How can UK estate agents remain relevant?

COMMENT: It’s no secret that the UK’s property market faces an unprecedented set of challenges, whether it’s long-running structural change, political and economic uncertainty, or the raft of additional legislation that’s come into force, writes Craig Steven-Jennings, partner at KPMG in the UK. Against such a backdrop, estate agents may find themselves standing on quicksand. Let me explain why. The latest ONS data shows that average house price growth across the UK is slowing, up by only 3.5% in the year to September 2018. Meanwhile, average prices decreased in London by 0.3% over the year. But putting price aside, it’s the volume of property transactions that arguably has a bigger impact on estate agencies, as agents most commonly receive a fee from each sale they complete. HMRC’s property transactions data also paints a rather shaky picture, with the number of completed transactions down by 0.5% between August and September, and up by 0.9% between September and October. There is no doubt that tighter mortgage lending criteria, political and economic uncertainty and general concerns around affordability will all be contributing factors, but there is more to it than that. Stamp duty reform and capital gain tax changes for non-UK landlords have also fed into the choppier waters on the transactions front, but estate agents should also carefully consider structural changes taking place as the industry is being reshaped. Traditional estate agents are, in essence, shops for houses. As such, they face many of the same challenges we are witnessing in the retail sector. Increased overheads – including increases to both the minimum wage and business rates – as well as declining footfall are just some of the aspects they have in common. And just like high street retailers, estate agents are currently being shaken by the fact that consumers are increasing turning online. Properties that were previously advertised only in shop windows or in newspapers are now featured on specialist web portals. For the established players, the initial shift in operating models has worked, simply driving further footfall into retail branches, having captured the initial attention of would-be online buyers. However, the relatively recent arrival of online-only and hybrid estate agents seeks to cut out high street operators altogether, while getting the client to do much of the sales work at the same time. These new entrants may only command around 8% of the market today, but their market share has grown by 30% year-on-year, which only points further to the direction of travel. The fall out of all this is a significant and ongoing squeeze on revenue for traditional agencies, as they aggressively compete with one another on price in order to sustain a property book large enough to keep prospective buyers coming through the door, and a cash flow sufficient enough to cover their overheads and deliver an acceptable margin. Meanwhile, adding to the pressure on revenues, new legislation expected to come in effect in 2019 will prevent agents charging an upfront “one-off” fee to new tenants. This will hit agencies focused on assured shorthold tenancies hard, particularly in London. So what should estate agents be doing to keep pace in this fast-changing industry? Fundamentally, it’s time for agents to rethink their strategies and their operating and business models, with a key focus on remaining relevant to customers and indeed consumers. That will entail taking a fresh look at their own property portfolio, which may gradually become surplus to requirement. As has become increasingly true in real estate across the board, levering technology often holds the key to remaining relevant – whether it’s simply using tech to better understand property markets or customers, or more forward-looking uses like using AI and machine learning to accurately and reliably undertake valuations, or carry out credit, referencing or approval checks more quickly. For those who can truly embrace the age of innovation, the future for estate agents looks promising, but there is no doubt that their form and function is set to change rapidly. Inaction will undoubtedly lead to irrelevance, and therein lies the challenge for traditional estate agents. How can UK estate agents remain relevant?