Simon Shaw, the chief financial officer of Savills (SVS), says that contrasting the running costs of the property agency in 2021 with 2022 is an “invidious comparison”. 

It’s easy to understand why. Covid-19 restrictions throughout 2021 meant the company’s workforce of surveyors, agents, dealmakers, planners and property advisers of all kinds travelled less, met fewer clients face-to-face, and generally chalked up fewer expenses. The return of all of these things, in addition to wage inflation, made Savills’ business more expensive to run in 2022. Consequently, the business posted a drop in pre-tax profit even as revenue ticked up.

Shaw says Savills had always been clear that these operating costs would come back post-Covid, but that doesn’t mean the business wants to write a blank cheque for these outgoings, adding that there is space to be more efficient while also growing the revenue in order to grow the business. The increase in the dividend – when 2021’s special dividend is discounted – indicates confidence in this future growth.

There are reasons to be dubious. While Shaw insists that the company is well prepared to ride out the downturn and do a lot of business as the sector emerges from it, there is little getting away from the fact that the picture over at least the next six months looks pretty bleak – with “green shoots” of a real estate recovery not predicted by CBRE Group until the final half of this year and Oxford Economics predicting a slow recovery beyond that point. 

On the face of it, exposure to many different markets gives Savills the ability to potentially counteract the limits of growth in its home market of the UK. Unfortunately, there is no guarantee that other locales will take a counter-cyclical turn to the UK. This time around, the German and Polish businesses made losses, while Covid-19 restrictions in China and Hong Kong have made business tough there, too. Should one of its many other geographies face unforeseen issues this year, this too could impact its bottom line.

Savills is priced at 13 times FactSet consensus earnings, falling to 11 times for 2024. This price reflects the potential for slow but steady growth over the coming years, but we believe some caution is still needed considering the macroeconomic trends in the real estate market. Hold.

Last IC View: Hold, 1,015p, 11 Aug 2022