Wednesday 26th July, 2017
Executive Summary
I believe Purplebricks is an interesting short with ~90% of downside.
The business offers a commodity product, at the highest prices in the market, in an industry with low barriers and dozens of new entrants.
Rapid adoption of its “Fixed Fee” model in the UK is being extrapolated into the Australian and Californian markets, which it only recently entered, while changes in the competitive landscape in the UK and Australia and idiosyncratic elements of the U.S. market are being ignored.
Thesis
Purplebricks (“PURP”) is a hybrid estate agent (online + offline) offering a “fixed-fee” service in the UK. The company has benefitted from aggressive advertising spend, which has created brand recognition. Positive recommendations from customers experiencing the advantages of a far-cheaper, fixed-fee online offering have also helped pushed the company’s valuation to greater than that of all other UK estate agents combined.
The bull case is based on a superior offering and growth runway. Fixed fees of c. £1,500 are cheaper than 2-3% on the average £250k sales price. The current penetration of online vs. traditional high street estate agents in the UK is ~2.5% and is expected to rise to about 20% by 2020.
But PURP is not unique. In 2016, almost all the c.50 online estate agents also offering “fixed-fee” products benefitted from this same tailwind of growing online penetration. While PURP’s share of online is close to 50% at present, this is likely to decline; the sheer number of competitors points to the low industry barriers.
Although PURP reports that it “completes on” ~88% of its instructions, my work scaping data from Zoopla and cross referencing the UK Land Registry website indicates PURP only sells about 35% of the homes it lists. This indicates they don’t have a superior offering to peers, but a commodity.
Furthermore, while many of PURP’s online competitors did not utilise Local Property Expert’s in the past, many including YOPA, Emoov, Hatched, House Network and Tepilo now do. Traditional estate agents including Countrywide are now offering a fixed-fee offering across 50% of its ~900 branches. This deteriorates the novelty of PURP’s hybrid offering.
In Australian, entered in Aug16, large incumbents such as L. J. Hooker have not waited to see if PURP’s model can succeed, and instead have responded quickly by creating a direct competitor, Settl. Several online “DIY” competitors also exist. Having already spent ~£3.5 in advertising in 2017 on its Australian operations, it is likely PURP will have to go over its £10m “maximum” it had previously stated. And given PURP’s recent £50m equity capital raising, it now has the cash to do so.
PURP announced its entry to the Californian market in Jun17 with a launch expected in H217. High commission rates in the U.S. of 5-6% provide a ripe opportunity for a low fixed-price provider. However PURPs model relies on licensing Local Real Estate Experts (“LREE”), who because of the high commission rates paid, will not be financially incentivised to leave the 5.5%+ commission model. LREEs are being drawn further away through the rise of “100% commission” brokerage houses like Real Estate Broker Services Inc., which provide infrastructure to agents for a fixed payment rather than taking 10%-50% of the commissions.
The Equity Analyst 