If there is one thing that the agency community agrees on, it is that further consolidation in the industry is inevitable. Whether this is a good thing or bad and whether the factors behind it are appropriate is another thing. But when it comes to a new catchphrase among the agents, it is most definitely “consolidation, consolidation, consolidation”.
Close to one-third of the agents that took part in Estates Gazette’s survey believed they would be involved in merger and acquisition activity over the coming 12 months, with more than 68% expecting more consolidation across the industry.
Consolidation has been rife since the economy emerged from the downturn. Private equity giant TPG has taken on DTZ and then merged with Cushman & Wakefield, Savills has expanded with Studley in the US and splashed £40m on rural practice Smiths Gore in the UK, while Capita has swallowed GL Hearn after takeover talks with Malcolm Hollis collapsed.
Colliers International has bolstered its London offering with the takeovers of West End specialists H2SO and retail firm BCL. It has also tried, but ultimately failed, to buy GM Real Estate, the City firm led by Tony McCurley and Tony Gibbon. And CBRE has spent more than £1bn expanding its reach into the global corporate solutions sector, buying Johnson Controls’ Global Workspace Solutions business and Norland.
“We are seeing a feeding frenzy at present as the big firms get bigger,” says the senior partner at one independent agency. “They are under pressure to grow and doing that organically is simply not possible, so sector consolidation will continue.
“As a firm we have already benefitted from competitors in our space disappearing or morphing into something larger. Of course, being big has some advantages, such as scale, leverage, global reach, but it also has some vulnerability, such as quality control, lack of accountability, motivation and morale. All of which are common themes when we recruit from larger competitors.”
The main motives behind consolidation among the top firms are clear: global reach and market share, with the vast majority ranking acquisitions and international capital flow as the biggest growth areas for the business.
“Those that will ultimately succeed must deliver a globally connected, multi-service offer to clients driven by top talent and an environment that fosters innovation,” says
CBRE UK managing director Ciaran Bird. “Those who continually evolve and can anticipate the needs of their clients will win out.”
“For the upper end of the market it is becoming increasingly difficult to grow organically in any meaningful way, so M&A is the only option to gain the growth they desire,” adds Cluttons senior partner Bill Siegle.
He adds: “The consolidation across the market is fundamentally changing the way the larger agents operate. They are now driven by the need to build turnover and gain market share as they seek to maintain a ‘magic circle’ or ‘big four’ like we have seen emerge in other professional services sectors. Yet in many cases, this growth comes at a cost. There is increased bureaucracy and multiple layers of management, the decision making process becomes unclear and in some cases pedestrian, and of course there is an increase in conflicts of interest.
“With this consolidation, the number of truly independent private practices is diminishing,” he says. “Yet, for those who survive there is a real opportunity to offer something different.”
And that opportunity is set to stay for some time, according to the agency community. The majority of survey respondents were confident about the future of the market, with almost three-quarters expecting to expand their workforce over the coming 12 months and almost 90% not expecting to have to make job cuts.
Financially, prospects look good too. Some 81.8% of firms said that turnover would increase this year, with 72% expecting an uptick in profit too. Those that expected profit and turnover to decline, reflected less than 5% of respondents.
Ian Tudor, partner and head of commercial agency at auctioneer CPBigwood, says: “With low base rates, low oil prices and the return of pay rises, there is a feel-good factor not felt since before the onset of the recession.
“Consumer confidence has returned and some of the prices being achieved are reminiscent of the last peak in the market. The commercial market in 2015 still offers opportunities for risk-averse and risk-embracing investors and will be another strong
year. However, with rising prices investors need to look harder to identify markets and sectors that will deliver attractive returns, and until then we are some way short
of another peak in the
market.”
While most thought that yields were reaching the peak, there was little fear of a repeat of 2007 any time soon, with plenty of growth yet to come in the recovering occupational markets.
“Our view is that yields, which in some cases are at keener levels than 2007, are approaching the peak, but future investment performance will be driven primarily by rental growth,” says Scott Tyler, commercial managing partner at Allsop. “The market has further legs as more debt providers enter the frame, which will give a further injection to the investment market over the next 12 to 24 months and provide attractive geared returns.”
Alistair Elliott, Knight Frank senior partner and group chairman, agrees: “The income prospects for the next year look promising. However, it is likely that investment volumes are reaching their peak. That said, we are hopeful that this will be counterbalanced by greater leasing activity and consultancy income.”
But there are fears among some that the rental growth enjoyed by landlords over recent years may be coming to an end.
“With the pipeline of deliveries gathering momentum, we are expecting to see a widespread slowdown in the rate of rent rises over the coming years and by 2018 most areas of London are expected to see little or no growth,” says Cluttons’ Siegle.
“There are also concerns over the sustainability of the perpetual upward trajectory of rents in submarkets such as the West End and City, where we may already be on the cusp of the full rental potential in some schemes.”
Perhaps Capita Real Estate sums up the feeling best.
“It is too soon to call the peak,” says the firm, “but let’s say that when activity and pricing levels are around historic highs it brings as much apprehension in the investor community as it does joy about the performance already booked.”
Fees under pressure amid consolidation
Around 44% of the agencies surveyed by Estates Gazette said they had been asked to cut fees over the past 12 months.
For some the issue was a concern, with fears that the quality of advice given would diminish as fees came under pressure. Others saw the practice of fee cutting being a product of increased consolidation.
“Despite market conditions being healthy, fees are still coming under pressure,” says one senior partner. “I believe this is due to the commoditisation of certain services by the larger players and the willingness to drop fees to gain the business in the hope that it will spin off into more profitable instructions, meanwhile bolstering turnover to satisfy shareholders.”
