A terraced row of residential housing sit in the Muswell Hill district, in view of the Canary Wharf financial, business and shopping district of London, U.K., on Tuesday, July 31, 2018. U.K. house prices bucked their recent trend with a modest pick up in growth in July, according to Nationwide Building Society. Photographer: Chris J. Ratcliffe/Bloomberg
Digital estate agencies have sought to disrupt the traditional model © Bloomberg

One of the UK’s largest estate agency chains has closed its digital operation on the grounds that the online model is “fundamentally flawed”.

Connells Group, which runs almost 600 branches across the UK, bought the digital start-up Hatched in 2015 and subsequently devoted “significant resource” to the business, it said. That included roughly doubling staff to 49.

It announced on Thursday, however, that Hatched would close with immediate effect, with staff being moved to roles elsewhere in the business.

David Plumtree, chief executive of Connells, said: “We have thoroughly tested the hybrid model and have reached the conclusion that it does not produce a viable economic result . . . The cost of customer acquisition [is] one of the main barriers to being able to deliver a profitable return.”

The closure comes after other digital estate agencies, such as Purplebricks and Emoov, sought to disrupt the traditional model. They are also known as hybrids because they are not entirely digital: while they have no branches, they work with agents who handle viewings and negotiations.

Like Hatched, most of these start-ups have adopted a fixed-fee structure. Where traditional agents charge the seller a percentage of the sale price, online agents charge a lower, fixed fee whether or not a home sells.

However, Mr Plumtree said on Thursday: “An upfront fee obligation — payable irrespective of whether a property sells or not — is not the right solution for the customer.”

Adam Day, founder of Hatched, left in 2017 and now works at Emoov.

Another digital agency, HouseSimple, this year switched to a model in which fees are due only if a house sells.

The largest and most high-profile UK hybrid agency is Purplebricks, which is backed by the fund manager Neil Woodford and German publisher Axel Springer. It listed on London’s junior market in late 2015.

Purplebricks’ losses in the year to April increased to £26m from £6m a year earlier. It doubled revenues to £93.7m, but that incurred a sharp rise in marketing costs, which more than doubled to £42m.

Michael Bruce, chief executive, said it was “taking market share as we continue to win over consumers to the modern way of buying and selling property”.

Purplebricks said it had set up a “new, fairer, more transparent model which has saved our customers over £108m in commission payments in 2017 alone”.

Anthony Codling, an analyst at Jefferies who has questioned Purplebricks’ model, said the company this week altered its fee structure in Australia, where it operates in addition to the UK and US. It doubled its Australian fees but made half the sum payable on completion of a home sale.

“If [the upfront fee] doesn’t work as well as planned in Australia, can we be sure it will work in the US and the UK?” he said.

Connells, a privately owned company, made pre-tax profits of £76.3m in the calendar year 2016, the most recent year for which accounts are available. That was up from £62.5m a year earlier.

But the sector as a whole has suffered since then from a sluggish market, with slow transaction levels and prices falling in London.

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