PROPERTY

The digestive difficulties of gobbling up estate agents

NISHA STEYN

ost people care more about the value of their houses than the level of the stock market. Yet while there was wide- spread fascination with Big Bang in the City, the Big Bang in estate agency has largely been consigned to the financial pages.

They both have the same ingredients: Firstly, an unseemly scramble by financial institutions, out-bidding each other with telephone number pay-outs and golden hellos, for fear of being left out of the game. Then the shake-out: hundreds of redundancies and punctured corpoiate egos.

Admittedly the firing gun for the City's Big Bang was set off only too publicly. On 27 October 1986 the old rules were torn up, the new rules ushered in, allowing new members into the club. So the limbering up before the starting line was hard to miss.

The Big Bang in estate agency did not happen by announcement. There was no precise moment when it took place. Yet while three years ago there was only one large chain of estate agents with over 100 branches, now there are seven with over 500. And they are all owned by banks, building societies or insurance companies.

The trend setter was Lloyds Bank. It started putting together its Black Horse chain over 'five years ago. Today it has slipped to fifth position in the league table, after the Halifax Building Society and the insurance groups of Prudential, Royal and General Accident. Nationwide Anglia and Abbey National are now seventh and eighth. Unlike the Stock Exchange Big Bang it is building societies and insuranee companies, rather than banks, which have been making the running.

And the sums they have paid have been spectacular. The Prudential spent almost £250 Million to build up its 800 strong chain. (By comparison, BZW, probably the most expensive new stockbroking group, is thought to have cost Barclays Bank 'only' around £150 Million to put together.) , Worse, Many newly enriched partners simply took the cash and ran. Jeremy Agace, for instance, late of Bairstow Eve; when it was subsumed into Hambro Coun- trywide, Agace made enough to retire to Monte Carlo. He looks back with disbelief on what some of the newcomers were prepared to pay: 'It was a real bonanza for estate agents — and their accountants. You've never seen such a tarting up of the books to bolster the previous year's profits. Most institutions were so keen to buy they didn't • attach too Many conditions, they just handed over the Money. The sensible thing would have been to pay only a part of the settleinent up-front, and make the rest depend on future profitability. Very few fitins did that. Most ended up paying over The odds.'

Why the great urgency? Because some- time in the course of 1985-86 estate agents suddenly became seen as the doorway to all sorts of golden opportunities. 'It's the first port of call when people'are going to change their lifestyle,' explains Harry Hill of Ham bro COUntrywide. 'The agent is the first person they go to. When they marry, when they divorce, not quite when they die, but after someone. else dies, very often the first thing people do is to change house. We see it as a trigger point to many other transactions taking place.'

In other words, sell someone a house and the chances are you can persuade them to buy something else as. well — like a mortgage or some life insurance. That is the theory. But in practice it has not really worked.

, Remember all the pre-Big Bang tales of how snooty merchant bankers rubbed flashy stockbrokers up the wrong way? Well, imagine the culture clash when staid insurance or building society man meets wide-boy estate agent: salary scales based on years of service replace commissions based on what you've actually delivered. The Mercedes convertible is traded in for the company Sierra because head Office says so. . . It may seem hard to belieye but it also seems that many new owners imagined they were paying for recognised profes- sional skills -- that .certificate on the wall — rather like solicitors or surveyors. In fact, as most of us would suspect, standards in estate agency vary tremendously. So it has not been an easy job trying to create homogeneous chains from such diversity.

For example, most of the £100 million acquisition. costs of Nationwide Anglia's Move into estate agency have been written off as goodwill, and 50 expensively ac- quired branches out of 500 have since been shut down.

To Donald Storrie who was in charge of Nationwide Anglia's estate agency busi- neSs for all of 18 Months, the strategy was not properly thought through: 'If your main reason for buying estate agents was to make money you would have kept away from areas where it's extremely difficult to get high levels of profitability. Areas where house prices are low and where commis- sion percentages are low. It's much easier to make a profit when you're getting two per cent of a house worth £250,000 than it is to get one per cent of a flat which you're selling at £22,000. But the rationale wasn't sheer profitability, the rationale was to get a national network, to be big, so therefore you needed a geographieal spread.' In theory, insurance companies should be much better placed than building societies. Unfortunately most are coy ab- out revealing their figures, so it's hard to judge. However the Prudential reckons to have persuaded about a quarter of its house buyers to try other Pru products, generating about £9 million of new life assurance buSiness in the process — peanuts compared with its total UK re- venues of £252 million last year.

The Prudential is thought to have made overall only £18 million from 800 branches. In other words it would have done better to have left the £250 million it spent on estate agents on deposit. Nationwide Anglia actually lost £3 million in the 1987-88 financial year. And that was when the housing party was still in full swing.

Now that the property boom is running out of steam results can only get worse. Already the redundancies have begun — 500 at a stroke at a couple of chains.

So far the public line is to stick it out: we're in this for the long term. But that is what the new breed of stockbrokers said too, shortly after the Crash. In the course of 1988 many Of them caved in. After all, what really hurt stockbrokers was not so much the collapse in share prices 8 the lack of activity. The economics of estate agency are identical. House prices may not have crashed but in the south-east at least the market has ground to a halt. And fewer house transactions, inevitably means fewer opportunities to cross-sell other financial products.

From his South of France . retreat, however, Jeremy Agace's verdict is pessi- mistic: 'A lot of people are hoping that the market will bounce. But I'm old enough to fear that it may be a long wait — that's what followed the 1974 property crash, and the pessimists were proved right then.'

Nisha Steyn is a reporter on the BBC's Money Programme.