GVA may not be the only property services firm that engages in corporate activity this year as margins become squeezed and firms search desperately for economies of scale.
The likes of Lambert Smith Hampton could be spun out of its troubled owner, Countrywide, while Capita’s own struggles mean it could look to recoup funds and restructure by disposing of its property services business and jewel in its crown, GL Hearn.
For years the “squeezed middle” has been touted as ripe for corporate activity. This has largely not yet played out but, as in the fund management sector, there is increasing pressure for this to change with more regulation and, most importantly, lower fees.
Last year’s purchase of Strutt & Parker by BNP Paribas Real Estate was perhaps symbolic of the pressures the industry is facing and could be a precursor to more activity.
One chief executive of a major advisory firm estimated that over the past decade average leasing fees had dropped from 10% of rental income to 5%, while investment fees had dropped from 1% to 0.4% or 0.25% for large lot sizes, owing to increased competition and clients becoming more demanding.
Fixed costs
At the same time, the fixed costs of “putting the team on the pitch” have rocketed as a result of inflation as well as the need to provide all staff with expensive equipment such as smartphones and laptops.
“Each of the big firms has taken a bigger market share and is doing more deals to make the same amount of money,” the chief executive said.
“Company revenues have not necessarily gone down and profits have not necessarily gone down but the amount of work being done has gone up for the same outcome.
“Data and technology is helping, but it is not yet providing growth.”
While some of the largest firms are providing “one-stop shops” to global corporate occupiers, this is still a tiny minority of turnover for most businesses and professional services clients typically shop around to drive down cost and find the best offering.
The problem for prospective sellers of property services businesses is that given these pressures and the “late cycle” feel to the UK market, there is a relative dearth of willing buyers outside the industry.
Integrating with adjacent businesses such as facilities management and accountancy firms has achieved mixed results for the likes of DTZ-UGL and Drivers Jonas-Deloitte and it seems less likely that more of these deals will happen again in the near future.
Flat-to-slowing market
In a market that is broadly conceived to be likely to be flat to slowing, buying a business that relies on activity is a difficult pitch to a private equity firm and trade or merger deals are generally considered more likely as they have obvious cost-cutting elements.
There could be a positive spin for private equity, though. The big unknown for the agency world, as for much of the broader property sector and business at large, is the extent to which tech disrupts it and whether this becomes an opportunity or a threat. There is no shortage of dry powder for private equity to deploy into service businesses if the opportunity is right, and there is the possibility that investors in the sector could do so with a tech-first approach.
The potential for tech to drive down costs and increase efficiency through AI and the increased availability and accuracy of data means these businesses could hypothetically be transformed in a way that would generate private equity-style returns.
An expensive exercise
But it is tough. Implementing change on such a scale involves large expenditure and buy-in from senior management and employees in an industry which, one boss says, “doesn’t do change well”. It is also an expensive exercise.
Costs might ultimately be driven down by technology, but this requires capex, and if it means cutting costs through reducing staff numbers, the redundancy pay outs are also a major barrier.
“Is there opportunity for technology and disruption? Of course, but these have to be delivered in a manner that sits culturally into businesses, and it won’t happen overnight anywhere,” says another industry leader at the forefront of M&A.
True growth comes through adding high-value, additional services to businesses such as management consultancy-style strategic services or fund management offerings, but barriers to entry into such markets are high.
The real estate market may be near the top of the cycle but that does not mean that the UK property advisory sector is not one under increasing pressure.
How do you value a property agent?
Historically, transactional-focused property services businesses would be valued based on multipliers of EBITDA of between seven and eight times with up to 10 times for the very best businesses and five or six for those less shiny.
For businesses that were more focused on recurring income or professional services that dealt with lower-margin work, this income was considered more valuable or “sticky” and higher multipliers could be applied over and above 10, often in the low teens.
However, sentiment is changing somewhat. With the plight of Carillion, Capita and others, private equity firms looking at the sector are said by leaders to now be more sceptical of the sustainability of low-margin businesses and their propensity to do deals at a higher multiplier has lessened.
Achieving top pricing for property services businesses appears a task increasingly difficult to achieve.
To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette
