Owning buy-to-let property can be a time consuming and unpredictable business. What’s more, you are subject to the whims of the property market and, if you have borrowed money, interest rates.
With this being the case, in my opinion, companies that help buy-to-let investors buy and manage their properties are a better investment. These companies are the ‘shovels’ of the property business and they often generate exceptional returns on initial capital invested.
Rightmove (LSE: RMV) is a prime example of how profitable property businesses that don’t own property can be. Because the company has already built its brand and sales platform, operating profit margins are through the roof.
On average for the past five years, the company has booked an operating margin of 72%, that makes it one of the most profitable companies listed in London today. Return on capital employed (ROCE)– a measure of profitability for every £1 invested in the business — was 1,020% in 2017. For comparison, over the past five years Land Securities, the largest publicly traded real estate investment trust in the UK, has produced a ROCE of just 7%.
These numbers are difficult to argue with. Rightmove’s asset-light business, designed to help buyers and sellers of property is much more profitable than owning bricks and motar outright.
And shareholders have benefited tremendously from the company’s outrageous profitability. Over the past 10 years, the stock has produced an annualised total return of 35%, which according to my calculations, is enough to turn £1,000 into £20,000. Landsec’s total return over the same period is just 0.18% annualised.
I expect Rightmove’s market-smashing performance to continue. Even though the stock is trading at a forward P/E of 27, I’m of the opinion that it is worth paying a premium for this high margin, high return business that dominates the market for buying and selling property in the UK. Analysts are projecting double-digit earnings growth for the next two years.
OnTheMarket (LSE: OTMP) is trying to replicate Rightmove’s success, and while the company might still have some way to go (it is not yet profitable), I’m optimistic that the business can grab a large chunk of the UK’s highly fragmented estate agency market.
After going public in February, OnTheMarket has gone from strength to strength. Management recently announced that the group had signed listing agreements with 11,000 UK estate agent and lettings agent offices, double the number of deals signed at the IPO. Moreover, traffic to onthemarket.com has risen threefold since February, reaching a record high of 17.4m visits during September.
With traffic growing exponentially, I’m highly optimistic about the prospects for OnTheMarket. According to current forecasts, profitability is still some way away, but analysts believe revenue will more than double by 2020. Losses are expected to grow as the company reinvests earnings back into the business, which I think is a sensible course of action for this growth stock.
As the company uses the same fee-based business model as Rightmove, I am confident that when it finally switches out of growth mode, OnTheMarket will be a highly profitable enterprise. It might be sensible to take advantage of this opportunity before the rest of the market realises the opportunity here.
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Rupert Hargreaves owns shares in Land Securities. The Motley Fool UK has recommended Rightmove. 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.