| Exhibit 1: New medium-term targets |
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| Source: Foxtons Group |
Markets and expansion opportunities
The two charts below give a clear picture of the underlying markets in which Foxtons
operates. The left-hand chart shows the progression of the total commission pool split
by lettings, sales and financial services. In total, lettings commission accounts
for c 70% of the total and has grown at a CAGR of 6.1% over the last 20 years. Sales
accounts for another 22% and financial services accounts for the balance. It is clear
from the bars in the chart that lettings has seen structural growth, while sales and
financial services commission have been more cyclical. In total, the market has grown
by 4.6% per year on average.
The right-hand chart highlights the opportunity available to Foxtons. In lettings
and sales, Foxtons is the market leader with 6% and 5% share respectively, and these
modest percentages highlight the potential scale of the opportunity. We believe that
Foxtons is likely to focus M&A activity in the former rather than the latter, because
lettings businesses often have succession issues that offer opportunity, and also
because Foxtons has sufficient capacity within the organisation to handle increased
sales volumes and therefore does not need to acquire other businesses to drive market
share.
| Exhibit 2: London residential commission |
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| Source: Foxtons Group, TwentyCi |
Lettings: Organic and acquired growth potential
Today, Foxtons enjoys a c 6% market share of the growing London lettings market and
a 1% share of the ‘commuter markets’, a collection of markets surrounding London that
have attractive characteristics and locations that are commutable from London, which
makes managing the locations somewhat easier. Foxtons believes that the total addressable
market for London and the commuter markets could total c £3.5bn, after allowing for
growth tailwinds. If Foxtons was to increase penetration to 6% across the entire opportunity,
it would imply lettings revenue of £210m compared to its stated medium-term group
revenue target of £240m.
It is worth highlighting here that the £2.0bn of ‘London Today’ revenue represents
only commission generated by landlords that use a professional agent. Foxtons estimates that 48% of landlords use a professional lettings agent like Foxtons, but 52% of
landlords are direct (DIY) landlords managing their own properties and portfolios.
It is expected that regulation of the lettings industry will steadily increase and
that this will drive a shift from DIY landlords to professional agencies, thus adding
to the opportunity.
| Exhibit 3: The lettings opportunity |
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| Source: Foxtons Group |
Since 2020, Foxtons has successfully executed 11 M&A deals in the lettings space.
In total, it has spent £64.2m and has acquired more than 13,000 tenancies. By its
own calculations, it has made an average 26% return on invested capital post synergies
and has generated EBITDA margins of 47–60%. This implies a post-synergy EBITDA multiple
range of 2.3–5.4x, averaging 2.9x. Given the cash flow of the business and the target
free cash flow, it seems likely that Foxtons will continue with this highly successful
M&A strategy. Furthermore, although we expect a steady flow of M&A in the lettings
space, we do not believe that Foxtons will be aggressive and materially gear up the
balance sheet, potentially putting the company at risk.
Sales: Driving market share and margin growth
The London sales market has a number of structural and cyclical drivers that point
towards growth in future years, including a growing population, London’s ‘safe-haven’
asset status, pent-up demand from cyclically low levels of activity in recent years,
improving affordability and increasing mortgage availability.
That said, Foxtons is ‘turbo-charging’ these trends, which is resulting in the company
being in control of the largest stock levels in the market and an improving market
share, from c 3.4% in 2022 to 5.0% in 2024. Exhibit 4 below describes many of Foxtons’
characteristics that are leading to this successful outcome. Firstly, Foxtons is identifying
an increasing number of property instructions by leveraging its proprietary customer
database and introducing its AI-driven prospecting tools. This implies a step change
in its marketing from calling customers from a ‘dumb’ list of addresses to using AI
and the database to identify those households that are most likely to be thinking
of moving by taking into account considerations such as age, marital status, the amount
of time living in a property and type of property.
This smarter and more effective prospecting function is being augmented by a higher
conversion rate, which is itself being driven by an increasing fee earner headcount,
investment in intensive training and a rebuilt, competitive sales culture. The final
piece of the puzzle is the higher than average fee that Foxtons is able to charge
and an increasing average sales price. All of these point towards increased revenue
and profit, and an improving margin.
| Exhibit 4: Driving sales market share and margin growth |
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| Source: Foxtons Group, TwentyCi |
Financial Services: A largely untapped opportunity
Foxtons believes that its Financial Services division, trading as Alexander Hall,
is a largely untapped source of revenue and one that has not been modernised in more
than 20 years. In this period, the number of bank branches has dwindled and, between
2013 and 2022, the volume of mortgages that were broker intermediated has risen from
58% to 87%. Furthermore, it is a resilient sector where two-thirds of lending is non-cyclical
and is therefore a recurring source of potential fee income. Currently, interest rates
are edging down towards the long-term average and mortgage availability is again improving,
particularly after the September 2022 mini-budget hiatus.
Foxtons has actively introduced new initiatives to the business, which has led to
steadily increasing volumes of lending products and an improving ‘leads-to-deals’
ratio. This is being achieved by adding to the broker headcount and introducing a
new compensation package, as well as a new data platform and real-time key performance
indicator tracking to improve process upgrades. In addition, operational processes
are being augmented to increase cross-selling of financial products, reducing the
time from enquiry to appointment and upgrading the re-booking process to reduce the
number of wasteful ‘no-show’ appointments.
Finally, Foxtons is broadening out the available market, as illustrated in Exhibit
5. The business has usually been focused on the c 120,000 buyers in the market in
any year. However, there are large pools of sellers and landlords that are potential
customers, as well as an even great number of tenants who may need financial products
as and when circumstances change. To this end, Foxtons is introducing a self-employed
broker network that allows low-risk exposure to this largely untapped market. It is
also pursuing a strategic partnership that is expected to be announced in the next
12 months, which should unlock a much greater financial services opportunity.
