from The Daily Mail & General Trust the publisher of the same name which is still the largest shareholder in the company with 52.8% of the shares. Zoopla whilst not attaining anything like the revenue and profit levels of Rightmove (£38m in revenue and £10m in profits) has driven the business to create a very strong number 2 player in the market. Core to this success has been data around sales prices and estimated valuations. In very much the same model as Zillow in the US, Zoopla took public record data on property sales prices and mapped it on the site day one and this as with Zillow has delivered a valuable unique proposition for the company. Nowadays Rightmove and the other sites feature such data but back then the advantage was played well by Zoopla.
Zoopla has now announced its decision to undertake its IPO with an expected valuation of £1,000 million, providing a healthy return for its largest shareholder which has invested close to £80m in the business.
What is most interesting within the news of the IPO is the decision by Zoopla to offer a special share purchase scheme for its customers. The scheme available to existing customers of which there are an estimated 20,000 in the UK - real estate offices and property developers, is a two stage purchase of £2,500 each - one tranche now and one in a year's time. Based on a say a share price of £15, with say 23 million shares on offer, this scheme would over the two years if fully subscribed create a 10% ownership within the industry. A very smart move to tie-in their customers (something I have advocated for Realestate.co.nz in my recent strategic proposal).
To sweeten the pot Zoopla has announced that existing customers will get a 20% discount on the issue price, which they recon represents a discount of £20 million - a great gesture and one that I am sure will attract a significant uptake.
There is another reason for this strategic offer and intent to create a shareholder structure within the industry. Last year it was announced that a collection of real estate companies fed up with spiralling increases in fees and the perceived excessive profiting by these real estate portals (despite the fact that RIghtmove was started as an industry owned site) was going to create a new genuinely industry owned website to champion a fairer (lower cost) portal - sounds like a familiar situation to those in the NZ real estate industry battling Trade Me's fee increase?!!
What was very interesting in the announcement (and I personally do not believe it has much hope of success - have a read of an opinion piece I wrote at the time) was that the new site called Agents Mutual was going to require subscribers to commit to its site and only one other portal - saying to the industry, you choose Agents Mutual and Rightmove or Zoopla - but not both! - consider the influence of being a shareholder in Zoopla on this decision now??
The message from local and central government for the majority of this year has been that we face a critical housing shortage. Certainly it is more acute in Auckland but that fact is not surprising given the expected rise in the population to c. 2.5m in the next 30 years.
The Reserve Bank has made it clear that it is going to implement policies to take some steam out of the property market that will require banks to restrict lending for loans of over 80% loan to valuation ratio. Potentially reducing these high LVR loans from the current level of 25% of all new loans to below 10%, with the consequential effect of cutting off supply of funding for first homebuyers especially.
The political parties have rallied to the call of seeking to assist these first homebuyers. Labour’s view is that its all the fault of overseas speculators and will outlaw overseas based buyers. National has announced the raising of the dual thresholds of income and purchase price of homes eligible for the government deposit subsidy scheme through Kiwisaver.
In my view neither really are significant or well directed enough to address the fundamental issue. We have a shortage of housing – this matched to increasing demand fueled by record low interest rates is pushing up prices. Prices are rising at a rate that sucks in speculators – this virtual circle is dangerous and is the heart of a property bubble. To this is potentially being added the dangerous risks associated with alternative lending sources which will be keenly sought out by buyers who cannot meet the 80% loan / 20% equity criteria, likely to be set by banks. Be wary because this property bubble is going to pop.
How can this situation be averted? In someway I don’t think it can. Property cycles happen and keep happening. They build slowly, they gain visibility and media coverage, they explore and they then implode. Doing something today is too late in my view we have too much fuel being poured on the fire. My only hope is that we fizzle rather than pop!
So what could have been done? I think part of the solution could have been addressing all three issued cited above – build more homes, support first time buyers and reduce risk in the property market. To a solution, have a look at the UK government scheme – New Buy.
Put together a few years ago when the property market and the economy was on its knees the plan was to encourage group home builders to add new stock of home to by; encourage home buyers to buy new homes, and thereby stimulate the economy and through government support underwrite the risk component of loans to make buying new homes attractive through a much lower deposit requirement.
New homes have additional benefits they are more energy efficient, they can be built to meet the growing intensification requirements of our largest city, and they add supply at the bottom of the market.
This last point is key because the vast majority of new homes built, particularly of the past 5 years has been tailored designed homes built for owners with a median size of at least 220m2 – 4 bedroom on a 500+ m2 section. We need more homes (apartments, townhouses, multidwelling units) – this is how younger generations want to live and can afford to live.
The government could have taken parts of the UK scheme. Created a loan guarantee for new mortgages on new build properties with a minimum 5% deposit. The government could then have incentive building companies to build homes faster and more affordable by fast tracking consents and discounting compliance costs based on property construction type. They could have partnered with group homebuilders to offer these New Build home loans. They could have even required citizenship or residency requirements to access this component. The key thing would have seen a more holistic integrated programme that would have seen investment funds flow to building companies to move ahead and create supply ahead of demand, create modular construction techniques with scale advantages and move our building industry from being a craft built cottage industry into a scalable industry.
Now the fact is the UK scheme is attracting a large amount of negative press as it is seen as a accelerant of property inflation however there is no doubt based on the reports by group builders that they are seeing big increase in demands for new homes – that means they are building more, that increases supply and that will in time affect underlying demand which can be the most effective tool to take the air out of the property bubble.
For less than it seems to costs to get consents to start work building a house in NZ you seen to be able to have a whole one in the UK!!
Now I confess this whole thing is a bit tongue in cheek, there is no way that this could be considered a livable house or that you would not need appropriate consents and approvals as well as connected utility services. However I think there is a bigger point to be made here than just a bit of a light hearted headline “Is this the answer to the #HousingCrisis? £9,999 flat-pack from Tesco”
Why is it that in a country that produces so much construction lumbar and ships it in raw logs overseas can we not turn our hand to creating this type of solution? There are certainly sleepouts and cabins for sale in NZ. But look for just a minute at the detail in this flat-pack cabin.
It is described as luxurious – it has 5 rooms with an upstairs storage area, it has shingle roof tiles, 8 toughened double glazed windows – the walls are 44mm thick interlocking wall boards.
This is a product which demonstrates what can be achieved when you apply modular design with mass production techniques. The massive population markets of Europe make this a possible solution to be made in the UK, but could we not apply the techniques to our geography and build and export a similar higher spec version complete with services for less than $100k?
This cabin is not the solution to NZ housing crisis or affordability issue but it should be viewed more as a lightening rod to challenge and stimulate thinking about the issue with a new pair of eyes.