Brokers say next few months could be a rocky ride for HIPs suppliers

Investment analysts Scotia Capital have issued the following equity research paper in relation to the UK HIPs market and solution providers such as MDA… According to Paul Steep, the director of software & IT services research “We have conducted a series of interviews with various market participants to assess initial acceptance, pricing and experiences with Home Information Packs. Our discussions support the expectation that HIPs will continue to full deployment in the U.K. despite some early growing pains in the first phase of the roll-out. We anticipate that HIP providers will be tested in earnest starting Monday, September 10, when the roll-out expands to three bedroom homes (covering 65% of U.K. housing stock). Our view is that over the next several months issues relating to the next phase of the roll-out are likely to be highlighted in the press by HIP detractors creating the potential for volatility in the stock.”The report goes on to say…• We believe the HIP market remains in the development stage with market participants (eg estate agents, EPC inspectors, HIP providers) all still in the learning process as a result of limited market experience from the launch of 4+ bedrooms. Early feedback indicates the transition to the new scheme has been relatively smooth given the small initial market size (~18% or 340,000 home sales on an annual basis).• Our view is that UK government’s recent announcement (August 17, 2007) to expand the scheme to include three bedroom homes as of September 10, 2007 represents the real test for HIP providers. This expansion will result in over 65% of the U.K. housing market coming online (~1.2 million homes sales on an annual basis). This significant expansion should test providers’ ability to deliver a higher volume of HIPs in a timely manner to meet market demand more closely reflecting full scheme conditions. Some market participants have cried foul over the rapid roll-out schedule raising concerns that the government has not taken sufficient time to review how the HIP supply chain is adapting to the 4+ bedroom implementation. The feedback we received did not highlight this as a major concern but estate agents were surprised by how quickly the government was moving (expectations were 3+ bedroom roll-out a month later). The latest data indicates almost 3,500 assessors are now accredited, meeting the government’s original requirements of 3,000 to cover the entire market. Distribution of accredited assessors remains soft in two of ten regions (London and South East regions) but appears to be more than sufficient to support the 3+ bedroom rollout.• Our view is that the accelerated implementation timeline for 3+ bedrooms signals the UK government’s focus on fast-tracking the roll-out of HIPs to ensure that the EPC component of the scheme is deployed. We believe the factors driving the government’s move relate to European Union energy savings directives and the government’s desire to ensure that the trained EPC inspectors have employment.• Our view is that HIP providers are insulated from some of the volatility of retail pricing but have limited pricing power. Our research indicates that the HIP market consists of a wide range of retail pricing and marketing strategies. We found pricing for HIPs to generally be within the range of £300 to £400 but climbed to as much as £750 for larger or more expensive homes (ie +£1 million). The marketing strategies for HIPs to consumers also varied widely with certain estate agents offering a free HIP as part of their service to win the listing of a home while others advertise variable HIP pricing dependent upon a variety of factors (eg listing price, size of home). Our expectation is that retail pricing for HIPs will settle over the next six months as the HIP providers consolidate and as estate agencies standardize around how the cost of HIPs will be passed on to clients• Our view is that over the next six to twelve months the market will consolidate with a large number of the marginal HIP producers exiting the market. We believe that given the tight margins and competitive nature of the business that the HIP provider market is likely to consolidate down to a handful of leading firms with MDA expected to be among the market leaders. At present, a consumer can obtain a HIP from an estate agent, a solicitor, a conveyancer or a dedicated HIP provider. There are a large number of HIP providers in the market with the Association of Home Information Pack Providers listing over 65 members ranging from small start-up operations to established firms such as MDA or LMS.• Our discussions with estate agents indicate that some are still in the process of evaluating HIP providers. Our view is that the key factors in selecting a HIP producer will be: speed of HIP turnaround time, financial stability, and pricing of the offering.