Why was real estate disruptor Purplebricks put up for sale?

The online estate agent Purplebricks set out to revolutionise the housing market when it launched in 2014. However, its share price has plunged 90.6% since its 2015 IPO, and it recently hung out a ‘for sale’ sign as it bids to maximise shareholder returns.

– Purplebricks issued a warning in February that it expects a fiscal 2023 loss of between £15 and £20m.

– Despite challenges, the company’s business model will remain attractive to some vendors.

– The iShares UK Property UCITS ETF is up 5% year-to-date.

Online estate agent Purplebricks [PURP.L] formally put itself up for sale a fortnight or so after it informed the market that it was open to buyers. 

In mid-February, the beleaguered company announced it was expecting to lose £15m to £20m in the fiscal year 2023 and would be seeking an alternative ownership structure so that the company’s potential “may be better realised”.

One of the prospective bidders might be co-founder Michael Bruce, who could seek to regain control of the company which he exited in 2019, Sky News reported on 1 March. Bruce’s latest venture, Boomin, a property portal platform, went into liquidation at the end of 2022.

The Purplebricks share price is down 2.1% year-to-date but popped in reaction to the Bruce news, jumping 28.4% last week.

A sale would maximise shareholder returns

When Purplebricks first launched in 2014, it set out to revolutionise the way houses were bought and sold by removing commission fees and charging a flat fee instead of a percentage of the sale price.

“It was a disruptive business, but it had an overambitious business model,” David Reynolds, an equity analyst focused on disruptive technology at Davy, told the Telegraph last week. “It expanded prematurely, and its international operation was a failure.”

In a trading update released on 17 February, Purplebricks warned that the number of instructions—properties it’s been asked to market—for the November to January quarter “were lower than the board’s previous expectations” due to “more disruption to the sales field than originally envisaged”.

This disruption forced Purplebricks into a strategic review and ultimately to put itself up for sale.

The company said in a statement that the formal sales process will enable the board to engage with potential buyers “with a view to maximising the outcome”. A sale isn’t guaranteed at this stage.

Online selling model still viable

Despite the challenges facing Purplebricks, its model remains attractive to some vendors. While the foundations have started to crumble, the walls might not cave in anytime soon.

“There is definitely a market for the [Purplebricks] sale model—there is a good number of people who want to sell that way,” Anthony Codling, who runs property platform Twindig, told industry publication The Negotiator on 28 February. “I think the traditional agents will be much more reluctant to offer that service.”

Nevertheless, there could be fewer property owners willing to put their houses on the market in the near-term, especially after February’s house prices fell at their fastest annual rate in over a decade.

Housebuilder Persimmon [PSN.L] issued a profit warning last week and slashed its dividend pay-out by 75%.

“The sales rates seen over the last five months mean completions will be down markedly this year and, as a consequence, so will margin and profits,” said group CEO Dean Finch in a statement.

Funds in focus: iShares UK Property UCITS ETF

Given the pressure the Purplebricks share price has been under, it’s unsurprising that fund managers haven’t been adding the stock to their portfolios. Only one rating has been issued for the stock over the past 12 months—a ‘hold’ from Citigroup.

For investors interested in gaining broader exposure to the UK housing industry, the iShares UK Property UCITS ETF [IUKP] holds London-listed real estate companies as well as real estate investment trusts. The fund is up 4.8% year-to-date, though down 7% in the past month.

The iShares STOXX Europe 600 Personal & Household Goods UCITS ETF [EXH7.DE] holds Persimmon and fellow house-builder Barratt Developments [BDEV.L] at respective weightings of 0.50% and 0.55% as of 3 March. The fund is up 10.3% year-to-date and down 0.5% in the past month.

Both Persimmon and Barratt Developments are also held by the iShares UK Dividend UCITS ETF [IUKD.L], with weightings of 3.81% and 2.30%, respectively. The fund is up 7.1% year-to-date, though down 0.4% in the past month.