Would these firms survive a property crash?

The latest data may show the UK housing market at least stabilising following post-Brexit vote turbulence but with Article 50 invocation coming soon, now is a good time to take stock of how housing-related shares would respond if the market crashes.

On the face of it lossmaking hybrid online estate agent Purplebricks (LSE: PURP) would suffer just as much as, if not more than, larger and more established peers. It’s true that a property market downturn wouldn’t be good for it, but the firm does have a few advantages that may make it more resilient than a first glance would suggest.

The biggest advantage it has going for is the low fixed fees it charges sellers. Rather than engaging a traditional estate agent that takes a percentage of the final sale, ranging from 0.75% to 3.5%, Purplebricks’ customers pay a flat fee averaging around £1,000. Even if the bottom falls out on the housing market, it doesn’t mean everyone stops buying and selling homes. And this downturn would make sellers more price-conscious, likely leading more to give a low cost option such as Purplebricks a shot.

The second thing working in Purplebricks’ favour is a capital-light business model. The company has no expensive high street branches. Instead, it has a nationwide network of independent agents it works with and pays each time a client signs up for its services. This keeps costs down throughout the business cycle and led to gross margins of 56.9% last year.

Finally, Purplebricks’ financial situation isn’t as precarious as heavy losses make it appear. The company did post a £10.5m pre-tax loss in fiscal year 2016 but this was due to the £12.9m spent on sales and marketing to build brand awareness. The company is expecting to become profitable in the current fiscal year and could always dial back on marketing spend if the housing market does pull back. And with £30.5m of net cash at the end of April, Purplebricks has a comfortable cushion to fall back on. It wouldn’t be pretty, but its healthy balance sheet and low-cost model make me believe it would survive a housing market crash just fine.

Tough on two fronts

Traditional high street agent Foxtons (LSE: FOXT) is having a bad enough 2016 even without the property market going into a tailspin. The London-focused agency has seen share prices collapse 45% since the beginning of the year as the new stamp duty, weaker emerging market economies negatively affecting overseas buyers and Brexit fallout have led to poor trading in the upmarket postcodes Foxtons calls home.

Management knew the market for expensive homes would contract eventually, which is why Foxtons has built up a lettings business that represents around half of group revenue. Unfortunately, Phillip Hammond delivered a body blow to this division in his Autumn Statement when he announced the government’s intention to do away with estate agents charging tenants administration fees. This is a high margin business that will hit Foxtons’ profitability hard at a time when revenue from home sales is already falling at a rapid clip.

The good news is that with a healthy balance sheet and the ability to end hefty dividends and share buybacks, Foxtons will survive any downturn. But with sales falling and new restrictions on fees I wouldn’t be buying shares at this point.