Despite rising by 235% since the start of the year, there could be further capital growth ahead for online estate agency Purplebricks (LSE: PURP). The company has a sound business model which is becoming increasingly popular among consumers. It may also enjoy a tailwind from rising house prices. While its valuation may be rather expensive, the company could be a worthwhile buy for the long term.
A changing market
The housing market is undergoing a major change at the present time. The days of paying estate agents a percentage of the sale price of a house may be numbered, with many companies now offering low-cost fees in return for an online-focused presence. This means they offer a similar amount of online exposure to potential buyers as traditional estate agencies, as well as a local property expert to guide the seller through the process.
The popularity of such services is growing, with Purplebricks being one of the leading operators in this area. As online-focused estate agency services gradually become more mainstream, the company could experience a tailwind due in part to its dominant position within the industry. This may act as a catalyst on its financial performance and share price over a multi-year period.
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Growing market
While house prices have fallen marginally in value this year, their outlook in the long run remains relatively positive. High demand plus a limited supply of new houses means there is likely to be a supply/demand imbalance for some time to come. This should mean that the average time it takes to sell a house remains somewhat limited. This could persuade more sellers that they do not require a traditional estate agency service, but rather can take a risk by using a cheaper alternative such as Purplebricks.
Certainly, Purplebricks may not be a cheap stock to buy at the present time. For example, it has a forward price-to-earnings (P/E) ratio of 223. But with significant growth potential, it could gradually begin to justify its valuation in the long run.
A further opportunity
Also offering upside potential within the property sector is Belvoir Lettings (LSE: BLV). The UK’s largest property franchise reported on Thursday that it has acquired Brook Financial Services for a total consideration of £2m. Of the amount, £1.5m will be paid in cash, while the remaining £0.5m will be paid for in new shares in the company. The acquisition is expected to be immediately earnings accretive and could help to better position the company within the mortgage marketplace.
Looking ahead, Belvoir is expected to deliver earnings growth of 18% this year and a further 10% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 1.1, which suggests they could offer capital growth potential. With trading in line with expectations and a sound strategy despite a management reshuffle, now could be the right time to buy a slice of the business.
