Investors’ Chronicle, the weekly investment magazine published by the Financial Times Group, has lavishly praised high-end agency Savills for diversifying its activities to minimise the risk of being hurt by a possible housing market crash.
IC says estate agency in the UK is in general a high-risk sector for investors because “there is very little that can be done to counter a cyclical downswing” and because it is suffering from a shortage of stock to sell - and thus income to receive - with what it believes is no solid evidence that a market recovery will come any time soon.
IC also says the traditional agency model is under threat from online alternatives, and that the most sensible high street agents have chosen to diversity to spread its risk.
“Other sources of income include surveying and commission for arranging mortgages, but these still depend heavily on housing turnover. That leaves the business of lettings, which has received a sustained boost in recent years as houses have become less affordable for first-time buyers” says the publication.
However, Investors’ Chronicle lavishly praises Savills for going further still and diversifying internationally.
“Its most recent step was the acquisition of US commercial real estate group Studley, which boosted US revenues in the first half of this year from £11.1m to £86.7m. Savills also has its own investment management operation - Cordea Savills - which was merged with SEB Asset Management, a German operator. Profits here are expected to double between 2014 and 2016 to £8.5m” says IC.
“No other estate agent has diversified so far or so successfully, so prospects elsewhere in the sector remain much more dependent on UK transaction volumes as well as the health of the lettings market. Competition here has intensified as volumes have dwindled. Agents have traditionally charged a fixed percentage fee on transactions, but there is a growing band of agents offering flat-rate fees” warns the publication.
Its advice to investors interested in putting money into the listed companies in the real estate sector is equally clear.
“Savills is the obvious choice” it says, before then claiming that “Foxtons looks particularly vulnerable because of its exposure to the top end of the London market, where stamp duty is particularly aggressive.”
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In my opinion 2016 will mark the biggest change in estate agency since the 1988 housing act created the assured short hold tenancy giving birth to the modern PRS. Most High Street agents will need to look at maximising their margins and seeking new income streams if they are to prosper in this time if change
Don't have much time for Savills (it's what they stand for more than anything - i.e. gross wealth and high-end clients only, the rest of the market can do one) but I can't disagree too much with this analysis. If a crash does come, Savills are in a much better position to deal with it than, say, Knight Frank or Foxtons because of their other interests.
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