Is it time to get out of Foxtons Group plc and Purplebricks Group plc as panic sets in?

Will new letting fee restrictions cause serious harm for Foxtons Group plc (LON: FOXT) and Purplebricks Group plc (LON: PURP)?

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The malaise that has affected the UK’s housebuilders in the wake of the Brexit vote is spreading to anything connected with the property market, including estate agents.

Legislation blow

Foxtons (LSE: FOXT) is one of today’s biggest fallers, down 10% to 110p by early afternoon, in the light of government plans to outlaw fees charged by letting agents to people seeking a rental property. In fact, Foxtons shares plunged as low as 13% down at one stage before recovering slightly.

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According to the latest English Housing Survey, such fees typically amount to around £225, though the homelessness charity Shelter reckons one in seven tenants has to stump up more than £500. That’s a lot for estate agents to lose, and they’ll have to find other ways of generating cash if they’re to maintain their current profitability levels.

The Foxtons share price was already under pressure after the EU referendum, losing a third of its value since 23 June — and we’re looking at a fall of more than 70% since a peak in February 2014.

Is the share price fall overdone and is it time to pounce? I usually see short-term falls as excessive, but in this case I’m more bearish. At the latest price, Foxton’s shares are on a forward P/E of 17 for this year, dropping a little to 15 on 2017 forecasts.

Though that takes into account the drop in earnings predicted as a result of post-Brexit falls in demand, it does not yet allow for the likely effect of the new letting legislation — and I can see forecasts being cut back further in the near term.

The saving grace is Foxtons’ dividends of around 5p per share that have been built up over the past three years, which would yield 4% on 2016 forecasts. But cover would be getting dangerously low, and it’s surely not one of the safest dividends around.

Across the board

Online rival Purplebricks (LSE: PURP) has also seen a share price fall — albeit not as big, with a drop of 5.5% to 109p. Purplebricks shares are still up since the firm’s stock market flotation in December 2015, but their early rise has been reversed and they’re down 39% since May’s high point.

A difficulty with investing in Purplebricks, similar to many startups, is that it’s not profitable yet and so it’s very hard to put any kind of valuation on the shares. There are no earnings forecast until the year to April 2018, and even then a fairly low EPS figure of 2.7p would give us a forward P/E of slightly over 40 — with only a token 0.1% dividend yield on the cards.

Of course, P/E can be pretty meaningless in a company’s first profitable year, and it wouldn’t take much in the subsequent couple of years to knock it down to a bargain price level. And Purplebricks does seem to have hit on a differentiation factor that’s popular and gives it a competitive advantage — it charges a fixed fee instead of a percentage, and provides a local estate agent to help.

The company has plenty of cash and should hopefully be able to capitalize on its first-mover advantage. But against that, there’s really nothing to stop others moving to fixed fees too, and it’s a very competitive business.

There could be good value here, but it’s a high-risk sector that I prefer to steer clear of.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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