Property boom prompts special dividend at Savills

A flurry of activity on the UK housing market offset weaker demand for office space at Savills (SVS), leading the estate agent to more than double its pre-tax profits in 2021. The property company announced a one-off special dividend of 27.5p, sending shares up 5 per cent on results day.

House sales in the UK grew by 38 per cent to £210.7mn in the year to 31 December, thanks to double-digit house price growth and the “highest level of transactional activity since 2007”. 

This was particularly evident in the high end of the housing market, where buyers remained unfazed by the end of the stamp duty holiday last year, and buyers’ preference for larger houses continued to shift the regional power balance away from London. International property also recovered in 2021, with activity in Asia Pacific picking up in the final quarter.

Both the booming house sales and “abnormally low” discretionary spending on travel, entertainment and marketing boosted underlying profit margins to 9.3 per cent from only 5.6 per cent in 2020.

Still, commercial real estate, from which Savills derives the bulk of its consultancy and property management revenues, rebounded less quickly with office leasing volumes below pre-pandemic levels in most of Savills’ markets. Meanwhile, demand for logistics and retail warehousing contributed to 61 per cent higher volumes in industrial property volumes.

Chief executive Mark Ridley said 2022 has started “in line with our expectations”, but added that it is too soon to tell what impact the Russia-Ukraine crisis could have on global real estate markets, including a “longer-term inflationary” economic impact. 

If inflation continues to run hot, interest rate hikes are likely to follow later in the year, which could dampen demand for more expensive properties as mortgages become increasingly unaffordable.

“Subject to this key uncertainty, we would anticipate real estate transaction volumes and discretionary spend to normalise in the year ahead, alongside the continued recovery of global markets as they emerge from pandemic-related disruptions,” said Ridley.

Despite the expected moderation in profits, Numis upgraded Savills from Add to Buy, saying that its unabated investment activity during the pandemic has given it a stronger market share across its geographies, which is “not adequately reflected in the current rating”. Savills is trading on a forward PE ratio under 13, which is significantly below rival CBRE, on 16 times consensus earnings.

Nevertheless, broad macroeconomic trends coupled with the trend toward home-working are likely to produce a leaner year for both residential sales and commercial sales in 2022. Savills’ geographic and end-market diversification should shield it to a degree, so we move to Hold.

Last IC View: Sell, 1235p, 06 August 2021.