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 who has specialised in the property sector for more than forty years.