There’s a piece in the FT about EasyProperty – one of the many offshoots of Easyjet founder Sir Stelios Haji-Ioannou. Aparently, EasyProperty has so far let roughly 5,000 residential properties and been instructed to act on 2,500 commercial properties. I’d like to know a lot more about the type of commercial property.
Eerily echoing decades-old frustrations about the property industry and new technology, the chief executive of EasyProperty is amazed by
“…the total refusal by the major agents to accept anything to do with modern technology. The property industry is the last industry to totally ignore consumer behaviour and say ‘this is the way we’ve always done it and we’re just going to carry on’. Nothing has really changed since I came into the industry aged 16.”
However, as the article and the chief executive himself points out, a lot has changed. In particular, the arrival of the big portals (e.g. Rightmove) has been transformational in terms of property search. However, in a sector that looks ripe for disintermediation, agents and their commission models remain dominant. Is this likely to persist? I don’t know and have always been puzzled by the agency world.
A potential rationale for persistence was discussed in an earlier blogpost. The basic argument was that so much was at stake for individuals in a house sale and the transaction executions could be so complex (think chains) that home sellers were willing to spend fairly large sums to ensure that nothing is overlooked. The rationale for experienced, expert investors to pay such high commission seemed less cleaarcut.
I’m still puzzled by the apparent lack of any relationship between brokerage business costs and brokerage fees in residential and commercial real estate markets. They are fairly contestable, competitive markets. However, if house prices go up by 30%, so do fee levels without any change in the operational costs of the broker. There is little additional cost and effort in selling a £1 million house compared to a £100,000 house but fees are still a proportion of the value and can be 10 times higher. I remember one agent telling me that the file for one of his deals for a major shopping centre selling at hundreds of millions of pounds consisted of a single letter containing confirmation of introduction of the property and an invoice for a few million pounds. Having just done an international survey, I know that the calculation of fee as a % of price is standard in most international commercial real estate markets. So it must exist for a good reason, mustn’t it? In addition, there can be big variations between markets. For instance, in the US residential market brokers’ commissions of 6% are common compared to 1.5% in the UK. I imagine that these commission structures incentivise agents reasonably well, I’m just struggling to understand their persistence in an ostensibly open, competitive market. Surely it can’t be that hard for potential buyers to find out what is on the market. I MUST be missing something obvious.