Estate agency business model – High Street or Virtual?

depressed looking estate agentThe UK’s domestic property sales have traditionally relied on the services of an estate agency.

Any consumer-reliant business is susceptible to fluctuations in consumer confidence, consumer buying power and on the health and strength of the economy in which it is operating. This is particularly true for estate agencies.

Some are local branches of national chains, while others are locally owned or region-specific, but most have relied on a High-Street presence, knowledgeable sales agents and marketing for their business model. They make most of their money from the percentage fee, on average 1.5 to 2.5% of the property price, charged on completion of a sale. They also generate fees from services such as valuations, conveyancing, letting and management as well as commissions from introducing insurance and mortgages.

While most of these revenue streams have been under pressure from specialist providers, estate agencies have hung on to their most profitable activity, the sale of property.

This model is coming under increasing pressure now that most search for property is done online via consolidator websites, chiefly Rightmove and Zoopla. Given the change in search behaviour, estate agents are having to list property on these sites.

Will the rise of the virtual, online-only estate agency affect the traditional business model?

Since March, reports from mortgage lenders, surveyors and the Office for National Statistics (ONS) have been indicating that both property price growth and sales have been at best slowing and at worst stagnating.

The causes have been identified as rising food and fuel price inflation due to the fall in the value of £Sterling following the June 2016 EU referendum and now being passed onto consumers, stagnation in wage growth and most recently the June 2017 General Election. The recent tax hikes on property transfers have also played a major factor, in particular at the top end where the stamp duty land tax on the purchase of residential property is as high as 12%.

Despite this, many of the traditional agents to whom we have spoken argue that sales remain buoyant due to a shortage of available properties and to continuing demand from buyers.

But, alongside the change in behaviour that has seen buyers first searching on Rightmove and Zoopla before contacting an agent, there is another factor that could affect the viability of the traditional model and this is the rise of the online-only agency.

These agencies, such as Purplebricks, Yopa and Emoov, do not have the overheads that go with a High-Street presence and therefore can offer much lower fees and charges. However, fees vary substantially with some of these agencies charging vendors a fixed fee payable in advance.

They also offer varying levels of service, with additional charges for add-on extras such as accompanied viewing, providing Energy Performance Certificates, for sale boards and even for floor plans and photographs.

These services all form part of the normal service offered to vendors by the traditional agents, who argue that there is in any case no substitute for their sales teams’ local knowledge, active marketing using their databases of potential buyers and high quality marketing materials and photography. But will vendors want to pay an estate agent £15k to sell their home for £500k?

Given that High-Street estate agents are essentially marketing property on behalf of vendors via consolidator websites, their high cost and thereby their existence suggests the model is no longer viable. Most need to change their business model before they go bust.

 

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