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Double trouble for property agents

Created:
8 July 2008
Written by:
Claer Barrett

This week's trading update from Savills has sent a collective shudder through the world of commercial property services. For this increasingly globalised sector, an abysmal year for the 'crunched' UK market had been partially offset by more robust property markets in Europe and Asia. But now these are showing signs of sickness - and the UK market is not looking any rosier.

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The three UK-listed property services firms - Savills, DTZ and Colliers CRE - traditionally generate large fees from transactional work, like advising on the sale of commercial property investments, or leasing space on behalf of landlord clients. Since the onset of the credit crunch last July, UK transactional business has plummeted, hammering their share prices by an average 70 per cent. Although companies are now concentrating on cutting costs and diversifying their businesses (see box) the international markets are now losing their lustre.

Savills shares fell 8.5 per cent on Tuesday when it revealed that overall transaction volumes were down significantly in 2007, adding that "difficult trading conditions have now spread to Europe, where the number of transactions is declining as financing becomes more difficult to obtain".

Group finance director Mark Dearsley admits that Asian property markets are "not decoupled" either, with Australia and Japan now feeling the pinch, although Hong Kong and Singapore remain stable when compared to 2007 levels.

"The UK transactional market is tough, but deals are still being done," he says. "People are not sitting at their desks playing Sudoku. There is not a shortage of buyers - for example, the German open-ended funds are very active - but there is a shortage of debt financing. When people make comparisons to the situation in the early 90s, then, there weren't buyers, property was an unloved asset class, and the big pension funds were changing their allocations. We are not seeing that this time.'

DTZ also has significant international exposure, and its own research team has predicted that global property transactions will decline by 30 per cent this year. At the time of going to press, its imminent full-year results were expected to show a 53 per cent decline in pre-tax profits.

Colliers CRE is a slightly different animal - as a brand that operates under licence across the world, it benefits from an 11,000-strong global network, but only has direct financial exposure to the UK, Ireland and Spain.

"We are finding the investment market challenging, like everyone else," admits chief executive David Izett. "Some say transaction volumes are down 30 per cent; I think it’s probably worse. We are budgeting for no real increase in investment activity in 2009. We might be calling the market too darkly, but we’re budgeting for that."

When the transactional market might come back is a moot point. Mr Izett notes the amount of property vulture funds building up on the sidelines. "The market will get to a position where someone cash rich will break rank and call it, particularly when they see that the debt market is easing. The UK will be out of it before Europe, the cash buyers will come back here first."

Colliers' Irish business is only expected to break even this year, due to the relatively high level of residential (30 per cent, compared to around 1 per cent for the UK business), but Mr Izett claims the Spanish business will not make a loss as its main activity is consultancy with very little pure brokerage.

The sickly residential market has hit Savills, which has an up-market residential estate agency arm, the hardest. Residential transactions accounted for 20 per cent of last year's profits, and even its well-heeled clientele are affected by the current mortgage malaise.

Tuesday's trading update revealed that in Savills' core market of homes priced between £1m and £5m, transaction volumes in London had fallen by 45 per cent year on year, with prices adjusted downwards 7.5 per cent in central London in the first half of 2008. The country house market is now following suit.

"Right at the top end, the market for homes above £5m remains buoyant," says Mr Dearsley, adding that international buyers continue to dominate that market. Nevertheless, Savills house broker ABN Amro has cut its full-year pre-tax profit forecast to £52m from £62m, which compares to £85.5m in 2007.

The firms may be concentrating on cost cutting and diversifying their service lines, but until earnings visibility from the transactional side of their business improves, any 'buy' light remains switched off.

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