When will the value of a residential sales business recover?

The week after the Brexit referendum vote I lost every single business sale in my pipeline. It was heartbreaking, months and months of work all came to absolutely nothing. However, after 32 years of selling businesses, I have come to realise that these rollercoaster ups and downs are all part of the job.

The value of a residential letting business recovered quite rapidly and we were able to put most of the deals back together again, albeit at reduced prices. Six years later, letting businesses are selling for the highest prices that we have ever achieved. It took a while, but the market has realised that Brexit was never going to be a threat to the letting industry.

Sales-only businesses are currently selling for only about one third of what we were achieving six years ago.”

Unfortunately, the value of a residential sales business has still not recovered from the shock of the Brexit referendum and remains stuck at an all time low. Sales-only businesses are currently selling for only about one third of what we were achieving six years ago, and even at this price, there is often no buyer. So will prices ever recover and if so when?

Market cycles

My view is that they will probably in about two years’ time. Whilst there is always a market for letting businesses, residential sales businesses only make good prices for two or three years in every market cycle. After 44 years in the property industry, I have seen quite a few cycles.

My own business was sold to one of the major building societies in 1987 for the astonishing price of 26 times profit. We just couldn’t believe our luck. Less than a year later the housing market crashed and shortly after that what little remained of our business was sold for £1!

The same thing happened six years ago when we completed the sale of a single branch sales-only business for almost £5 million. It was a hugely successful and profitable business but we were nevertheless astonished by the price it made. Had it been offered for sale again six months later the buyer would have been lucky to recover 20% of what they paid for it.

The market cycles are typically about eight years and the current one started the days after the Brexit vote. Under normal circumstances, we would by now be seeing a recovery, but unfortunately just as the green shoots were starting to emerge, they were killed off by Liz Truss’s disastrous budget and the huge increase in interest rates that followed it.

My view therefore is that the window of opportunity to sell a sales business will open again in about two years’ time. This will be driven by a recovery in the housing market and the fact that residential sales businesses are very undervalued. However, very few people so far have spotted the opportunity.

Income vs capital growth

One of our clients sold his letting business for £2.5 million. Last year the business was making a pre-tax profit of about £250,000 per annum – a return on capital of 10%. He has since used the proceeds to buy a number of sales-only businesses in the same area.

This year these businesses will make a pre-tax profit of over £1.5 million – a return on capital of 60%. I spoke to him at length about his decision and he explained why it was perfectly logical. He is of retirement age and wants income not capital growth. Consequently, the future value and saleability of his sales businesses are of no interest to him so long as they continue to produce income of £1.5 million under the supervision of a competent management team that means his own involvement is kept to a minimum.

If you own a residential sales business, you just need to be patient then act quickly.”

As the market recovers I am sure that other investors will spot this opportunity and when they do, the law of supply and demand will ensure that the value of a sales-only business will increase again.

If you own a residential sales business, you just need to be patient then act quickly when the window of opportunity re-opens. History tells us that the window doesn’t stay open for long and another unpredicted national or world event such as the 1973 oil crisis or Lehman Brothers going bankrupt is bound to trigger the end of the next cycle within two or three years.