The property market can be a roller coaster of ups and downs, yet there’s a sector that often gets overlooked despite its significant influence and unique resilience: the real estate services sector. Investors Chronicle looked into the UK’s £23.4 billion-worth property services industry to see why it’s a sector worth watching, especially if you’re thinking of dipping your toes into property shares.
The Powerhouse Behind the Property Market
At first glance, it might seem that the big names in the UK real estate market are the ones who own the most buildings or construct the finest homes. However, this isn’t always the case. Take Rightmove (RMV) as an example, a giant in the FTSE 100 index, with a value just shy of £4 billion. Unlike what many might assume, Rightmove isn’t a Real Estate Investment Trust (REIT) or a housebuilder. It doesn’t own or build properties but operates as an online property portal, facilitating real estate transactions.
The UK-listed property services sector, with a market capitalization of around £23.4 billion, includes a variety of players who compete fiercely. Rightmove stood as the second-largest UK-listed property company until it faced a valuation drop following OnTheMarket’s (OTM) takeover by CoStar, signaling a competitive battle to lead the UK’s online property portal space.
A Spectrum of Services
This sub-sector is rich in diversity, with companies like Savills (SVS) and LSL Property Services (LSL) providing a range of services from agency franchises to services for occupiers like IWG (IWG) and InterContinental Hotels Group (IHG). Despite the different business models, all these companies thrive on the vibrancy of the property market without the need to own or construct properties themselves.
Mixed Fortunes Amid a Market Downturn
When the property market falters, not all companies are affected equally. Some, like Rightmove, have excelled operationally by turning the market slump to their advantage. Rightmove relies on estate agents who list properties on its site. With the recent property downturn, these agents are more eager to promote their listings, boosting Rightmove’s revenue significantly and giving it an edge over other companies, with an impressive operating margin surpassing 70%.
However, Rightmove’s success and high charges leave room for competitors like OnTheMarket to attract estate agents by offering lower prices while still enhancing their operating margins. This intense competition is welcomed by estate agents who have felt the pinch from high advertising costs.
Franchises Flourishing
The market also includes franchises like Belvoir (BLV) and The Property Franchise Group (TPFG), which have harnessed the power of independent estate agencies across the UK. These franchises often outperform non-franchised agencies thanks to the entrepreneurial spirit of the franchisees who work harder to sustain their income in tough times.
Franchises boast higher operating margins since they take a revenue share without the burden of operational costs borne by their non-franchised counterparts.
Diversification as a Defensive Strategy
Diversification is another tactic used by companies to navigate through downturns. Belvoir diversifies into financial services, while Savills extends its offerings to a wide array of services, including commercial real estate and global operations. While this shields them from UK market downturns, it also exposes them to global market fluctuations, a double-edged sword that has caused some to question whether being too diversified might be a risk in itself.
The ‘Hotelification’ Trend
A unique subset of the property services sector is businesses that engage in ‘hotelification’, leasing and subleasing spaces akin to hotel operations. Companies like IWG and hotel chains such as IHG operate on this model. Despite the blow dealt by COVID-19, with travel and office use plummeting, these services have seen a resurgence as travel bounces back, although they continue to grapple with lease debts.
Investing in Property Services: A Varied Landscape
For investors, this varied performance landscape highlights that opportunities in real estate services require a keen eye. Understanding each company’s business model, market position, and response to economic pressures is crucial to making an informed investment decision. Whether looking at franchises, diversified agencies, or ‘space as a service’ companies, the key is to identify those who can navigate the complexities of the property market and emerge stronger.