If you are a property bull, you’ll like this

With Chinese investors snapping up London property, this estate agency has good cause to be optimistic, says Tom Bulford. So, if you must invest in property, this penny share could be for you.

The Chinese love property. High rises in Shenzhen, luxury apartments in Hong Kong, penthouses in Vancouver. Build it and they will buy it. And in recent months, they have been eyeing up London. One in three newly built homes in London is being bought by a Chinese buyer. And it is not unusual for the buyer to purchase the property without ever setting eyes on it.

There is a good reason why the Chinese are so keen on property. They don’t trust much else. Long memories of their country’s troubled past allied to the absence of any proper legal system means that the Chinese trust nobody outside the family. But nobody can run off with their bricks and mortar in the middle of the night, least of all if it’s in London, and so this becomes the preferred receptacle for their savings.

Everywhere Chinese travellers go, retailers are busy hiring Chinese speakers to better understand their requirements. Now estate agent Winkworth (AIM: WINK) has followed suit, setting up a China desk in its Mayfair office run by the splendidly-named Ice Wang. She should be kept busy, as 27% of Winkworth’s overseas buyers are already from China and 2011 saw a 30% increase in the number of Chinese visitors to the UK.

These were amongst the facts and figures revealed to me by Winkworth’s affable chief executive Dominic Agace when I dropped by last week. Winkworth came on to AIM at a price of 80p three years ago and the shares have since crept up to 90.5p, not a bad performance when you take into account that holders have also received dividends totalling 11.8p. But what really interests me is Winkworth’s strategy.

Why estate agents are like cockroaches

Let’s face it. The estate agency business is hardly cutting edge. It has been around in pretty much the same format for as long as I can remember and, if my local high street is anything to go by, estate agents are like cockroaches. It takes a heck of a blow to kill them.

Most seem to have somehow survived both the downturn of the economy and the threat posed by the internet, which, at least in theory, helps sellers find buyers without the middle men. Thanks to a move to selling higher priced homes, Winkworth is managing to raise the average commission on its sales of country properties to 1.6%, which nets a tidy £10,000 on the average sale price of around £650,000.

But even in this glacial business there has been some progress. Websites are becoming more sophisticated – Winkworth boasts ‘heat-maps’ that show estimated commuter times (my tip – take these numbers and double them!). It is reaching out to overseas buyers with offices in Europe and Asia, and it is about to trial a new informal office lay-out in Weybridge designed to encourage locals to drop in and get to know the staff.


Winkworth’s franchise model: a chance to dominate territory

But the real drive of Winkworth’s business is its franchise model. Since this has barely changed since Winkworth came on to AIM it is clearly working to the benefit of both itself and its franchisees. The basic deal is this: Winkworth takes 8% of the revenue of the franchised agent in return for an upfront payment of two to three times this amount.

The franchisee gets the Winkworth name and branding, centralised marketing that includes the website, and the chance to follow up on leads generated elsewhere in the group. Winkworth gets a nice revenue stream, an army of motivated franchisees and, now with 93 branches, the chance to scale up and dominate the territory that lies between the mass market and the £20m-plus tastes of Russian oligarchs.

If you are a property bull, the attraction is this: Winkworth is buying into these franchises when the number of property transactions is at a historic low. Over the last four years the number of property transactions in England has averaged 603,000. That is little more than half the average of the previous four years and well below the one million seen in 1970.

Agace reckons that it is only a matter of time before the market frees up, banks start to lend again, youngsters hop onto the property ladder and the whole national obsession with housing kicks off again. If it does then Winkworth should do well. And since a holding of Winkworth shares does not come with demands for council tax, home insurance and the cost of a new roof, I would rather hold them than buy a house.

First of all, though I have got to become a bull of UK property. And I am not ready yet.

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