Could this penny stock benefit from the current housing market?

Jabran Khan examines whether this penny stock could experience an upturn in fortunes due to its close affiliation to the housing market in the UK.

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British Pennies on a Pound Note

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I think penny stock Foxtons (LSE:FOXT) could benefit from recent events in the UK housing market. Should I add the shares to my holdings?

London’s leading estate agency

Originally founded in 1981 in Notting Hill, London, Foxtons has grown to be London’s leading estate agency. It has over 1,000 employees working at 50 interconnected branches strategically located throughout the city. The Foxtons website receives approximately 10m visits a year.

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A penny stock is one that trades for less than £1. Foxtons shares are currently trading for 36p. At this time last year, the shares were trading for 59p, which is a 38% drop over a 12-month period.

The demand for housing in the UK is currently outstripping supply. In recent months, macroeconomic headwinds such as soaring inflation, rising interest rates and costs have impacted the average citizen’s pockets. It has also impacted the housing market with mortgage rates increasing and house prices shooting up too.

For and against buying the shares

FOR: Foxtons’ rise to become London’s premier estate agent is quite the achievement, in my opinion. The business has grown exponentially, and in a saturated market too. I believe this competitive advantage is a unique selling point. Furthermore, the shares would offer me a passive income stream through dividends. The shares yield just under 2%. Of course, dividends are never guaranteed, but a penny stock with a yield close to 2% is enticing.

AGAINST: The Bank of England (BoE) has taken unprecedented steps in recent months to curb rising inflation by raising interest rates. This means that mortgage rates are increasing too. This is not good news for buyers in the market because with prices high, and mortgages offering higher rates, it may not be financially viable to buy just now. This would impact a business like Foxtons too.

FOR: What about Foxtons performance? Well, looking back, 2021 full-year results showed improvement from the pandemic-affected 2020 results. The penny stock reported that revenue increased for the year ending December 31 2021, compared to the same period last year. I do understand that past performance is not a guarantee of the future, however. Coming up to date, a Q1 update released last month made for good reading with overall revenue increasing 8% compared to Q1 last year. Sales revenue was down marginally but lettings revenue increased by 21%. Positive performance could underpin further dividend payments as well as send the shares upwards.

AGAINST: Another concern I do have with Foxtons is that despite its market dominance in London, it is still a relatively small property business in a very large lucrative nationwide and worldwide market. There is every chance that competition could muscle in on its London market share and this could affect any shares.

A penny stock I’d buy

Overall I like the look of Foxtons shares. The recent stock market correction has placed pressure on the shares and made them even cheaper. I’d add a small number of the shares to my holdings and batten down the hatches given the macroeconomic issues set to batter the majority of the housing market. In the long run, however, I think the shares could provide me with decent levels of returns.

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Jabran Khan 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.

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 considered, so you should consider taking independent financial advice.

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