Does the flotation of Zoopla signal the top of the UK property market?

The Zoopla business model has been discussed time and time again, criticised, praised and dismissed in similar measures. The group has grown significantly over the last few years resulting in confirmation the company will be listing on the London stock market despite the fact that some companies have decided to pull their stock market flotations in the short-term. While there is growing concern about “new flotation fatigue” as well as concerns that the worldwide political situation has taken a wobble, Zoopla is pushing ahead strongly.

The company will raise around £250 million which will go directly to existing shareholders with the largest being the Daily Mail & General Trust owning 52.6% of the operation. While investors and advisers have no qualms about long-term shareholders reducing their exposure, this has opened a very interesting debate about the UK property market and the potential success/failure of the Zoopla flotation.

Has the UK property market topped out?

The main problem investors and advisers have at the moment with the UK property market is booming prices across London which in many cases overshadow more modest increases in other areas of the UK. Zoopla itself suggests that London is a “micro market” which is not always reflective of the underlying strength of the overall UK market. The suggestion that the company is looking to cash in on the booming UK property market has been dismissed with a very strong argument in favour of supporting the flotation.

Quote from PropertyForum.com : “The U.K.’s second largest real estate investment trust, British Land, has today announced an additional £1.3 billion of investment in commercial property. The majority of this new investment will be centred round London and the south-east of England as the group reported a jump in pre-tax profits to £1.1 billion for the year ended March 2014.”

The company reported revenues of £64.5 million to the year-end 30th of September 2013 with adjusted earnings of £29.4 million. It is interesting to see that Zoopla will be targeting shareholder payouts in the region of 35% to 45% of net profits which effectively means that the business would be run as a cash cow. There may also be share buybacks in the future as well as the potential for special dividends in extremely profitable years.

Is there more to Zoopla than meets the eye?

While many people assume that Zoopla is the only operational business within the group, it is worth noting that the company also owns Prime-Location, SmartNewHomes and HomesOverseas which allow the company to diversify into different markets. If the traditional Zoopla business model can be replicated in other areas of the world there is the potential to further increase the company’s profitability, market share and overall value.

There are few companies that have incorporated the ongoing popularity of the Internet with the ongoing popularity of real estate with as much success as Zoopla. The business model has been criticised and ripped apart but here we are today with the company standing on the verge of a £1 billion flotation. If you’re looking to invest in Zoopla shares it is essential that you take professional financial advice before undertaking any commitment.

Conclusion

Whether or not Zoopla has timed the forthcoming flotation to coincide with the top of the UK property market remains to be seen but there are obvious concerns about overheating. The fact that the company is looking to return up to 45% of net profits by way of dividends to shareholders will be very attractive to income led investors and offer something different from the norm. We wait with bated breath to see whether the Zoopla flotation is successful.