Private equity eager to cash in on real estate bubble

Alice Murray
14 October 2013

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The much-debated property bubble has economists worrying over soaring inflation rates. However, for the buyout community, a rush of first-time buyers and a flood of foreign money has those supporting the property industry licking their lips in anticipation. Alice Murray reports

According to the Office of National Statistics, house prices in London have rocketed by around 10% over the past 12 months. Average property prices in London hit a record £438,000 in July, an increase of £13,000 in just one month. The surge in prices has been attributed to a swarm of first-time buyers and well-heeled foreigners buoyed by the security of the London property market.

The property boom in London has undoubtedly brought relief for BC Partners as it listed London-focused estate agent Foxtons last month at the top end of its 190-230 pence range.

BC acquired Foxtons in May 2007, shelling out around £400m. The company then fell into the hands of lenders in 2010 when it failed to keep up with debt repayments. BC repurchased its majority stake in Foxtons in 2012 for a total of £120m.

Last month's listing saw such strong investor appetite for Foxtons' stock that on its first day of trading, its share price rose by 16% and it is now valued at around £750m.

Exposure to the property market appears to be topping investor wish-lists as the Foxtons listing follows Oaktree Capital Management and Apollo Management's float of estate agent Countrywide in March, where it raised around £220m.

Venture play-house
And it is not just the big buyout houses benefiting from the resurgence of real estate; venture-backed Zoopla is also considering a foray on the public markets. In September, it was reported that the property website had enlisted Credit Suisse to "explore further strategic opportunities". One of those options is a flotation, which could value the business at £1.3bn.

In early 2008, online property site Zoopla was launched after having raised more than £1.5m in a series-A funding round led by Atlas Ventures. A year later, Octopus joined Atlas in a £2m funding round and since then Zoopla has completed several add-on deals including online rival PropertyFinder, The Digital Property Group, owner of Primelocation.com and FindaProperty.com, and more recently on UpMyStreet.com.

Despite these deals, the asset class has been quiet in the estate agency sector. According to unquote" data, aside from a smattering of property developer acquisitions, the only investments in estate agent businesses since 2008 has been Bowmark Capital's purchase of UK-based Leaders and more recently the £50m management buyout of Romans.

Indeed, Octopus decided to back Zoopla against the cycle: "We saw great potential in the countercyclical investment opportunity presented within the housing market at the time. Zoopla's advanced technology platforms meant the company had the potential as a new entrant to the market in 2009 to take advantage of the economic conditions," explains Alex Macpherson head of the venture team at Octopus.

Although estate agencies are largely unloved by the asset class, this recent clutch of exits proves the merits of investing countercyclically. However, surging property prices and a lack of housing supply has the Royal Institute of Chartered Surveyors demanding the Bank of England moderate volatility in the property market by capping house price increases at 5% per year. With mounting attention and potential swathes of regulation set to hit the market, private equity is likely to remain cautious. Investor appetite for property businesses is strong today, but the government's Help to Buy scheme sounds to many like a haunting echo of the pre-crash, US sub-prime mortgage disaster.