The right moves
Reports of bonanza earnings by the partners in Knight Frank UK, set me thinking about the globalisation of the estate agency business, and the implications for people involved in the industry. And it’s clear that, whilst size matters, it’s far from everything:
For the year ending March 2018, Knight Frank’s 70 equity partners in the UK enjoyed an average payout of £2.4m (€2.8m) each. That represents a margin before tax of 32pc, on turnover of £167m (€195.5m).
This result dwarfs the payouts to equity partners in the “Big Four” accountancy firms (below £1m (€1.2m) each) and all of the UK law firms, bar one.
Some commentators are attributing this to Knight Frank’s leading position in the top-end of the London residential market. However, whilst Knight Frank say that their UK residential business “performed robustly”, it was their commercial businesses which had a record year, and that’s an interesting outcome in the shadow of Brexit.
There are a few lessons from this result: the first is the importance of being in diverse sectors of the market. So, whilst Knight Frank enjoyed a bonanza through a booming residential market, when that weakened, the commercial departments produced the goods. Another strength the global players have is that when particular markets are in a downturn, markets somewhere else can replace missing turnover.
It’s also interesting that Knight Frank can produce such profits, given their size relative to the other big global players.
CBRE are dominant with world revenue last year of $21.3bn (€18,9bn), and on a European scale Knight Frank are ranked fourth by turnover, with about half the revenue of Savills, and a third of JLL’s.
The estate-agency business has been transformed over the last 15 years, with the largest handful of firms growing fast by acquiring independent businesses around the world.
There are three main factors driving this: a) globalisation by clients, means that clients have property needs in different territories and the firms compete for mandates to handle all that business; b) there are synergies in that firms in one territory can refer clients and enquirers into other countries and earn a share of fees; c) the acquiring companies are leveraging-off the strength of their brand. The deal makes both them, and the local firm, stronger. There may also be economies of scale.
This overseas ownership of firms has brought great change to the local business models. Traditionally, the career path was to earn your income via a blend of basic salary plus a commission for each job you handled. The best performers would then likely be promoted to a position as an associate director, or a “non-equity” director. Promotion to “director” was prestigious, and usually meant an increased basic salary, management responsibilities and a commission based on a departmental profit. One downside was that the very top fee-earners could actually suffer a decrease in earnings, as their efforts became “pooled”. But this was accepted as a step on the path to the ultimate goal, which was to be awarded “equity” or the opportunity to build a shareholding in your firm.
The acquisition of the “equity” by an overseas player, sees that goal disappear, so the acquiring companies have to find the correct blend of remuneration, to attract and retain staff. They will pay strong directors salaries and may leave a third to a half of the profits of the local firm, to be divided up through bonus schemes. If the parent company is a public one, local staff may be part-rewarded by being awarded shares in the parent company, but which can only be sold at some stage in the future – and if you remain an employee, thus serving to bind-in staff.
Knight Frank has a very strong Irish operation and will be delighted to be part of this story. One thing clients and staff love, is being associated with success. And another lesson is that, whilst size matters, margin is even more important.