Foxtons shares have rocketed over the last year, as investor optimism finally returns to the estate agent on the back of a booming rental business.
The FTSE All-Share firm’s shares have risen almost 50 per cent over the last 12 months, having been ‘turbo-charged’ by increased demand and higher rents which helped drive steady profit growth.
And, with shares still well short of their pre-Covid peak, Foxtons could be a must-hold stock in 2024 – if momentum can withstand a looming shift in monetary policy.
In recent times, London’s biggest estate agency has endured some difficult years with the firm not making a profit over a four year span from 2017 to 2021
Why is Foxtons thriving?
Foxtons was founded in 1981 by the then-28-year-old Jon Hunt, who has since gone on to become a billionaire.
It became known in London for the branded yellow and green Mini Cooper cars given to agents, in which they would whiz around the capital attending viewings.
The group, which was first listed on the London Stock Exchange in September 2013, endured four years in the earnings wilderness after posting losses every year throughout 2017 to 2021.
But Foxtons has bounced back with two consecutive years of profit, with group becoming by far the fastest growing British estate agent, according to data from TwentyCI.
The London-focused company has largely benefitted from its letting business. The UK capital is home to the country’s highest rental prices, which have seen enormous increases since 2021.
This is in part because landlords who have seen their mortgage payments spike have passed on the extra cost to their tenants.
Higher rents equal more commission for lettings agents – and the firm also earns interest on tenant deposits which it holds.
Office for National Statistics data shows that average rental prices in London were up by 6.9 per cent in the 12 months ending November 2023.
In addition to a healthy 28 per cent year-on-year jump in its sales business, Foxton’s scored a 36 per cent increase in lettings sector market share last year.
Foxton’s letting business is now its biggest profit driver
Foxtons was well ahead of its closest competitor, Connells, which grew its lettings market share by 9 per cent.
As a result, the group’s lettings business saw revenues exceed £100million for the first time last year, helping to offset a slump in home sales.
Sarah Coles, head of personal finance at Hargreaves Lansdown said: ‘Foxtons makes most of its revenue from lettings, and massive hikes in private rents have boosted profits.
‘The Rics survey shows rents are expected to keep climbing – albeit more slowly – as private landlords continue to exit the market, so there may be more growth in lettings income to come.’
Victoria Scholar, head of investment at Interactive Investor, added: ‘Foxtons has benefitted from the surge in rental costs as rising mortgage rates push many individuals and families away from buying a property towards the lettings market instead, which accounts for around 70 per cent of its group turnover.’
Sky-high rents are a product of Britain’s severe undersupply of affordable homes, and the pressure on renters has been exacerbated lately by landlords passing on the cost of rising mortgage rates.
‘These dynamics have turbo-charged Foxtons’ share price,’ Scholar said.
Foxtons Mini: The cars given to agents have become a well-known sight in the capital
Base rate cuts loom
Foxton’s one-year share price performance is impressive, but the stock remains roughly 40 per cent below its February 2020 peak of 94.2p.
Future cuts to the Bank of England’s base rate could also spell more difficult trading conditions for its fast-growing lettings business.
Analysts at Peel Hunt last month upgraded their Foxtons price target to 50p to reflect improved performance – however, this still marks forecasts of an impending decline.
The broker warned: ‘We are cognisant of the growing proportion of profits coming from interest on tenant deposits, and their potential volatility should interest rates decline. We therefore retain our hold rating.’
In fact, Foxtons made around £5million in interest of this kind last year – its total adjusted operating profit was £14million.
While Peel Hunt is concerned that letting returns are ‘subject to moves in interest rates’, so too are sales.
The Bank of England is currently forecast to cut base rate from its current level of 5.25 per cent to as low as 4.5 per cent by year-end – potentially helping to bring down mortgage rates and revive home sales.
Interactive Investor’s Scholar noted Foxtons shares have enjoyed a boost since October ‘once it became clear that the Bank of England looks set to switch away from restrictive monetary policy towards cutting rates instead in 2024’.
She added: ‘This should help provide a boost to Foxtons’ sales business this year, as buyers and sellers return to the market as mortgage affordability improves.’
Still room to grow: Foxtons shares remain well short of their pre-Covid peak
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