Property Natter - what happened when big lenders had their own estate agencies?

All my recent Natters have been focused on one particular topic, the coronavirus crisis, for obvious reasons. But there has been a greater sense of some normality returning since the lockdown started to be eased at the beginning of last week.

The property market reopening was one (major) sign of this. So now seems a good time to start focusing on something other than Covid. In fact, we’re going to travel back into time to the mid-1980s – when I was still just a boy! – when the worlds of estate agency and financial services collided, with disastrous effects in most cases.

Whilst researching a recent Natter, I came across this Independent article from 1993 which looked into the story behind Abbey National, a well-known former high-street building society and bank wholly swallowed up by Spanish banking giants Santander in late 2004, and the sale of its disastrous 1980s estate agency venture.

It piqued my interest and so here, with the help of EAT editor Graham Norwood and his encyclopaedic knowledge of all things property, I delve into the fascinating historic relationship between big lenders and agency, with some remnants still existing today.

Once common, now very rare

Once upon a time, financial institutions of all types used to own or invest in agencies in a way that rarely happens at all now.

Hambros Bank (a now defunct British bank originally founded as far back as 1837) was 30-plus years ago very big into corporate finance and an early part of what is now Countrywide.

Bradford & Bingley (then a building society, now a mortgage and investment firm) was a big player in the corporate finance sphere, too, and involved in financial services activities alongside Black Horse (part of Lloyds).

Both Bradford & Bingley and Black Horse had agencies that took their brand name. While some of these agencies have simply disappeared over time, some have been absorbed into the big agency corporates which exist now.

The biggest example nowadays of a close connection between a major high-street lender and a major agent is Connells, which was acquired by Skipton Building Society in 1996 and remains a subsidiary of it to this day. Founded in 1936, a founder member of Rightmove and with a network of 600 branches nationwide, Connells Group – which includes brands such as Gascoigne Halman and Barnard Marcus – is perhaps the most successful and long-lasting example of an agency-financial services tie-up.

There are also a few smaller agencies still owned by building societies today. One well-known regional example is Harrison Murray, which is a wholly-owned subsidiary of Nottingham Building Society and has been for decades.

Meanwhile, in the portal world, HBOS (Halifax Bank of Scotland before they split off into Halifax and BoS as a result of the global financial crisis) at one point owned a large chunk of Rightmove before selling its remaining stake during the credit crunch.

In May 2008, HBOS sold off its entire 13.1% shareholding in Rightmove, weeks after the property website warned that increasing estate agent closures would have a significant impact on the business.

HBOS, which was one of the four founding shareholders in Rightmove alongside Countrywide, Connells and Royal & Sun Alliance, sold 16.2 million shares and raised £59.2 million, just two years after Rightmove floated on the London Stock Exchange.

Terrible investments all round

In the mid-1980s, the Prudential (often known as the Pru) was the UK’s biggest financial services group. It’s still a humungous name now, with a primary listing on the London Stock Exchange and membership of the FTSE 100 Index.

This made its purchase of a medium-sized estate agency called Ekins, Dilley & Handley for £12 million in 1985 a slightly surprising one. It was small change to an incredibly well-resourced group like the Pru, but according to Richard Thomson – who penned the Indy article all those years ago - this relatively modest deal ‘began an extraordinary sequence of events that left Britain's leading financial services companies with egg all over their faces’ and losses of more than £1 billion by 1993.

Once word of the Pru’s deal fed through to the rest of the financial services industry, it was a case of follow the leader as insurance and building society executives entered panic mode and, barely pausing for breath, decided they wanted in on the action. As Thomson says: “Suddenly, all hell broke loose.”

Between 1985 and 1989, these firms battled it out to acquire estate agency chains UK-wide, at the cost of well over £1 billion. The housing market collapse of 1989 – which saw house prices eventually fall by 20% between ’89 and 1993, with around a quarter of a million homes repossessed and many more in negative equity – meant everything went a bit Pete Tong for those who had invested big in agency.

While total losses are hard to quantify, it is predicted that they comfortably surpassed the sums originally spent. The Pru finally sold out for a total loss of £340 million in 1990, while in August 1993, Abbey National sold its 347-branch Cornerstone chain for only £8 million, leading to a loss of a quarter of a billion (£250 million) since 1987.

What went wrong?

The Pru was testing out a theory with its original purchase that it could sell more mortgage-linked endowment policies through its own agency offices. These policies were extremely valuable to insurance companies but the Pru had been left behind because the big building societies – seeing the Pru as competition – refused to offer Prudential policies to their mortgage customers.

The theory could never be played out to its conclusion, though, with other insurers copying the Pru as soon as they saw what it was doing. A surge began, accelerated by the new Financial Services Act which required insurers to sell their products either through tied agents or independent brokers.

Provident Life, General Accident (GA) and Royal Insurance began searching for estate agents to purchase, while the Pru and Lloyds Bank – who, according to Thomson’s article, had started down this route earlier than anyone else - set about acquiring some of the UK’s biggest and best agencies at some not insignificant prices. The Pru, in just a couple of years, had acquired a chain of over 800 branches, while Royal and GA had approximately 700 and 600 respectively. The gold-rush had well and truly happened.

The UK’s biggest building societies soon piled in, with Charles Toner – then managing director of new business at Abbey National – admitting it got involved to imitate others.

There was some strategy behind this, with half of the Abbey’s mortgage business coming via estate agents. It was worried that if the whole sector got tied up to other lenders, its own lending tap would be switched off.

Concern was already there for the building societies because, by 1986, competition from the banks had seen their share of the mortgage market decline from 80% to just 50%.

Building societies wanted to defend their market and were rattled when Nationwide – one of the country’s biggest building societies then, and now the biggest – announced a tie-up with more than 200 agencies.

The starting gun had sounded, and Halifax and the Abbey each had 500 branches within four years. Nationwide by this point had 500 branches, TSB joined in and other smaller building societies hoovered up the scraps. By moving in late, the Abbey missed out on signing up any big players and instead ended up with 112 entirely different chains.

In the rush not to be left behind, no-one checked if what they were doing was actually the right thing.

Throughout 1987 and 1988, as the bidding got incredibly competitive, prices went crazy. Offices were in some cases going for £400,000 a pop.

The owner of a Midlands chain called Tony Snarey sold it for £90 million to Royal despite the company only making a yearly profit of £6 million.

With the prices so high and unjustified in many cases, many estate agent owners decided to sell up. While agents were initially impressed by their new partners, this soon evaporated when it became clear ‘they didn’t know anything about estate agency’, says Steve Minchin. (Minchin sold his firm Reeds Rains to the Pru for about £24 million having been approached by six major players.)

But it soon ruined any goodwill it had by replacing the name of its agencies with Prudential itself, which had no meaning to local buyers and sellers. It also cost a bomb, with £60,000 spent on refurbishing some branches.

As costs soared, the insurance companies and building societies who had been so acquisitive started to close down many of the offices that they’d shelled out so much for only a few months prior. Senior estate agents had to switch from selling houses to handling the huge amount of admin demanded by their new owners.

Mike Newmarch, chief executive of the Pru by 1993 but not directly involved in the ill-fated estate agency venture, admitted that the Pru’s error was in trying to create a corporate environment where this was not suited. Corporate and estate agency are not natural bedfellows now, let alone in the 1980s, so I’m not surprised this was the case.

To try and salvage something from their acquisitions, the companies attempted to make agencies pay their way by creating a one-stop financial shop. The idea being that a house-buyer was a captive audience who could be sold all the necessary legal, investment and insurance things in-agency – but this never came to fruition. Buyers resented estate agents selling them insurance, they wanted that advice from elsewhere.

It also soon became clear that agencies weren’t very effective when it came to enhancing the endowment business of insurers or the mortgage business of building societies – the very thing they had been acquired for. For instance, Abbey National’s large agency chain never made up more than 5% of its total mortgage lending. The attempt to bring these two very disparate things together had been a disaster.

All these issues were then exacerbated by the 1989 housing collapse, which saw the number of house purchases drop dramatically. Estate agency – a high-volume, low-margin business – was crushed.

The Pru’s agency chain saw its profits of £17.2 million in 1988 turn to losses of £48.9 million the following year. Royal, meanwhile, went from profits of £8 million to losses of £26 million in the same period. While the housing collapse played a major part in this, these agencies were not set up in a way to prove resilient against such outside influences.

The Pru acted quickly to get out first. It started selling in 1990, believing estate agencies had no value after all. Large losses were a price it was willing to pay to escape. Minchin bought back Reeds Rains for only £3.3 million, having sold it for nearly eight times that much five years before.

By 1993, Nationwide and the Abbey had sold out, too – although by waiting longer to potentially ride out the storm they got even lower prices (according to Thomson, selling offices for a twentieth of what they paid for them in some cases).

Royal, Halifax and GA said they were committed to estate agency, but GA no longer exists, Royal is now known as More Than and the Halifax estate agency chain was sold off on the cheap during the global financial crisis.

Will it happen again?

Very unlikely. Since the 2008 banking crash there have almost certainly been guidelines (possibly laws) which have led senior management at major financial companies to avoid potentially high-risk investments like estate agencies.

Instead, what you do get today is agency-bank tie-ups, with big loans of many millions for agencies to acquire rivals. Yorkshire’s Linley & Simpson is one example, with bucketloads of money provided by Santander.

There we have it – an object lesson in why agency-financial services tie-ups rarely work well. Until next time…and stay safe!

*Nat Daniels is CEO of Angels Media, publishers of Estate Agent Today and Letting Agent Today. Follow him on Twitter @NatDaniels.