SAVILLS looking oversold

The Sunday Times December 18, 2005
Savills manages to remain a hot property
Judgment Day: should you buy shares in Savills?

THE group provides international property services and has a network of offices and associates throughout Europe, the Americas, Asia Pacific and Africa.
Savills has six different businesses: transaction advice, property management, consultancy, facilities management, fund management and financial services. It deals with the American market through its partnership with the leading property services company Trammell Crow.

Savills employs more than 12,700 people worldwide in 103 offices. The company is run by chief executive Aubrey Adams and two chairmen, Jeremy Helsby and Rupert Sebag-Montefiore.

The two experts below have been selected for their skill in several investment areas. They, or the funds they manage, may buy or sell shares in the companies or sectors that are discussed in this column.

Andy Brough: fund manager at Schroders:

Feeling hot, hot, hot must be the sensation experienced by everyone associated with the property sector in the past few years. People seeking a safe haven for their savings have poured so much money into commercial property that yields continue to hit new lows. And we all know what has happened to residential property.

Savills is normally associated with the top end of the property market and those glossy photos in Country Life, but there is a lot more to the company than this. The proposed introduction of real-estate investment trusts (Reits) should increase the number of transactions, which can only be good news for the market leader.

In addition, there seems to be no let-up in the demand from the Middle East where buyers, awash with the proceeds of the high oil price, are snapping up property in central London.

Savills has also established a platform to tap the “wall of money” that is expected to be invested in European property. You have only to see the number of companies floating on the Alternative Investment Market to get some idea of the potential demand. Investors are looking to take advantage of the higher yields available in areas east of Vienna, where property can yield nearly twice what it does in Britain.

Savills has established a fund-management business to exploit its expertise in these markets and provide a home for money looking to get into this area. These funds will typically borrow £2 for every £1 put in by the investors. This allows a higher return to be made (providing the market keeps going up) and should enable Savills to earn good performance fees.

The target is to at least treble funds under management in the next five years as this is a market where institutions and retail investors are underweight.

Savills’ share price has virtually quadrupled over two years, principally due to earnings upgrades with a bit of a re-rating. The shares are on a price/earnings ratio of 15 to December 2006 and a yield of 2.8%. There is a lot going on in this company and it enables you to play all areas of the property sector.

Judgment: Buy below 900p.


Tim Steer, fund manager at New Star:

Savills is more than just an estate agent. It is a broadly based property group with a growing presence in the Far East and a company that sits right in the middle of the current interest in property as an asset class.
Traditional asset classes include equities and bonds but a third one is gathering momentum and that is property. This is hardly surprising because property has performed better than equities or bonds over the past ten, five and three years. In the past ten years property has returned 12.3% a year in capital and income against 7.6% a year for equities.

One should look at Savills rather like one looks at an investment bank when stock markets are rising — it is a geared play and the company has the same kind of cost structure as the investment banks because, increasingly, costs are variable — bonuses last year accounted for 70% of salaries and, not surprisingly, staff are highly motivated as a result.

Just as the mid-tier brokers such as Numis, Evolution and Panmure have capitalised on the buoyant Alternative Investment Market (AIM), I guess that Savills will be involved in the next wall-of-money story — AIM property companies, many of which will be European. There are expected to be 50 of them on AIM by the first quarter next year as new companies exploit the gap between a gross rental yield — in Germany in particular — of 7% to 8% and all-in financing costs of 4% to 5%.

While Savills is transaction-led in its commercial and residential activities there is some resilience in the latter as it specialises in the £1m to £50m price bracket — a range in house prices not normally affected by the British economy or interest rates as many of the clients are from overseas.

The shares trade on 14 times 2006 ex-cash earnings so they are not a steal but Savills’ embryonic fund-management business will give the shares a gentle re-rating over time. The company will provide a trading update early next month and the shares should be purchased before then.

Judgment: Buy.

Savills at a glance

Share price: 950p
Market value: £630m
Year end: December 31
Consensus forecast for 2005 pre-tax profit: £51m
Consensus forecast for final dividend: 21.16p

The largest investors in Savills are Trammell Crow (12%), Savills Employee Benefit Trust (7%), Barclays (7%), Legal & General (3%).