Sticking to their guns

Mladen Petrov

The advisory agencies’ financial results are here and – again – it is not looking good. As profits fall, the global agencies are tightening their belts. What could this mean for the CEE region?

No one knows the property market better than real estate consultancies. Or at least most people tend to believe so. So, when their financial results finally came they were the last ones to be taken by surprise. In the quagmire of explanations about the reasons why profits were significantly down (credit crunch, slowing down of leasing and investment activity), there remains some room for optimism.

Few digits to start with

Cushman & Wakefield was the first company to announce an actual loss in the first half of 2008. The deficit of USD 67.3 mln was published in the accounts of its Italian owner, the Ifil Group. The owner commented that the main reason for the losses is to be found in the sudden drop in the performance of the capital markets advisory services, which so far has been the most profitable area of the company’s business. Bob Rozek, C&W chief financial officer, told ‘Eurobuild CEE’ that: “The historical operating results of the company have always followed a seasonal pattern, with first half revenues and operating results being significantly less than the revenues and operating results in the second half.”

The company’s competitors – Jones Lang LaSalle (JLL), CB Richard Ellis (CBRE) and DTZ – also blamed the situation on the credit crunch and the growing costs of acquisitions. Due to the reduced number of transactions, companies have experienced a reduction in profits – a 69 pct fall to USD 24.5 mln for JLL and an 88 pct fall to USD 16.6 mln for CBRE against the same period in 2007. The announcement of the Q2 figures resulted in JLL’s share prices plummeting – USD 48.25 on July 30th, down from USD 56.73 when the results were announced on July 29th. A year ago, on July 30th, JLL’s closing share price was USD 115.15, while shares in CBRE were priced at USD 10.75. After the announcement of the Q2 financial results, CBRE’s closing share price on July 29th was USD 2.6. The two companies explained that another reason for the poor financial results is the slowing down of leasing and investment activity, especially in America and the UK. CBRE’s revenues were down by 13 pct at USD 1.3 bln. On the other hand, JLL has recorded increasing revenues in the Americas, Europe, Africa and the Middle East, where CBRE’s revenues have slumped. DTZ’s profits in 2007 were 45 pct down to GBP 5.6 mln as a result of a number of corporate acquisitions in 2007, including the takeover of Donaldson’s, but as company officials commented, “the 2007 results are in line with expectations.”

Looking good in CEE

In the CEE region, however, the situation looks different. When asked for the financial performance of the region, John Duckworth, JLL’s new managing director of CEE operations, says, without sharing more details: “We are going to plan. The consensus in the company is that we will meet our targets, meaning that we will be able to close 2008 on a sound financial basis. It’s no surprise that the capital markets are more challenging, but we are seeing growth in our retail and office leasing teams, as well as tenant rep and advisory sectors, such as valuation.” Paul Bacon, CEO of C&W’s EMEA operations shares Duckworth’s positive feeling about the region’s performance: “In 2007 20 pct of our revenue in EMEA comes from our CEE operations. We are looking to continue to grow our operations,” he says. CBRE is also satisfied with the pace of growth in the region. “The first half of 2008 was very successful in the region for us, especially in Poland and Russia. In this period, our EMEA operations maintained revenues at levels comparable to H1 2007. We continue to benefit from the increased balance we have attained between transaction and consulting services,” claims Mike Strong, Chairman and CEO of CBRE, EMEA.

What does this mean for the market? A couple of months ago, ‘Eurobuild CEE’ ran a story on the consultancies’ ambitious development plans in the region. Poland was the location for most of the activity in the region: King Sturge opened an office in Katowice, Colliers entered the Kraków and Wrocław markets, while CBRE opened an office in Wrocław.  CBRE, meanwhile, entered the Montengrin market, as did Colliers International, which also established an office in Albania. “We might be making an announcement in the next few weeks,” was the message from King Sturge’s headquarters in London. Most probably the news will be regarding expansion in the Ukraine, which CBRE entered in 2008. King Sturge had been planning to enter the Bulgarian market through the acquisition of a local agency, but eventually the deal fell through.

In February this year, CBRE started to fight for a slice of the Romanian pie, acquiring Eurisko Consulting SRL for USD 35 mln, the largest independent commercial real estate services company in the country. A year earlier in 2007, the company started operations in Serbia. So how are the unsatisfying financial results of the global players going to affect their ambitious expansion plans in the region, where according to some, the growth of companies such as Colliers International has been too rapid, even allowing for the favourable conditions?

Counting their pennies 
and still looking for talents

Even before the financial results were announced there were rumours about wide-ranging cost-cutting measures, including a hiring freeze or redundancies. This is especially the case for the badly affected UK market. Atisreal admitted it is in consultation with 15 members of its UK staff about possible redundancies, while DTZ is conferring with about 50 people. Staff are also being transferred to the markets that are less affected by the economic stagnation. JLL for example is redeploying employees from London to Russia and the Middle East, while imposing a hiring freeze in most markets.

Most markets, however, does not mean the CEE region. The company may not be hiring aggressively in the region at the moment, but as John Duckworth puts it: “We are always looking to attract valued people.” The Polish offices of King Sturge and Colliers are not currently hiring, but not due to cost cutting. As new projects appear, new people will be hired to work on these accounts. Luke Dawson, CEE regional director of operations at Colliers International, explains: “We have not had to do any real restructuring or reduction in staff expense. However, our local managers have taken a strategic approach to hiring over the last few quarters. The focus has been to bring in experienced professionals to fill strategic gaps and also to further develop the existing young talent”. Andreas Ridder, CBRE’s CEE chairman says that: “We do not expect any staff reduction in the CEE region (700 employees in 14 countries), although we will be looking very carefully at employing new people”.

Paul Bacon, chief executive of C&W’s EMEA operations, reveals that the company has no current plans for wholesale redundancies in the region. “Our priority in the current climate is to keep our teams intact so that we are poised for the upturn, when it comes.” Following the boom on the Polish real estate market in 2006-2007, 60 pct more employees were hired by C&W. At the beginning of 2008, however, the company decided to expand its staff by 5 pct. The company is now looking for employees with tight specializations, who can work in newly established structures, with the hospitality department being one of them.

The list of calculations also includes managing discretionary expenses, such as travel, entertainment and internal meetings and (in the UK) even moving out to new offices with cheaper rent. C&W’s Bob Rozek adds that: “We have and will continue to implement a variety of cost reduction initiatives, but for competitive reasons we cannot be more specific. We will continue with the strong financial discipline.”

Eyes turned east

Global companies will most certainly make it safely through the turbulent times, having the advantage of their worldwide reach and diversified portfolios. They remain optimistic about the situation in the CEE region. C&W’s Paul Bacon says: “In the last 18 months we have expanded our presence in the EMEA region with new offices in Romania, Turkey, Ukraine and recently in Dubai.” DTZ is also scanning the region for growth opportunities. Alan Colquhoun, DTZ’s Poland & Central Europe managing director, discloses that: “We have recently firmed up affiliate arrangements in Croatia. Bulgaria, Serbia, Slovakia, and the Baltic States are also on our radar screens; in fact we already have property management activities in Slovakia. No announcements about any new offices in these countries is expected soon, however. In the short-medium term, DTZ is concentrating its expansion activities on the Middle East.”

In 2007, JLL enjoyed a revenue growth of as much as 150 pct in the Middle East, with revenue even doubling in Russia. Combined with the CEE region, 15 pct of the company’s revenues came from credit crunch-free markets. Remaining cautious about the near future, agencies feel comfortable with their portfolios. JLL’s John Duckworth is not seeing any major changes in the company’s business lines in the near future. “We are most certainly not looking to reduce any of our business lines.” The other consultancies are also putting a bigger emphasis on non-transactional business, such as consulting and research, building consultancy, property and asset management, and valuations.

What the future will bring

‘‘We are getting ready for the upturn, when it comes,” is a mantra that was repeated to us many times when working on this story. So, when is this eventually going to happen? Not any time soon. “We are cautiously optimistic for Q3 and Q4, with a focus on managing the cost side of the business,” says Colliers’ Luke Dawson. C&W also remains optimistic for a better H2 of the year, but as Bob Rozek agrees, the bad conditions will continue into 2009. “We will continue to evaluate strategic growth opportunities, which in this economic environment of lower market capitalization, have become even more attractive,” he adds.

JLL’s CEE finance and operations manager, Kamil Lubiejewski, believes that next year will be a test for the region and the market. “We are reviewing our development strategy in the region, but generally speaking the business remains in good shape. Of course we are also starting to see signs of a slowdown. Inevitably, this will impact on us – but by what degree we are not sure.” The potential of the CEE markets, and especially Ukraine and Russia, gives consultancies hope for a return to healthy profits. “The pace of growth will ease this year, but should remain robust relative to Western Europe,” Andreas Ridder concludes. 
   The picture is not completely rosy, however. In the opinion of John Duckworth: “There will be change in the market across the CEE region, we have this constantly under review and are seeking to understand the dynamics around what our clients need.” ν