Several of our big business sales have been announced over the last few weeks and the trolls have been busy slagging off the buyers. Their view is that the buyers have paid far too much money for what they have bought and that they will never get it back because the landlords will all leave and go to a cheaper agent instead.
I find these comments to be extraordinarily ill-informed. Most of the buyers are professional investment funds or large regional or national estate agency companies. They are highly profitable and successful businesses run by experienced and sophisticated management teams. To talk of them collectively as if they are a herd of sheep following each other over a cliff is insulting and just plain wrong.
A managed letting business that turns over £500,000 per annum will typically sell for £700,000 to £800,000. Such a business would typically make a profit of £75,000 to £100,000. However, if it is bought by a local competitor and run from their shop, it will make a profit of circa £250,000 per annum. This means that the buyer will get their money back in around three years which gives a return on capital of 33%. This is a fantastic rate of return.
The post-acquisition wastage rate of a letting book is typically 5-10% per annum. Even if the buyer lost half the landlords which would be unprecedented, they would still make a return on capital of 16.6% per annum which is a better return than most independent agents earn from even a well-run letting business.
Buying a letting business is therefore a wholly rational thing to do. The risk to reward ratio is very attractive and the returns are fantastic. In view of this, further consolidation of the letting industry is absolutely certain to happen and the buyers will have no cause to regret their decision to expand through acquisition.
Adam Walker is a management consultant and business transfer agent at Adam J Walker & Associated Ltd.
If you’re not an investment fund or a large regional agency…you know nothing.
You know this, because AJW have told you.
Now move on, there’s nothing for mere mortals to see here.
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“Most of the buyers are large regionals and nationals”
As if somehow that means the purchases are copper bottomed .Just.ask CWD who hoovered up lettings inventories with borrowed monies only to see revenues shrink
Inventories disappearing within nanoseconds as individuals contracts expire.
Starting up afresh thanks for the big cheque as they start up next door cherry picking both staff and clients.
Caveat emptor.
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There’s another, in my view quite important element AJW is missing here…of those portfolio clients, how many are either in the process of, or considering selling (based purely on the economic outlook, sec.24, and now the spectre of even greater LL taxation)? 5,10 maybe even 15% of those?
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The fourth paragraph covers exactly that? Even going as far as showing what would happen if 50% of the portfolio was lost. Might be an idea to read the entire article prior to making a comment.
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Although question the immediate saving of £250k pa !on an acquisition 50%. cost savings? Minor problem of jettisoning premises without incurring costs for starters.
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Hi AtomicPea,
I don’t believe the fourth para does ”cover exactly that”…The term ”wastage” seems by implication to be, not loss as a result of disposal of assets, more relating to losing clients to other firms/self-managing (I assess that this article relates to a recent one, regarding the sale of Aston Rowe, to Foxtons).
I would imagine that quite a number of Aston Rowe’s clients were with them, precisely because they chose to not engage Foxtons, KFH, M&P etc. (indeed both AR’s and F’s Hammersmith/Shepherd’s Bush offices are only some 500m apart).
For clarity however, my hypothesis relates specifically disposal of LL assets (and this point specifically, is IN ADDITION TO the ”typical” figure suggested by the author, not as a part of). Given that the level of LL disposal over the past two years, has been notably higher than in previous years [for some of the reasons I had previously alluded to].
I’m sure that a buyer would be pleased to lose 50% of the portfolio they’d just paid £2.2m for, and to be told…well, even if you lose 50% of the clients, its still a good result (I disagree)…
But I appreciate your suggestion…i’d not thought of reading something, before commenting on it.
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Wise words.
attended a few of his courses. Always done what he says. Made the business more profitable…
where are my local letting agents…?!?!
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I was one of those who sold to one of those ‘sophisticated’ buyers….. they made the biggest mess anyone could of the business and continue to constantly lose clients. I sold because the industry is on the decline and don’t regret it.
I have also acquired books in the past and have certainly not gained the truth about the quality of the book from the selling agent. In fact once they email you the contact number you never hear from them again unless it’s to confirm your price…..
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I think I must be one of those Trolls! Buying a letting portfolio only makes sense if you get it for the right price.
Mr Walker – That’s a big leap of faith to assume that a business netting £75k per annum will net £250k in new hands. Is that with or without, borrowing costs, redundancy costs, attrition costs etc?
Mr Walker – you buy and sell lettings portfolios as part of your livelihood don’t you?
For me Happy Daze is a way more credible commentator on such matters.
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There is some truth in there. We sold our business to the big boys back in the day, and a small amount was deferred and paid to us based on their retention of clients. I was amazed that pretty much all stayed with them based on the service we experienced. We’ve also brought small portfolios but nothing like the ratio’s mentioned.
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When you calculate your rate of return for any investment, you’re calculating the percent change from the start of your investment until the end of the period you’re measuring.
What a book produces now is not necessarily what it will achieve in the future if you do not own the stock i.e. Landlords! The quality of the stock and actual and potential future liability will affect that investment return. Lettings is a very risky business with tax changes (gross not net), new legislation on construction in the wings, tenant protection, arrears and political landscape all to be considered. Just like anything you invest in, pay too much and your liability of loss appears on the horizon when the going gets tough. All boils down to the quality of the book.
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with a turnover of £500k then thats going to be about 6/7 staff if profit of £75k then losing 4 staff/redundant will free up about £100k-ish? thus £175k less office overheads of 2 offices then your up to £210ish easily. Funny coincidence with the figures as we are at £560k turnover but we are already at £220k profit. if taken over and consolidated then 2-3 staff could go getting that £220k up to close to £300k profit.
As Woodentop has said the quality of the landlords and properties are key but equally the quality of the references (most inhouse) that we do help ensure we have sucessful landlords. We have had many for 20+years and work hard to provide an excellent service. May have to contact Mr Walker for a estimate of a sale price !
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Well binning the 3/4 staff who have served the clients well and enjoyed a good working relationship isnt going to sit well Client now.being passed over to some salary man in some behemoth also causes slippage.
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