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Crumbling Bricks of Purple over BUYER BEWARE note

As the estate agency gets into a public spat over critical research, Sky’s Ian King asks if Purplebricks should be seeing red.

Ever since Purplebricks floated on the Alternative investment Market, in December 2015, it has divided opinion in the City and in the estate agency sector.

That division has now spilled into an open war between the “hybrid” estate agency and the stockbroker Jefferies.

At the centre of the dispute is an assertion from the broker that the company is not selling as many houses as it claims to be. That claim sent shares of Purplebricks down by almost 8% on Thursday and by a further 6% on Friday – provoking an angry response from the company.

Anthony Codling and Sam Cullen, the two analysts at Jefferies who cover the stock, told clients to sell the shares in a note entitled Buyer Beware.

In it, the pair criticised the company, which charges an upfront fixed fee rather than a commission based on a percentage of the sale proceeds, for not disclosing the number of homes it has sold.

The point is a crucial one because the fee is charged regardless of whether the fee-paying client’s home is actually sold or not.

So the Jefferies team, who describe the process of trying to sell a home via Purplebricks as “a £1,000 coin toss” (a reference to the average fee charged), conducted their own research – tracking properties listed on the Purplebricks website in November 2016 against Land Registry data.

They concluded: “Our research sample found that Purplebricks had sold 51.6% of the homes listed in November 2016 within 10 months, a similar success rate to the overall market, but below the company’s claim of 88%.

“Our concern is that the group has expanded quickly across three continents before the model has been proven and therefore that the shares are priced for perfection. Our research is not able to replicate the views on selling success expressed by the company.”

The most explosive claim in the note, though, is probably this: “A review of PB’s accounting policies raises concerns to us that either its contractual obligations to its customers end with their home being listed on the major property portals or that revenue may have been overstated and deferred income provisions understated in its audited accounts. Should the model stumble, the share price may do likewise.”

Purplebricks hit back: “Purplebricks contests the findings of the Jefferies research report. Jefferies estimated Purplebricks’ completion rate is based on a single month’s data and does not include properties that have completed but have yet to be uploaded to the Land Registry, which can take several months.

“Equally the research does not take into account properties which have exchanged, have reached sold subject to contract (SSTC), or are on marketing breaks.

“Purplebricks reiterates its most recently published sales conversion rate from instruction to sale agreed of 78%, which it believes more accurately reflects its sales performance, although this figure itself does not include those properties in the sales pipeline at the end of the period which will in due course sell.

“Purplebricks firmly refutes the criticism in the research note of its revenue recognition policy and stands behind both the fully audited results and the accounting policy itself.”

So who’s right? It’s impossible to say. But the issue of revenue recognition is an important one because Purplebricks, prior to publication of the Jefferies note, had a stock market valuation of £1.36bn despite never making a profit.

That compares with just £211m for Countrywide, the UK’s largest listed chain of estate agents, £184m for Foxtons and only just shy of the £1.4bn for Savills, the property consultancy whose activities include an upmarket estate agency business.

Purplebricks will argue that none of those established players publish a figure for the number of homes that they sell, as a proportion of the properties they market, either. But those businesses do not charge customers an up-front fee and so it is not as relevant for them.

The row is doubly damaging for Purplebricks because it is the latest in a string of rows over the way it does business.

In August 2016, the company was ordered by the Advertising Standards Authority to stop telling customers they could save an average of £4,158 by using its services. It was the sixth time in 18 months that it had been censured by the ASA.

However, in August last year, the BBC’s Watchdog programme reported that Purplebricks was still making the claim in promotional emails. It also claimed that the company’s “Local Property Agents” (LPEs) – Purplebricks uses self-employed estate agents rather than full-time employees on the ground – were exaggerating the number of instructions they were receiving and sales figures for the areas in which they operate.

A star-studded cast of business people sits behind Purplebricks.

Founded by brothers Michael and Kenny Bruce, who previously ran a traditional estate agency business called Burchell Edwards, its backers include Paul Pindar, chief executive of outsourcing firm Capita during its glory years; Will Whitehorn, a long-time lieutenant to Sir Richard Branson and the former president of Virgin Galactic; Martin Bolland, co-founder of private equity firm Alchemy Partners; Errol Damelin, the co-founder of loans provider Wonga and Neil Woodford, the celebrated fund manager.

And, notwithstanding the recent turbulence, Purplebricks has proved a stellar investment.

Ian King

Business Presenter

SKY

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