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Onthemarket.Com (OTM)

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Onthemarket.Com (OTM) Shomik Banerjee, CFA Poulami Bhattacharya Director [email protected] +44(0) 7800 922132 Onthemarket.com (OTM) Investment Case OTM faces headwinds from reluctant vendors and low levels of audience traction, despite a strong start with 6,500 agencies signed up since launch in January 2015. The market however continues to be an attractive investment proposition that offers £19-35m a year in structural growth and where the leading players Rightmove and Zoopla enjoy 50%+ margins. Yet for OTM, comparatively low returns on marketing spend, especially in terms of leads; remain a key concern. Unless it can at least double its inventory of listings from current levels of 240,000 and increase marketing spend to build audience reach comparable to the incumbents, its long term sustainability across the UK will remain doubtful. Another key test is whether the business can continue to raise enough capital from its members to fund its growth. We expect OTM to become an acquisition target. 1 | P a g e Shomik Banerjee, CFA Poulami Bhattacharya Director [email protected] +44(0) 7800 922132 Executive Summary In this report, we analysed OTM as a challenger in the digital classified property advertising marketplace. We started with a model to estimate the total addressable market size. We then looked at key factors that impact the market. This is followed by a study of the market structure and an in- depth analysis of OTM (based on information available). Finally, we concluded with a forecast that forms the basis of the investment case. Total Addressable Market Size We used a three stage top down model to estimate the total addressable market size for digital classified residential property advertising in the UK. First, we used transactions (sales and lettings), degree of estate agency intermediation, and average commission rate to arrive at the total estate agency market size. Next, using public data and primary research, we estimated total marketing spend as a % of estate agency’s revenue from intermediation, and the share of digital marketing. And finally, using estate agency market size, marketing spend as a % of estate agency revenue and digital as a % of total marketing, we estimate the total addressable market size (as illustrated in figure 1 below). Figure 1: Model to estimate total addressable market for digital classified residential property advertising (UK) Finally, we examined factors that are likely to impact the total addressable market size over the forecast period (2016-18). UK residential property sales market size ONS estimated 1.22m properties transactions (4.4% of total housing stock) were completed in the UK in 2014 with aggregate value of £303bn. The number of completed property transactions in 2015 was 1.23m. As ONS hasn’t released the aggregate value data for 2015 yet, we use house price increase 2 | P a g e Shomik Banerjee, CFA Poulami Bhattacharya Director [email protected] +44(0) 7800 922132 data as a proxy instead to calculate the aggregate value. Average house price increase for the year was 6.7%. Therefore, we estimate aggregate value of property transactions in the UK was £324bn for 2015. Figure 2: UK Residential Property Transactions, 2006-2015 Source: ONS Majority of property transactions are intermediated. We use consensus of 90% in our calculations. Estate agencies charge a commission for facilitating a transaction which is applied on the sale price of the property. The commission rate varies depending on a number of factors. Typically, it is between 1- 2%, but in reality the range is wider (0.75-3% + VAT). According to Which?, the national average was 1.8% + VAT in 2015. Using aggregate value of property transactions, degree of intermediation, commission level, we estimate total estate agent market from property sales intermediation in the UK to be £5.2bn in 2015. UK residential property lettings market size According to the 2011 census data (figure 3), out of the 23.4 million households in England and Wales, 15 million (64%) were owner occupied and 8.3 million (36%) were rented, half of which were rented privately (4.2 million). 3 | P a g e Shomik Banerjee, CFA Poulami Bhattacharya Director [email protected] +44(0) 7800 922132 Figure 3: Home ownership and renting in England and Wales, 2011 Source: ONS Most rented properties are small dwellings, flats and small houses majority of which are two or three bedroom properties. Research published by Kent Reliance1 indicates that total rent from private rental sector in 2015 in Great Britain was £56.7bn. In this section, we used Great Britain as a proxy for the UK, and also limited our definition of the lettings market to be that of the privately rented sector. The private rental sector is a dynamic market. Our research indicates that ~60% of the market is intermediated. According to the Association of Residential Lettings Agents, the average tenancy in the UK is 19 months. Letting agencies have a number of different operating models right from completely managing a property to simply acting as a commission agent. Our research indicates that commission income is by far the most common model for letting agencies. Commission rate is calculated on the annual rent of property. The range (7-17%) varies depending on the level of service, competition and location. For the purposes of calculating the total addressable lettings market size, we are taken 10% of the annual rent to represent average letting agency commission rate. Using total rent from private sector residential lettings, degree of intermediation and average commission rate, we estimate total estate agent market from property letting intermediation in the UK to be £2.5bn in 2015. Digital Classified Property Advertising Market Size Estate agency commission market from residential property intermediation in the UK was £7.4bn (property sales - £5.2bn, lettings - £2.1bn) in 2015. We estimate that marketing spend on classified advertisement is 7% of the revenue from intermediation and digital advertising is 55% of marketing. We estimate that the total digital classified residential property advertising market size in the UK is £285m. -------------------------------------------- 1 Kent Reliance is one the largest buy-to-let mortgage provider and part of OneSavings Bank plc 4 | P a g e Shomik Banerjee, CFA Poulami Bhattacharya Director [email protected] +44(0) 7800 922132 Factors that impact the market There are three factors that impact the addressable market. These are categorised into cyclical and structural changes. Coincidentally, all of these factors have a continued positive impact on the market over the forecast period which underpins our analysis that this sector remains an attractive investment proposition. Cyclical recovery of the market Activity in the housing market is on the rise although it still remains below average. We identify the increase in transactions as cyclical recovery which started in 2013 and is expected to continue over the forecast period, which is supported by a) increase in supply of new properties in the market. 144,970 new houses were completed in 2014. We estimate 160,000 houses were completed in 2015. New house building completion levels remain at 15 year low (figure 4) although the situation has been marginally improving over the last two years. There is significant political pressure to build more homes to meet the market demand. However, restrictive planning permissions and unavailability of enough land in areas where demand is the greatest remain roadblocks. Despite the roadblocks, we believe that over the forecast period, 150 – 180,000 new houses will be completed each year. b) continued increase in house prices that has brought more properties on the market. c) changing demographics, mainly increase in retiring age population Figure 4: New house building completed in the UK (2000-2014) Source: ONS Cyclical recovery of the residential property market in the UK helps in the growth in revenue for the estate agents. In turn, a strong estate agent market benefits property portals through an improved pricing environment and additional estate agency formation. Despite the recovery in housing activity, number of property transactions remains comparatively low. Our analysis indicates that across the economic cycle, in a given year an average of 5% of the total housing stock changes hands. In the past two years, total transactions were only 4.4% of the total housing stock. 5 | P a g e Shomik Banerjee, CFA Poulami Bhattacharya Director [email protected] +44(0) 7800 922132 Structural growth opportunity We identify two separate structural forces impacting the market. First, a growing private rented sector is changing the dynamics of the estate agency market and increasing the addressable market size for both the estate agents and property portals. The second is the continued migration to digital led primarily by audience. We explore both in detail (a) Continued growth in the private rental sector: Increasing house prices, rising affordability gaps and increased migration to London and the South East has led to a robust and sustained growth in the private rental sector. There were 5.6 million households renting privately at the end of 2015, according to research by Kent Reliance1. 400,000 households are expected to be added in 2016. The property rental market provide estate agents with low but more frequent commission income which over the lifetime of the property on average is more attractive2 than sales transactions. We estimate an addition3 of £9-14m a year to the market size over the forecast period. (b) Continued digital migration: Near universal smartphone usage along with ‘always on’ mobile Internet has led to sustained growth in online property searches so much so that it is believed 90% of property searches starts online these days. Our survey corroborates further by showing that property portals account for more than 70% of leads to an average estate agency.
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