When prices are rising, it’s straightforward to sell properties, which makes the online estate agent’s business model of a single upfront fee, attractive. However, when prices are falling, and buyers aren’t queuing up to place offers, the service offered by traditional estate agent becomes invaluable. In a falling market, estate agents start to earn their fees.

Never tested 

Purplebricks has never been tested in a falling market, so we don’t know how the company will perform in this environment. But with home prices across the UK starting to slide, we’ll soon find out.

The problem the company now faces is trying to stave off losses in its home market while growing overseas. Purplebricks is trying to break into the US and Australian markets and this expansion incurred losses of more than £30m in the first half of last year.

So far, the UK business has helped to fund these losses with the home division reporting a profit of just over £4m in the first half of last year. Although this wasn’t enough to prevent overall H1 losses doubling.

Meanwhile, City analysts are not predicting any profit for the group for at least the next two years, possibly longer, if sales in the UK start to fall. With so much uncertainty surrounding outlook for the business, I’m a seller not a buyer at current levels.

On the other hand, I think Purplebricks’ peer OnTheMarket (LSE: OTMP) has a much brighter future. 

Fatter profit margins 

There are several critical differences between these two businesses. OnTheMarket is an online property portal and doesn’t get involved with buying and selling properties like Purplebricks. I think this is a much better business model, and one that we know can succeed as proven by Rightmove and Zoopla. 

Traffic to the site is surging, with the number of visits exceeding 23.5m in January, a new monthly record, according to the company. The number of estate agent branches using the site has more than doubled year-on-year. In January, OnTheMarket delivered more than seven times as many phone and email leads than it did at the time of its IPO at the beginning of 2018.

What I really like about the online property portal model is that it requires relatively little capital investment to set up. Once the initial systems are in place, economies of scale are quickly realised. Rightmove, for example, reported an operating profit margin of 73% for 2017 and a return on capital employed — a measure of profit for every £1 invested in the business — of 1,000%.

If OnTheMarket can replicate this success, I think there could be significant gains ahead for shareholders.

The post Why I would sell the Purplebricks share price and buy this competitor instead appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Ups and downs

There are certainly good reasons to be negative about property right now. Brexit. The slowing UK economy. Rising interest rates. The uncertain future of the Help to Buy scheme, which has driven demand for new-build properties.

Yet there are reasons to be positive, too. Barratt expects pre-tax profits to hit a record £835m, a rise of 9% on £765m in 2017, driven by its highest level of completions for a decade. It aims to boost new house sales by another 3-5% over coming years, while increasing its minimum margins from 20% to 23%. That’s being helped by new housing designs that are faster to build and reduce costs and waste.

London falling

The weaker London market is a worry although the rest of the country is holding up, with average selling prices rising 5% to £288,000 last year. Investor concerns looked priced in, though, with Barrett trading at just 8.4 times earnings and offering a forecast yield of 7.9%, with cover of 1.5.

The risk you are taking is that interest rates rise faster than expected, or the property market slows, or we get a global financial crisis. In other words, the usual dangers when investing in stocks and shares. Barratt nonetheless has long-term recovery potential.

Moving on

This is a poor day for another property company, OnTheMarket (LSE: OTMP), which is down 5.45% at time of writing following publication of its interim results for the six months to 31 July.

The £79m group, which listed on AIM in February, was set up by estate agents to challenge the Rightmove and Zoopla “duopoly” and fight back against rising portal charges. Today, it posted a modest 1.4% rise in first-half revenues to £7m. But a 200% rise in administrative expenses to £12m left an adjusted operating loss of £5m, against a £2.9m profit last year. 

Listings up

Worryingly, average revenue per property advertiser fell from £194 to £153 over the period, but it wasn’t all gloom and doom. Period-end property listings jumped almost 74% to 7,788, while visits more than doubled to 69m.

Its cash position has also improved following its recent £30m fundraising to stand at £24.3m on 31 July, up from £3.26m six months earlier.

Power of three

Post-period end activity also shows promise, with OnTheMarket signing listing agreements with more than 11,000 estate agency and lettings branches, a 100% increase since admission to AIM. It also expanded its field sales team and launched a new national TV advertising campaign, driving visits and leads.

OnTheMarket has a battle on its hands, as it takes the fight to the big two. There are signs of progress, but admin and marketing expenses may rack up as it builds visibility in a slowing property market, with low transactions. My Foolish colleague Rupert Hargreaves is optimistic, though.

The post The ridiculously cheap Barratt share price and 8% yield are difficult to resist appeared first on The Twelfth Magpie.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With this being the case, in my opinion, companies that help buy-to-let investors buy and manage their properties are a better investment. These companies are the ‘shovels’ of the property business and they often generate exceptional returns on initial capital invested.

Highly profitable

Rightmove (LSE: RMV) is a prime example of how profitable property businesses that don’t own property can be. Because the company has already built its brand and sales platform, operating profit margins are through the roof. 

On average for the past five years, the company has booked an operating margin of 72%, that makes it one of the most profitable companies listed in London today. Return on capital employed (ROCE)– a measure of profitability for every £1 invested in the business — was 1,020% in 2017. For comparison, over the past five years Land Securities, the largest publicly traded real estate investment trust in the UK, has produced a ROCE of just 7%.

These numbers are difficult to argue with. Rightmove’s asset-light business, designed to help buyers and sellers of property is much more profitable than owning bricks and motar outright. 

And shareholders have benefited tremendously from the company’s outrageous profitability. Over the past 10 years, the stock has produced an annualised total return of 35%, which according to my calculations, is enough to turn £1,000 into £20,000. Landsec’s total return over the same period is just 0.18% annualised.

I expect Rightmove’s market-smashing performance to continue.  Even though the stock is trading at a forward P/E of 27, I’m of the opinion that it is worth paying a premium for this high margin, high return business that dominates the market for buying and selling property in the UK. Analysts are projecting double-digit earnings growth for the next two years.

Bright outlook 

OnTheMarket (LSE: OTMP) is trying to replicate Rightmove’s success, and while the company might still have some way to go (it is not yet profitable), I’m optimistic that the business can grab a large chunk of the UK’s highly fragmented estate agency market. 

After going public in February, OnTheMarket has gone from strength to strength. Management recently announced that the group had signed listing agreements with 11,000 UK estate agent and lettings agent offices, double the number of deals signed at the IPO. Moreover, traffic to onthemarket.com has risen threefold since February, reaching a record high of 17.4m visits during September. 

With traffic growing exponentially, I’m highly optimistic about the prospects for OnTheMarket. According to current forecasts, profitability is still some way away, but analysts believe revenue will more than double by 2020. Losses are expected to grow as the company reinvests earnings back into the business, which I think is a sensible course of action for this growth stock. 

As the company uses the same fee-based business model as Rightmove, I am confident that when it finally switches out of growth mode, OnTheMarket will be a highly profitable enterprise. It might be sensible to take advantage of this opportunity before the rest of the market realises the opportunity here. 

The post Forget buy-to-let! These bargain property stocks could be a better buy appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares in Land Securities. The Motley Fool UK has recommended Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.