Blamed: political and economic uncertainty, Brexit, and the very measures designed to tamp down on London’s housing bubble.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
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%.
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. By Don Quijones.
A high-risk blinking contest no one wants to lose. Read… “Cliff Edge” Brexit Threatens $34 Trillion of Derivative Contracts: UK Regulator
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I will not shed a single tear over these parasites doing down.
I shed some tears because justice is finally here for everyone involved. The agencies, the greedy speculators, etc.
The Mirage of Inflation
Central banks manipulation of interest rates create artificial boom and mirage of wealth.
That manipulation can not last forever and when finally stops, and stop it must if we are to avoid a runaway inflation, then the day of reckoning will arrive.
Boom and Bust is explained by Ludwig von Mises in The Theory of Money and Credit Originally published: 1912
– Also look at the currency exchange rates of the EUR and the USD against the GBP.
– Both the EUR/GBP (since mid 2015) and the USD/GBP (since 2014) have gone up by some 30%.
– The UK is a net food importer from the Eurozone. Did all british wages go up by 30% since then as well to compensate for the falling GBP ?
– Question for Don Quijones: How do rising UK interest rates have an impact on rates for mortgages ? How many british people with a mortgage have an “interest only” loan ? And how many times do these mortgages reset to a higher/lower rate level ? Every 2, 5, or 10 year ?
google much?
Hi J M Keynes, rates will go up by 0.25% on all tracker and variable mortgages. 18% of people in UK have IO loans. Compare that to Australia at 40%. As a mortgage payer myself these rises have been due. I’m aware of it paid down a bit of debt to compensate the increase and fixed my mortgage for next 5 years. Final point don’t buy as much imported goods.
– Australia is in deep do-do.
– The was a study done in which they took a sample of 1000 australian mortgages and looked at them in detail. They found that some 40% of mortgages had to be qualified as “Sub Prime”.
Yet many places in the World still have the stupid 0% rates or even negative rates.
Negative rates should be illegal by international law.
What’s this of owing money to the people who should be the one owning you?
The problem with Countrywide is that it’s having it’s Toys R Us moment saddled with massive debts caused by being bought out. As for the London market massively overpriced due for a correction. Brexit is a side issue.
London has also been been bid up over the years by foreign wealthy buy-to-let brigade looking for currency diversification, income, a future bolt-hole if needed and property/geography diversification in a strong demand location. It reached a limit. Brexit has some influence but irrespective, change was/is coming.
Countrywide also saddled with high street presence fixed costs (rents, business premise taxes etc) vs online operators.
Yes, it seems unfair to blame Brexit when the company was loaded with liabilities in 2007 by private equity group Apollo Management via a 1 billion-pound buyout.
Correct me if I am wrong but didn’t Apollo Management and their PE partners pay over a billion pound for Countrywide back in 2007 or 2008?
Technically speaking it was not a bad deal, as Countrywide made a whole lot of money in fees alone as the British RE market overheated during the following decade, but the minute that market slowed down and air started hissing out of ultra-prime markets Countrywide immediately hit a profit brick wall. Or to be more precise it hit a series of brick walls… just how many times have they downgraded profit forecasts this year already? I am still reeling in after reading how much container capacity shipping companies have added in a single year (I’ll write something about it) so you can understand my shocked conditions.
Regarding RE prices in the UK… they are bound to come down, I agree with that. It remains to be seen if it’ll be a Japan-style deflation, with prices steadily dropping for years if not decades, or if it will be the usual convoluted mess of bursts, stimulus, more bursts and bailouts which tends to slaughter last minute mom and pops speculators, always a rather large and vocal minority.
I also agree that Brexit is the most abused and laziest excuse to come around since “a dog ate my homework”. It’s beyond doubt the May Cabinet is either too incompetent or utterly unwilling to negotiate and has been wasting everybody’s time: Boris Johnson has a point in likening the negotiations so far to a general sending his vanguards on the battlefield with raised hands and waving white flags.
They hit a series of low-grade, poorly-insulated, fibre-board partitions…..but it still hurt, :)
If there is finally some competition in the real estate market and reduction in the ridiculous fees they charge, then it couldn’t be soon enough. We recently moved and paid $30,000 in fees for an easy sell to the agent, sale price 750k. Couldn’t come soon enough as far as I’m concerned. No one else except lawyers charge as much as real estate agents!
You don’t have to use an Estate Agent to sell your house. If you don’t like their fees then don’t use one, sell it yourself.
Greed
I hope the thing into flames.
I hope the thing bursts into flames.
Gotta be something in the name, “Countrywide” LOL!!
(I still shudder at what that name did here in the US in the FC of 2008!)
Yeah me too since I had a Countrywide mortgage Anthony Mozillo is a not a nice person Never spent a day in prison for destroying so many peoples lives
Interesting article. There is building evidence of a real estate decline in the glamour cities, but it seems to be a controlled one so far. It’s good when imprudent players are forced out of business on a regular basis. It’s keeps a lid on speculation.
It’s NOT just in the glamour cities It’s in plenty of non glamorous places as well like Rocky Mount NC and New London Ct
Why does a real estate agency need to take on a lot of debt in the first place? They have agents who help people buy/sell property and take commissions, right? It makes sense that the agents would hurt in a slowdown, but it makes no sense why the parent agency would have ever borrowed 250M.
Agree. Sounds like they need to lay some people off and shutter locations. Their overhead apart from office space and agents cannot be that high.
And in New York anyway they have no overhead for brokers as they work as subcontractors and pay their own overhead That’s what I’ve been told anyway
Read the comments above: Countrywide was the subject of a LBO by Apollo Management and other PE firms in 2007.
In absolute post-2008 terms their debt load is not catastrophically bad but with their business under attack from aggressive competitors and fees in the ultra-prime markets slightly contracting due to air hissing out of the bubble they are really feeling the pinch.
Yes the estate agents business model has also changed in the last ten years, in the UK as an example there is a CO called Purple Bricks who does a lot of things an estate agent does for free or a lot cheaper.
MC01,
Sounds like a well-known prescription. Apollo was able to unload it via an IPO. Those shareholders have gotten slaughtered. If you look at a long-term chart, this thing was over 600p in 2014, and by mid-2015, dropped to around 560p. And every year after that, it got crushed and crushed and crushed, down to 16p now. So in terms of pounds and market-cap, this year’s decline is just a leftover mop-up operation compared to the value destroyed in prior years.
Who owns those Countrywide shares? I can’t wait to see a company worth 37M pounds try to raise 149M pounds (what do you offer as collateral?).
Hard to tell what the proximate cause of Countrywide’s impending doom really is; candidates in priority sequence:
1) Debt repayment from LBO
2) Competition from on-line “estate agents” (I just love that name…sure beats real estate agent).
.
.
.
1247) London estate market cools
Doing some further research on the information Wolf provided above (thanks: I did not expect things to be that bad…) I’ve found the main Countrywide shareholders, accounting for 78% of total shares, are asset management firms, overwhelmingly US-based.
Which makes me grateful to have sold off my last managed asset fund shares earlier this year, very grateful…
Hilariously, the numbers Wolf cites show RE prices having barely started to drop at all – simply losing the prospect of eternal 20% YoY appreciation has sufficed to push these kinds of speculative-mania-as-a-business-model concerns to the brink of insolvency.
And thanks to the commenters who pointed out the “another smashing success for the PE looters” aspect.
Canada has an economy not that much smaller than the UK and I don’t think we have a publicly traded RE brokerage. (but I’m not sure)
It’s not capital intensive, so what’s the need to go public ?
For someone actually interested in operation of the business, very little need. It’s the private equity model of maximized looting and leaving others holding the bag.
There are plenty of reasons why prices are beginning to stall in London. Some domestic policies like stamp duty, transparency, tax changes on buy to let lending. Some overseas policies that are not always entirely clear to us here, like China clamping down on capital flight. And, of course, the sheer arithmetic of prices versus incomes.
But I would argue that one of the biggest reasons for the long term steady reduction in transactional activity is that so much of the market has been hoovered up since the financial crisis by buy-to-let landlords and overseas buyers as ‘investment’ properties. Home ownership levels have been falling rapidly. Landlords tend to hold on for far longer.
Agents also have to contend with plans to ban letting agent fees for consumers and make landlords pay for their services. Gouging as practiced by the likes Countrywide and Foxtons is under threat. So both sides of their business is under threat. We just need to add a miss-selling scandal to the mix now.
Thanks to NIRP + AirBnB – Nobody needs to sell!
The mortgage cost little to service and London being a tourist destination, one can make good money hiring out via AirBnB so as not to be bothered with pesky regulations and stuff.
I think Estate (Real Estate) Agents is a dying industry. 90% of all property found by buyers is found on the web and no visit to the Estate agents shop necessary. So estate agents such as Countrywide and Foxtons are doomed.