When a strange new virus called SARS-CoV-2 started spreading like wildfire through the Chinese city of Wuhan, few could have foreseen the far-reaching consequences for economies across the globe. Within a few short months, most of Europe was in lockdown and thousands of businesses had ground to a halt.
Among the hardest hit were those in the property sales market – unable to carry out valuations or conduct viewings, many shut up shop for the duration.
The Stamp Duty holiday may be grabbing the headlines now, but there’s a recession coming, and agents haven’t forgotten the meltdown that cost some of their colleagues their livelihoods.
For in those lean lockdown months, it was agents with a healthy rental book who could have confidence in their future, while for sales-only firms, the outlook was bleak.
Little wonder, then, that business brokers are reporting a flurry of interest from agents looking to buy a lettings business to add to their existing portfolio.
“It’s a fantastic time to look for acquisitions,” says Adam Walker of Adam J Walker & Associates. “The result of COVID is going to be a real sorting out of the whole industry. The sales-only agents are having a very, very tough time indeed. Their income is very volatile and they are very worried about the income they will get next year once the redundancies start kicking in and we get a recession.
“We can hardly give away a sales-only business at the moment, to the point that we are just not really able to take them on because we can’t sell them.”
The result of COVID is going to be a real sorting out of the whole industry. The sales-only agents are having a very, very tough time indeed. Their income is very volatile. Adam Walker, Adam J Walker Associates.
He explains that lettings are in strong demand because people want a “recession-proof” income.
“What the virus has shown us is that you can be the best residential sales agent in England – the month before the virus you are doing hundreds of thousands of pounds of business, and the month afterwards you are doing virtually nothing.
“Whereas letting agents have done remarkably well during the downturn, they have banked the great majority of their revenue and they’ve just proven how valuable lettings is because it’s a secure income stream.”
He gives an example of a lettings business that is turning over £200,000 a year and perhaps making £25,000 profit. “If you buy the business down the road that does £200,000 a year and drop it into your business, you make 50% net profit on that because you’ve got no office and you have all the economies of scale, so you will make £100,000 profit.”
However, Walker says it would be a mistake for a residential sales agent who knows nothing about lettings to take on a rental business without taking the time to learn how it works, and employing a specialist to run it for them.
“They can’t run it themselves without the necessary expertise – they will just get into the most terrible trouble and end up with huge compliance fines,” warns Walker.
He urges buyers to be wary and carry out thorough due diligence, “because there are some truly horrible businesses out there”. He adds, “You can buy a business for £100,000 that could have £1m of hidden [compliance] liabilities and fines.”
Marc Daniels at business transfer broker Addisons is much more bullish about sales-focused businesses, however – providing they are well run.
“A good business will always survive,” he says. “I have a client who had a pipeline of £30,000 to £40,000 and who is now doing £150,000, and 70 per cent of that is sales. We’ve got three or four people after it – it’s in a good position and it’s a good business.”
They have got to identify what they need to buy. They also have to identify they have got the infrastructure in place to manage the portfolio at a reasonable standard. Marc Daniels, Addisons.
He recognises the value of a good lettings business, but agrees with Walker that you have to be careful about what you take on.
“They have got to identify what they need to buy. They also have to identify they have got the infrastructure in place to manage the portfolio at a reasonable standard. People try to run before they can walk.”
He warns an agent looking to take on a book of 100 extra properties needs to make sure it’s the right fit and that they have the staff and expertise to handle it.
“They need to ensure the portfolio is good stock, has the right property that matches their existing book, has the right income, that T&Cs are in place for landlords and tenants, that contracts are in place, and that you can transfer the ASTs.
“The synergy has got to be there. If it’s got to the point where you need a compliance department you can add £50,000 a year costs on top of buying the portfolio, and that negates the profits.”
One of the key things to check is the number of landlords with big portfolios on the books. “We had one business in east London that had 100 properties, and 69 were with one client – the agent didn’t foresee that was a problem,” he says wryly.
Peter Nicholls, Managing Director at consultancy Ideology, says he is getting a lot of approaches from people looking to both buy and sell as a result of the pandemic.
“There is a lot of uncertainty among small to medium-sized firms,” he says. Unsurprisingly, competition to buy rental firms is strong, with prices firming up beyond the usual ballpark of around 1.5x turnover to nearer the 2x mark.
“Even if you’ve got three offices and your business is split 60/40 or 65/35 in favour of sales, you are running to stand still. You need to be acquiring rental businesses yourself so you can get it up to 50/50.”
EXPANDING THROUGH FRANCHISE
For an agent looking to expand their business there is another route, of course. Franchising is a tried and tested model that works well for some people, offering all the advantages of being part of a big company to help handle all those worrying compliance issues, while at the same time continuing to run your own business.
“Agents join us mainly because we can take care of all the compliance and we can do the training, so they don’t have to worry about that and can concentrate on the front end,” says Glynis Frew, CEO of Hunters.
“Most agents are ambitious to do more and that might be because they want to develop one side of the business or it might be they want to extend their footprint, maybe going into different areas or opening additional branches.
Agents join us mainly because we can take care of all the compliance and we can do the training, so they don’t have to worry about that and can concentrate on the front end. Glynis Frew CEO, Hunters.
“When you expand the number of branches it’s a bit like children, you have one child and then you get a second, and your work doesn’t double, somehow it quadruples. It’s the same when there’s an additional branch – all of a sudden there’s a lot more work and a lot more responsibility.
“What we try to put in place is specific management programmes that help the franchisee monitor key performance indicators, do appraisals and help them manage a bigger business.”
Several businesses have joined the franchise because of COVID. “Lockdown came as a shock and people were frightened – they thought they were going to lose everything they had worked for. We worked twice as hard to keep the network going and motivated.” All Hunters branches were able to stay open because of the investment the firm has made in technology.
However, she warns that 80 per cent of would-be franchisees are rejected. First and foremost, she says, they must be customer-focused. Hunters also carries out a thorough due-diligence process, looking at every letting on a portfolio, as well as analysing the number of likely property transactions in the area.
Tim Stephens, director at Humberts, is very much on the look-out for independents looking to shelter under a franchise umbrella in a difficult climate, and has already had a number of approaches.
The chain, bought out of administration by a group of its own franchisees, is abandoning the hub model that led to its downfall and going back to its roots.
“We want to have a presence in different regions – we need to be seen to be operating in different areas,” he explains. “We are very much open to anybody who would like to come and join us – we can give them plenty of coverage and add value to their business.
“We are really to go back to concentrating on face-to-face contact, with people able to see who their agent is, rather than being stuck away in some big building where identity is lost.
“We will give them support, we will hold their hands – their success is our success. We want them to do well and we will be on the end of the telephone and help them all the way.” He points out the timing couldn’t be better for those looking to make the move. “There has been a chronic shortage of stock for obvious reasons, and this is a time of opportunity. Anybody thinking about it should embrace these times now.”
Protection in a crisis
Meanwhile over at Belvoir, director of acquisitions Martin Bunney is equally bullish. “We have had a number of enquiries from people who thought the umbrella of a franchise would be helpful to them,” he says.
As soon as the lockdown was announced, Belvoir set up a COVID team at head office to support all its franchisees, advising them on government help, furloughing, cashflow and other critical factors. “We came together to support them and we’ve come out the other side very, very successfully. An independent might really have struggled with that.”
“People who are in sales-only realise that lettings is the part that will maintain them through a crisis so the business is pandemic-proof.
“If people with a sales business want to come to us and say, ‘We would like to get into lettings but we don’t have the expertise, the cost, the time to add that to our offering, would you consider us joining your franchise and bringing lettings forward,’ then absolutely, that’s a big selling point for us,” adds Martin.
The only thing that anyone can be sure of right now is that the future is uncertain.
With furlough ending in October, the prospect of mass unemployment looms, together with a recession. Little wonder so many are seeking safety by boosting their lettings, or joining a franchise.
As Martin Bunney says, “If I had an estate agency-only business right now and I saw the evidence of what I’ve just seen, I would be thinking to myself, ‘I’m not going to do this again, I’m going to have a secure income stream’.”