In my last article “Managing post-recession growth” (EG, 24 January 2015, p82) I considered what the post-recession landscape may look like and predicted that 2015 would be a year of merger and acquisition (“M&A”) activity for many real estate advisory firms. In part driven by succession issues inherent within firms but also, having weathered the economic storm of the past few years, to exploit the new economic environment that firms now find themselves operating in.
Movers and shakers
Over the past 18 months M&A activity in the real estate advisory sector has been well publicised, with the larger international property advisors taking the headlines. Most notably, but not exhaustively, we have seen:
- Colliers International’s acquisition of AOS Group, a European commercial property advisor;
- Bilfinger’s acquisition of GVA, driven by its ambition to build a pan European adviser;
- private equity firm TPG’s acquisition of DTZ and subsequent acquisition of US consultancy Cassidy Turley, followed by the acquisition of Cushman & Wakefield and merger into DTZ by TPG;
- Savills’ £154m acquisition of US-based Studley, a leading commercial real estate advisory firm. In the UK, Savills acquired the rural and residential specialist Smiths Gore (£40m) and specialist property management outfit Colliers and Madge;
- Lambert Smith Hampton (part of the Countrywide Group) purchased the Manchester-based niche retail agency Tushingham Moore and more recently acquired the ES Group;
- Montagu Evans announced its merger with specialist planning firm Blue Sky Planning in March 2015, bolstering its planning consultancy offering; and
- Capita acquired GL Hearn in July 2015 for £30m to strengthen its property infrastructure business.
Consistently, the strategic message underpinning these transactions has been the extension of international reach, broadening or diversification of service offering, deepening of skills and expertise and access to a new client base, markets or future opportunities.
Looking ahead
So will this rate of M&A continue through 2016? And what are the implications and opportunities of this consolidation on the mid-market advisory firms?
Ultimately, the decision to sell or not is dependent on whether it is the right strategic decision for the business and whether an equitable valuation and payment mechanism can be achieved.
Deal multiples and valuation techniques vary significantly. Whether it is applying a multiple of earnings or a valuation based on a multiple of revenue, value is a very specific calculation and one that is being further distorted by:
- the impact of quantitative easing, both in the UK and overseas, on the bond market (there is currently no clear understanding of what a risk-free rate of return in the modern world is); and
- oil prices. Production, not consumption, is determining what oil costs and by implication what the global rate of inflation will be.
These factors make the calculation of price or value fraught with uncertainty and the tendency is a flight to quality.
In assessing whether the rate of M&A will continue, there is an opposing view that the market is actually quieter than many would have us believe, with headline-grabbing prices being driven by the scarcity of good deals, rather than confidence in strong future cash flows. Investor confidence continues to be hampered by uncertainty over the US Federal Reserve’s decision to increase interest rates, the speed of any subsequent increase and the scale and impact of a Chinese slowdown on the global economy.
Opportunity knocks
However, the M&A activity of 2015 does present mid-market advisory firms with opportunity through 2016.
While many of the larger real estate advisory firms have undertaken a strategy of consolidation and international expansion, which I expect will continue through 2016 (as they leverage from strong equity values and seek to exploit synergies obtained through their global infrastructures and ability to invest in new technology), many of the mid-market advisory firms have embarked on an opposite strategy of retrenchment from underperforming overseas operations and a focus of capital on core strengths.
The global integration of a merged or acquired firm is highly time-consuming for management and not without risk or the potential for unrest. New management teams need time to cohesively form and clarity and alignment of strategies need to be revised, communicated and understood by fee-earners.
This presents a significant opportunity to advisory firms that are more focused on local markets and are able to develop a more clearly defined market proposition. They will benefit from being more innovative, more flexible, and able to attract key employees to a more entrepreneurial environment.
A key consideration for many firms of this size through 2016 will be agreeing on both a rate and measure of growth (ie revenue or profit) and this in many instances may be determined by factors outside of their control, namely access to skilled workforces or access to investment capital.
Private equity, whether by taking a majority or minority stake, could provide a solution to these restrictions. Many private equity firms, with a focus on the mid-market, have an increasing appetite for investing in professional service firms. There is also an abundance of private equity capital to deploy and a relative scarcity of quality assets in which to invest it.
Looking through 2016, politics, as much as economics, will shape the landscape for mid-market advisory firms. While the run up to this year’s General Election in May was expected to have an impact on advisors to the residential sector, the post-election lull caught many by surprise.
However, with the government’s commitment to home ownership, UK infrastructure spend (£48bn per annum over the next five years) and the rebalancing of the UK’s economy through the establishment of the Northern Powerhouse, UK real estate advisory firms – particularly those in the mid-market – are in a strong position for the future.
Tim Neathercoat is an audit partner at BDO LLP
