AI fears spread to property portals

The Fund’s underperformance in November versus its benchmark is linked to its investments in online classifieds, which currently account for about 12% of the portfolio. Despite these companies continuing to deliver solid operational performance in aggregate, their share prices have declined sharply as investors fear consumer adoption of Artificial Intelligence (AI) tools will materially disrupt their business models. This month we explain why we remain confident about the prospects for this particular cohort of businesses.

Winner takes most

Fairlight’s online classifieds feature offshore property portals that operate similarly to REA and Domain here in Australia. Property portals are classic examples of businesses that benefit from self-reinforcing, two-sided network effects, where more listings on a platform attract more property seekers which then in turn attract even more listings. To create a portal is expensive as it involves building both sides of the network concurrently. First mover advantage is important as once a portal becomes established in a category and/or region, this feedback loop leads to winner-takes-most dynamics where the largest portals become the default search destinations.

Fears of new competition

Recent share price weakness across property portals reflects worries that property seekers will change the way they search for properties and use AI platforms such as ChatGPT to search for homes via descriptive prompts such as “find me a villa that is on sale in this neighbourhood that has three bedrooms, two of which face east” and/or by uploading pictures of ideal homes.

If search were to move to AI platforms and agents, then sellers might be less willing to pay a premium fee to ensure that their listings are displayed more prominently within a portal. Some might even decide to have their property listed only on their agent’s website, weakening the network effects that have been protecting incumbent portals from new competition.

Portals hold first mover advantage

At Fairlight, we expect consumers will increasingly adopt and benefit from using AI tools to search for properties but these to be offered by existing portals rather than AI platforms. We think the combination of high direct engagement from property seekers and extensive and accurate proprietary datasets will make the incumbent portals the natural providers of AI-driven tools to improve the search experience.

From our conversations with industry participants, less than 1% of searches to leading portals currently come from AI agents, while more than 80% of traffic continues to arrive directly via incumbent websites and apps. We believe that the activity of browsing will continue to remain crucial when searching for a home as most of the time the quest is not to find the perfect one, but rather to minimise the risk of buying the wrong one. After all, buying a home is one of the largest financial decisions that a person will make in their life. Furthermore, many consumers simply enjoy the act of browsing properties.

Current leaders have successfully built powerful network effects and now have the balance sheet and the willingness to invest in AI tools (as per our conversations with the boards and management teams). Thus, we do not see them as the obvious losers, but rather the likely winners from broader AI adoption.

Portfolio positioning

Fairlight’s property portals include Scout24, Rightmove and Hemnet.

Scout24 is the dominant online portal in the German real-estate classifieds market, with approximately 65% market share. Since investing in it, Scout24 has exceeded our expectations, and it is continuing to do so, delivering 20% EPS growth in its most recent quarter. Management has a clear AI strategy and is allocating a significant proportion of the company’s annual R&D budget to better leverage the technology both for internal efficiency gains and new product launches. Members of the management team have been buying shares on market which we see as a positive valuation signal.

Rightmove has recently deliberately pivoted to heavier AI investment, accepting roughly 300 basis points of margin headwind and only low to mid single-digit operating profit growth in exchange for accelerating product innovation, which should help to deepen its existing market leadership in the UK market. Management is targeting high single digit revenue growth through to 2028, with operating margins still around the high 60s to 70% range. Management aims to restore double-digit profit growth beyond 2028 as AI features, scale and efficiency gains materialise. Despite a significant share price sell off around the announcement, Rightmove continues to command the clear majority of consumer time spent on UK property portals, maintains very high agent retention and trades on one of the lowest earnings multiples seen for a major classifieds franchise in recent years. Fairlight originally purchased shares on weakness after the announcement of CoStar entering the UK market, and again at lower prices post the failed takeover bid by REA.

Hemnet is the leading property portal in Sweden. The business has faced volatile listing volumes since the pandemic, with recent weakness mostly pointing to macro uncertainty and elevated existing inventory on the platform rather than competitive displacement (Hemnet receives 16x more views than the next competitor). Management estimates that roughly nine out of ten homes sold in Sweden continue to have been listed on Hemnet, and is experimenting with more flexible payment structures for its clients, such as paying listing fees at the time of sale to better align perceived cost with delivered value. AI investment is at an earlier stage than peers, so near term emphasis is on making proprietary data easier for large language models to consume in order to capture incremental AI driven traffic from a very low base. We have been gradually buying more shares in recent months and have suggested to the board to increase the pace of the current share buyback program.

The Fairlight View

Fairlight’s portals are the clear number one players in their markets, enjoy pricing power, have high margins and cash flow conversion, and typically no financial leverage . Their management teams recognise both the risks and opportunities from AI and are investing to ensure their platforms remain the default destinations for buyers, sellers and agents. Classifieds economics are underpinned by network effects, habit driven direct traffic, and proprietary intent data, all of which are difficult for any form of competition to replicate at scale. Fairlight’s assessment, informed by direct engagement with company leadership, is that the current share price falls offer an opportunity to purchase high quality businesses at attractive valuations.