When online estate agents raise capital, buy Rightmove shares

Online agents, which have been active in the market since 2008, are largely unprofitable businesses.

This is typified by the large amounts of capital being raised to maintain such small businesses. Online agents collectively control less than 4% of Rightmove listings in 2015.

Emoov, an online agent which launched 5 years ago and claims to have 16% of online agency property listings is raising yet more investor capital. 

Trashing competitors

In an interview with Property Industry Eye, Emoov CEO Russell Quirk has brazenly attacked his online agency competitors

House Simple, it says, where Carphone warehouse founder Sir Charles Dunstone has put £5m into the business, has poor customer reviews and weak technology.

Sarah Beeny’s Tepilo is described as offering “poor customer service”. Estates Direct, whose chairman is ex-Poundland founder Steve Smith, is said to have “very poor ranking and listing volumes, they have also priced themselves out of the market”.

Hatched is described as “having problems with senior management, no SEO, very poor tech and lack of automation, mainly lettings focused”.

It reflects poorly on the prospects of his own business. Consider, using his own numbers, those competitors control 84% of online agency sales listings. 

Only Purplebricks escaped criticism. But how could he criticise a business which has gone from zero to his equal within 18 months?

Purplebricks is generating a lot of its traffic through a large TV advertising spend, with Tepilo also launching a TV advert today.

Emoov by the numbers

The key takeaway: continued hate of estate agents is providing the likes of Russell Quirk with an alternative revenue stream. Not from customers, but from investors.  

Below is a snapshot of Emoov's financial projections from its Crowdfunding campaign.  

"Not a reliable indicator of future performance...."

"Not a reliable indicator of future performance...."

The numbers state Emoov raised £1.5m of capital last year, aims to raise another £1.8m this year (2015) and a further £5m of investor capital in 2016.

There's a clear red flag in just that one row of Emoov's financials: after five years it still isn't operating a sustainable business model.

So what changes to take Emoov from a (EBITDA) loss of £633k last year, and a projected loss of £2m this year, to a £10.7m profit in 2018?

Emoov made a 22% gross margin on its fees last year. It projects a 20% gross margin this year (leading to the £2m loss).

But suddenly, it seems, Rightmove is going to lower its fees for all that additional stock Emoov will list on the portal, as the gross margin 'jumps' to 50%.

For a mature business which has been running for five years to more than double its gross margin would be an incredible feat; and one I would say is pretty much impossible, especially in the timeframe suggested.

In the vein of remaining super clear, Emoov's own financials state it generated revenue of £1.3m last year. Previous years accounts have not been made available, for understandable confidence reasons. 

If Emoov had 1% of UK property sales listings, at a fee level of £595 the company would generate £7.1m in revenue. 

UK estate agents generated an estimated £6bn in sales fees last year. With that in mind, Emoov is leaving a lot of money on the table, to chase explosive growth in sales volumes that haven't materialised in the five years to date.

A tech play?

It's pretty plain the Emoov (and online agents in general) are not the rocket ship they persuade their investors into believing they are.

Worse, it seems there is no end to the equity dilution investors will face as Emoov continues to raise capital year-after-year to paper over the cracks of a business which the house selling public isn't all that enamoured with.

The justification from Russell Quirk is that Emoov is a tech play:

“Simon Murdoch, our biggest single investor, is interested in technology. He would not be interested in a four or five branch agency.”

He also draws parallels with how high street industries such as travel, car insurance and recruitment went online a few years ago, offering savings to the public as they did so. Quirk says that today 70% of insurance business is placed online, and 60% plus of holidays are booked over the internet. He says it is “inevitable” that home sales will follow.

“Just to build the platform costs £1m. The salaries associated with having a world class business are eye watering. We have had to hire guys who could be working for Spotify or in any other the other tech companies, but they have chosen to work for us because they believe in what we are doing.”

It's interesting that Russell admits they haven't built the tech yet. Especially considering there's been zero evidence of innovative technology to date.

And that is the key: Emoov is not a tech business.

It doesn't have 'sticky' customers who will come back. You sell a home once every 8 to 15 years.

The economics of an Airbnb or an Uber don't play out in real estate, especially a low-fidelity service such as Emoov.

The main evidence about the lack of technology is the lack of Emoov press releases about its technology. Russell Quirk isn't shy about the ole Press Release send button. 

Hear Emoov, buy Rightmove

What is clear for observers is the continuing transfer of capital from unprofitable online agents to the high margin, profitable businesses run by Rightmove and Zoopla.  

For these two portals, the cost of servicing online agents is close to zero. But the fees paid to Rightmove and Zoopla by online agents increases on a per listing basis.

More online agent marketing spend = more Rightmove revenue  

If you have spare cash to invest, and would like a stellar return, I'd recommend buying Rightmove shares every time an online agent raises capital.

It is Rightmove after all that makes all the profit, while Emoov takes on all the costs.