Countrywide, the UK’s largest real-estate services group with over 10,000 employees in 900 locations, saw its shares plunge over 60% on Thursday after the company asked investors to pony up £140 million of emergency funds to save it from collapsing under the weight of its own debt. At one point the shares were down over 70%. On Friday they fell a further 14%, writes Don Quijones of WOLF STREET
In the last three months, the stock has crumbled 86%, from £1.10 a share in early May to £0.15 on Friday. The firm’s market cap has plunged to a paltry £37 million — little more than the average house price on Britain’s most expensive street, Kensington Palace Gardens in London.
The company, which owns 50 agency brands, including high street agency brands such as Hamptons International, Bairstow Eves and Bridgfords, attempted to raise £250 million in May by issuing bonds. If offered price the five-year notes at a yield of 8%, but potential investors said they would have to have at least 9%, according to the FT. The bond was supposed to pay off a revolving line of credit, and there would have been some left over to decorate the balance sheet with a little cash. But the effort was scuttled.
Now, it hopes to stave off collapse by raising £140 million — more than three times its current market cap — through a heavily discounted share placing and open offer later this month.
If successful, the cash will help reduce Countrywide’s net debt, which currently stands at £212 million, by around 60%. If it doesn’t raise the funds, Countrywide could become the first major victim of the UK’s stagnating housing market. The group’s auditor, PwC, warned that there was a “material uncertainty” about its future if the share issue failed.
“The effect on the group of any failure to implement the capital refinancing plan may also be compounded by factors outside of the group’s control, such as a further downturn in the UK housing market or conditions adversely impacting the UK mortgage market,” PwC said.
In a statement to the stock market, Countrywide said its problems had been exacerbated by a flagging housing market, particularly in London. “The prime central London housing market continues to experience low levels of activity owing to political and economic uncertainty, particularly in relation to stamp duty and Brexit, which is felt more acutely in the capital,” it said.
The volume of transactions in London is down 20% over the last four years, according to Residential Analysts, who calculated the figure using Land Registry and HM Revenue & Customs data. According to the real estate agency Right Move, London prices slipped a further 0.5% in the month of July and are now 1.7% lower than this time last year.
In the worst-hit sector, one or two-bedroom properties, where first-time buyers are most active, prices fell 3.5% from a year ago. This is all happening in a market where prices were growing at a rate of around 20% annually a few years ago. Until recently, the mathematics of investing in London were pretty simple: you bought, you sold, and invariably you made a tidy profit. But not any longer.
One of the reasons is the acute uncertainty surrounding Brexit, which has disproportionately affected property in the capital. This has also coincided with falling demand for prime property globally, as a result of transparency measures, a clampdown on foreign buyers, and a slowdown in expansionary monetary policy. Market appetite in London has been further dampened by stamp duty hikes, designed precisely to tamp down on the market that had gone haywire: buyers of £1 million-plus homes are paying 2% more in stamp duty, and roughly 5% more on second homes.
London is “undergoing a sustained period of very low activity”, complained real estate agency Foxtons last week, whose shares have fallen by roughly a half in the last 12 months. A bellwether firm long-associated with gentrification in the capital, Foxtons reported a £2.5 million loss for the first half of the year, compared to a £3.8 million profit during the same period last year. But that pales in comparison with the £242 million pre-tax loss Countrywide announced for the first half of this year. Group revenues also plunged 9% to £303 million.
Countrywide is reeling not just from the ill-effects of the UK’s sluggish housing market, but also from rising competition from no-frills online agencies. Online agents are driving down fees, making it increasingly difficult for high street operators to pay their overheads. The UK’s biggest online agency, Purplebricks, has a market cap over 20 times the size of Countrywide’s, and is aggressively expanding its operations into markets in the US, Canada, and Australia.
Then there’s the additional fear for agencies like Countrywide: Rising interest rates, which will further dampen already waning demand. This week the Bank of England’s Monetary Policy Committee voted unanimously to increase rates from 0.5% to 0.75%, likely the kick-off of a gradual rate-hike cycle. For the UK’s struggling real estate agencies, the timing of the rate-hike cycle could not have been worse.
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