Should You Buy Rightmove plc And Zoopla Property Group plc Instead Of Countrywide plc, LSL Property Services plc and Foxtons Group plc?

How will changes in the estate agency industry affect Rightmove plc (LON:RMV), Zoopla Property Group plc (LON:ZPLA), Countrywide plc (LON:CWD), LSL Property Services plc (LON:LSL) and Foxtons Group plc (LON:FOXT)?

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Low fees from online-only estate agents should pose a threat to the traditional estate agents, as they typically charge a flat rate fee of as little as £500 for sellers to market their properties. This is far less than the typical 1.5% commissions that traditional estate agents charge.

The traditional estate agents hit back by claiming that customers prefer an all-inclusive service, as unlike online-only estate agents, they also host viewing, carry out negotiations and benefit from local knowledge.

Online-only estate agents still rely on the portals to market their properties to a wide audience. So, regardless of the changes in the estate agency industry, the importance of the online property portals is unlikely to change.

Rightmove’s dominance

Dominance by one company is commonplace in the internet industry, with Google being the dominant search engine, Facebook being the dominant social media, eBay being the dominant online auctioneer, and so on. Size matters, because of network effects and economies of scale.

But, although Rightmove (LSE: RMV) is the biggest online property portal by traffic, it still faces stiff competition from Zoopla (LSE: ZPLA). Innovations ranging from calculating the distance to the nearest railway station and archived listings have helped Zoopla to stay in a strong second place position. But, Rightmove’s dominance is set to strengthen with the rise of OnTheMarket.

Traditional estate agents, concerned about the duopoly of online portals and the rise of online estate agents, have launched their own competitor portal, OnTheMarket. Agents listing properties on OnTheMarket are only allowed to list on one other portal; and with Rightmove being the busiest, it is Zoopla that loses out. OnTheMarket also refuses listings from online-only estate agents.

Zoopla, which still managed to grow revenues by 10% in the six months leading to the end of March 2015 saw the number of its members fall by 16%. The worst may yet be to come, as Zoopla could see more traffic move to Rightmove, given that Zoopla no longer has a comprehensive listing of properties for sale.

Countrywide (LSE: CWD), LSL Property (LSE: LSL) and Foxtons (LSE: FOXT) have all not signed up to OnTheMarket, and continue to use Zoopla and Rightmove, among other advertising venues. This should mean that OnTheMarket will fail to build enough of a presence, and instead actually strengthen Rightmove’s dominance, as only Rightmove will be able to attract listings from all agents.

With Rightmove’s dominance set to strengthen, it is a better buy than Zoopla. Rightmove’s forward P/E ratio of 29.7 is also lower than Zoopla’s 34.7.

Incumbent estate agents will continue to grow (at least in the medium term)

The average seller is apprehensive with handling prospective buyers and dealing with negotiations, and so there will always be a market for traditional estate agents. So far, online-only estate agents only make up 5% of the total market, and this is unlikely to change significantly in the medium term.

With property transactions rising strongly and property prices increasing, the incumbent estate agents will likely continue to see their revenues and earnings grow steadily. 

What’s more, shares in Countrywide, LSL Property and Foxtons are undervalued, with their forward P/E ratios being 14.7, 12.2 and 21.0, respectively. Benefiting from strong operating cash flows, they also pay attractive dividends, with forward dividend yields of 4.1%, 3.4% and 4.1%, respectively.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has a position in Countrywide. The Motley Fool UK has recommended Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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