Property Letting - The Case for Consolidation

Introduction

The UK Property Letting sector has seen a significant amount of legislative change over in 2016 and 2017 [1]. The implications of these changes will continue to be felt for the foreseeable future, as elements continue to be rolled out.

If you’re involved in this sector, it’s likely that you know all about this already. If not, we suggest you talk to your industry bodies at the earliest opportunity to avoid any issues.

However, this dynamically uncertain environment presents an opportunities for those that want to take it. This short article presents the case for consolidation by merger or acquisition within the UK Property Letting sector.

Why Might you Acquire in the Property Letting Sector?

The underlying reason for acquiring is your Strategic Rationale. This gives a strong starting point for conversations around funding or investment in your business, as well as clarifying why you are considering this option. 

You can download an example Strategic Rational template here

In the Property Letting sector, the Strategic Rationale might be:

• Local Market Consolidation - Reducing excess capacity or competition in a geographic market.
• Optimising the Performance of an Acquisition Target - A competitor may be hampered in managing costs, sales or both by their small scale. Combining the organisations may give a stronger base to work from.
• Geographic Expansion - An agency which is concentrated in a single geographic area is more exposed to local trends than once which has wider coverage.
• Buying Cheap - The Legislative changes mentioned above may prompt some agencies to exit the market at a lower exit valuation than may otherwise be the case. For example, in Scotland, the agency registration and certification requirements may encourage older agents to choose retirement rather than investing time and money in meeting these standards.

Each is a valid reason for consolidation, but to build the business case further detail is required. These are the Value Drivers for the deal.

What are the Value drivers for your Acquisition?

The Value Drivers for any deal are specific to that situation, and ultimately determine the price that a buyer is willing to pay.

Example Value Drivers may include:

• Increase of Portfolio Size - Ultimately, property letting is a relatively straightforward business. Assuming everything else remains proportional, cost and revenue will scale with the size of the portfolio. This should be the baseline for future business planning. However, simply increasing size will not add significant value to the business, unless the acquired business was operating below an efficient scale.
• Economies of Scale - At a certain scale, it will be possible to drive further efficiencies. For example:
• A small back-office team can provide support for a larger number of client facing staff, freeing them up for sales and service.
• Supplier relationships can be enhanced, driving down per unit costs, e.g. for electrical or energy efficiency inspections.
• Investments for Growth - More significant investments such as IT improvements can be considered. For example, providing customer facing staff with tablets to enable digital documentation, opportunity tracking and photo evidence capture.
• Spreading of Portfolio Risk at the Agency Level - A smaller client portfolio is always subject to more variability. By increasing the size or geographic scale of the portfolio, monthly variation in revenue can be minimised. This allows for better cashflow planning, which in turn may allow more aggressive pricing against the competition while retaining margin.
• Capturing Best Practice - It may be hard to believe, but you are not the best at everything! Due Diligence on an acquisition will highlight areas of operation where the target does things better than you. Capturing this best practice, and combining with your own Operating Model, will improve the effectiveness of the business. This too may lead to lower cost and higher revenue. 

Perhaps the most important Value Driver is to increase the future value of the business for exit. While selling your agency may not be front of your mind at the moment, scaling up by consolidation and acquisition has the potential to significantly increase the future sale value. If this is your eventual plan, then you should consider any acquisition in the context of:

• Having a clear history of revenue growth
• Demonstrating stable and predictable cashflow in the current challenging economic and legislative environment.
• Establishing barriers to further entry of your local market

Beware of Dis-synergies

While acquisition is the fastest route to growing your business, it does not come without risks. These are sometimes known as dis-synergies, i.e. factors which will decrease the value from the deal.

We’re not going to go into the detail on these here, but as a guide of things to consider, the following diagram shows the results of a survey describing where challenges were faced in merger integration projects:

Source: PwC 2014 M&A Integration Survey Report

It is always better to plan effectively in advance than to find yourself hitting these issues after the deal is done. 

Conclusion

The political, legislative and technology challenges facing the Property Letting sector are significant. Companies within this sector must consider how they are going address these while continuing to grow their businesses. 

Mergers and Acquisitions are not the only answer - organic growth and stability are valid strategies. However, these uncertain times provide an opportunity for rapid change for those that are willing to take it.

If you do choose to take this route, ensure you get the right advice. RitchieHogg provides practical advice on the end-to-end process, supplementing targeted help you may receive from other advisors such as solicitors and accountants. Further information is available in our Whitepaper “M&A Success for SMEs”, featuring the RitchieHogg Acquisition Framework:

[1] Recent Legislation includes:

• The Housing and Planning Act 2016
• The Renting Homes (WALES) Act 2016
• The Private Housing (Tenancies) (Scotland) Act 2016