Sail on the sale boards as housing rebounds: Quoted residential estate agents expect London prices and activity to lead the long-awaited recovery of the property sector

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The Independent Online
IT IS SURPRISING how often in investment that the obvious strategy is the right one. Many mistakes come from trying to be too clever.

I have believed for some time that one obvious strategy is to accumulate shares in quoted residential estate agents. Because of their branch networks and consequent high overheads, any pick-up in prices and activity in the housing market translates into dramatically higher profits.

This has worked to their disadvantage over the past three years, during the worst residential property slump in decades. But there are now unmistakable signs of improvement both in prices and levels of activity. The largest building society, Halifax, and its rival Nationwide, are looking for average house prices to rise by 5 per cent this year, accompanied by an increase in activity by perhaps up to 15 per cent.

A pointer to what may lie ahead for the sector can be found in a parallel between estate agents and stockbrokers. The latter do well when stock markets are buoyant. Just how well has been indicated by a profits explosion at Smith New Court, the quoted stockbroker and market-maker, where shares have more than quintupled since August 1992 - and still look cheap.

By contrast, shares in the largest quoted estate agency, Hambro Countrywide, have slightly more than doubled over the same period to 86p.

My bullish thesis is going to be tested quickly, since of the three quoted residential estate agencies, Savills, at 96p, is reporting its interim figures on Thursday and the central London specialist John D Wood, at 84p, a week later. The results will certainly show continuing improvement from the dreadful conditions in the second and third quarters of 1992 and should be accompanied by positive statements on prospects. But the real case for all the shares is the prospects for housing markets in the mid-1990s.

The big bull is Savills, which has astonished other observers with a seemingly outlandish forecast that central London house prices could rise by 25 per cent in 1994. Director Victoria Mitchell vigorously defends the forecast, based on factors such as affordability, the encouragement of foreign buyers because of the weak pound, and a belief that prices fell too low in 1992. Even with such a recovery, she expects prices will still be significantly below the peaks of 1989-90.

Outside central London the recovery will lag, with rises of 15 to 20 per cent within the M25 and perhaps 10 per cent in the country at large, according to Savills. The figures are based on the company's own indices, which already show an 11 per cent recovery in central London prices for 1993 against its forecast of 10 per cent at the beginning of the year - which raised eyebrows at that time.

An important point about all the estate agents is that they do not just sit taking a turn on house sales. Savills is divided roughly 50-50 between residential and commercial (and that market also is improving dramatically) and it aims to make 60 per cent of profits from professional services, such as valuations and surveying, where business is less cyclical than on the commission side.

Hambro Countrywide, which strengthened its balance sheet by selling its legal protection business into the recently floated Hambro Insurance Services, also has a rapidly growing wholly-owned life and general insurance subsidiary, Hambro Guardian. Launched five years ago, this has grown into a substantial business selling endowment policies and other property-related insurance. It has just come to the end of a five- year reinsurance and administration deal with Guardian Royal Exchange, which means that all the profits will now accrue to Hambros, although Guardian retains an interest with a 22 per cent share stake in Hambro Countrywide. Recovery in the housing market would give a dramatic boost to Hambro Guardian's growth.

But the real fireworks will come on the housing side, as a huge chunk of any incremental income from higher house prices and transaction levels flows straight to the bottom line. Some idea of how tough it has been is given by the fact that the group reported overall losses for four successive years from 1989 to 1992. It returned to modest profit in the first half of the financial year, discounting the pounds 11m gain on the sale of Hambro Legal Protection. A pointer to second-half prospects is that agreed house sales in the hands of lawyers were up 80 per cent. It looks just a matter of time before the group's profits and share price take off in the style of Smith New Court, especially given that the average commission rate on a sale has increased by 25 per cent or so over levels in the 1980s.

John D Wood (with no connection, incidentally, to John D Wood Commercial) was understandably guarded on specifics so close to its results, and was sceptical of the notion that London house prices could rise by 25 per cent this year. If they do, however, this tightly run business, with eight of its 14 offices in wealthy areas of London, should do very well.

An intriguing variant on the straight residential agency - and one with recovery potential that is every bit as exciting - is the Christie Group at 60p, an agency and valuer with 11 branches and a dominant share of the market in hotels, pubs, nursing homes and convenience stores. Activity and price levels in the leisure-related fields have taken a battering, with volumes down by half on the 1989 peak and prices down about a third, in an almost exact parallel with what has happened in the residential market.

Like others, Christie has focused on fee-earning professional services, but has still had three years of losses, with the low point in its markets as recent as the beginning of last year. Since then corporate demand has begun to revive, and the group reported a tiny profit for the first half to end-September 1993, although no dividend as yet. It is still an act of faith to buy, but I am convinced investors prepared to take a view will be handsomely rewarded.

(Photograph omitted)

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