Disruptive valuations

There was an interesting piece in the FT Lex on Purplebricks – one of the many market entrants trying to disrupt the established intermediaries in the residential brokerage sector.  The valuation of the company looks very exuberant for a sector where barriers to entry are fairly low and established businesses can probably adapt their business models if disruption levels undermine the current ones.

So Purplebricks, the UK estate agent whose shares trade at 560 times 2019 forecast earnings, should feel right at home as it launches in the Golden State…Having floated with a market value of £240m in 2015, the upstart is now worth more than established peers Foxtons, Countrywide and LSL combined, even though its UK market share is about 4 per cent.

Lex are concerned that Purplebricks’ business model that is working reasonably well in the UK and Australia will not work in the US.

There seem to be two key differences between US and the UK markets – one is very encouraging for Purplebricks, the other is less so.  The bad news is that the residential brokerage market in the US is a lot more regulated than the UK.  Brokers need to be licensed in most states.  They need a professional qualification.   The good news is that fees are far higher.  Typically brokers can extract 6%-7% commission.  The US is a major outtier compared to other markets where UK levels of 1.5%-2% are more typical.   US agents seem to be earning abnormal profits.  The strange issue is that it is a UK-based online firm that is trying to disrupt the homes of Silicon Valley.   Where are the US online real estate intermediaries?

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