In the last decade or so, the way we buy and sell houses has been transformed by the internet.

Property listings website Rightmove (RMV) has enjoyed spectacular returns thanks to its position as a first mover in this space. However, could the company be about to face a genuine competitive threat from estate agent-backed rival OnTheMarket (OTMP:AIM)?

Created in 2000 as a joint venture between property agents, Halifax, Countrywide (CWD), Connells and insurer RSA (RSA), Rightmove was first listed on the London Stock Exchange in March 2006.

In the interim the company has advanced from its issue price of 335p all the way beyond £50 and currently trades at £49.57. Its main rival to date, ZPG (ZPG) owned Zoopla could be set for a strategic refresh after its parent group recently agreed to be taken over by US private equity firm Silver Lake in a £2.2bn deal.

By establishing a market leading position early on Rightmove has created a virtuous circle. Its website has the most listings and is therefore the one which prospective property buyers will go to when looking for their next home.

This reinforces its position as a must-have product for estate agencies and generates significant pricing power when it comes to securing subscriptions from agencies. This has enabled the company to boost average revenue per advertiser (ARPA) from £684 per month in 2014 to £922 per month in 2017.

This underpins a margin upwards of 70% and has been rewarded by the market with a premium valuation. Based on forecasts from Liberum the stock trades on 27.6 times forecast earnings and on an EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) ratio of 21.9.

REACHING ITS LIMITS

However, high margins will typically attract either competition or regulation and there are signs Rightmove may be hitting the limits of its profitability.

Liberum analyst Ian Whittaker, a long-running fan of the stock, recently moved from ‘buy’ to ‘hold’, citing limited scope for further upside. ‘We think Rightmove will not want to aggressively push ARPA increases for fear of attracting regulatory attention.’

He also doesn’t think M&A interest will emerge. ‘We see a bid for Rightmove – as happened with ZPG – as unlikely.’

Rightmove’s dominance has inevitably created some resentment among the estate agent community and OnTheMarket was an agent-led attempt to shake up this market, offering member agents access to potential house buyers at a significantly lower cost than both Rightmove and Zoopla.

Industry group Agents’ Mutual launched OnTheMarket in January 2015 with a rule which initially allowed agents to list on only one other site, essentially Rightmove or Zoopla – but not both.

Dropping the ‘one other property portal’ rule, OnTheMarket joined the stock market in February 2018, raising just £30m against the targeted £50m for a marketing push. After a shaky start the company is now trading roughly in line with its AIM IPO price of 165p.

FOCUS ON BOOSTING PROPERTY INVENTORY

Under chief executive Ian Springett, who founded PrimeLocation.com in 2000 and led its growth until it was sold in 2006, the company recently revealed a shift in its approach.

While Rightmove has nearly total coverage of the market, OnTheMarket has around 48%, so the priority for the remainder of the year is therefore to build up the stock on its site before it launches another marketing push.

The company has made some recent progress, adding agency branches at a good pace; more than 8,500 are now participating, a rise of 3,000 since the company joined AIM.

Traffic to its portal in the current financial year starting at the beginning of February to end May came to 42.2m visits, compared to 21.9m in the same period in 2017.

Springett says the company is looking to get agreements with estate agents to release properties to OnTheMarket for an initial exclusive period.

He notes agents are incentivised to do so both due to their interest in having greater competition in this area and because many of them are offered shares as part of their partnership agreement so have ‘skin in the game’.

A FAIR PRICE

He suggests some estate agents may be approaching a point at which they can no longer afford Rightmove’s charges.

OnTheMarket is offering discounted fees to get agencies on board. Research house Edison recently reduced its forecast ARPA for the financial year to January 2019 from  £176 to £163.

Springett tells Shares the company can develop an ‘attractive revenue and profit model’ by offering core listing services at a ‘sensible, fair price’.

He says: ‘There are two scenarios. If we’re not able to break into Rightmove’s dominance, then that’s bad news for every portal including Zoopla as Rightmove will suck in every spare pound the agents have but we could develop a credible alternative.

‘We need to put estate agents in a position to contemplate less reliance on Rightmove and to do so we need match as far as possible their market coverage and that’s what we’re driving ourselves towards,’ he adds.

Investors can therefore judge OnTheMarket’s progress by its coverage of the market, while Rightmove’s ability to drive further growth will be reflected in the ARPA figure. Rightmove is next set to update the market with its first half results on 27 July. (TS)

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