Savills said it was weathering the storm in real estate markets globally, with certain regions like the UK and sectors like industrial recovering, but it reduced expectations for the year in results for the six months ended 30 June 2023.
The London-headquartered global brokerage giant posted group revenue of £1,011.4 million, down 2.5% on the first half of last year's £1,037.4 million.
Group underlying pretax profit was £16.3 million (H1 2022: £59.2 million). Underlying basic earnings per share were 9.2p from 32.4p last year and an interim dividend of 6.9p was declared, up from 6.6p.
Savills' share price was down 8.32% at 909p per share by 12.49pm on Thursday as investors reacted to the profits fall and downbeat appraisal of the wider market.
Transaction advisory revenues were down 20% supported by "market share gains" while its less transactional businesses – a key defensive measure increasingly in slower times for deal-making – performed "well in aggregate" with revenue up 9%.
Property and facilities management revenue was up 16%, while consultancy revenue was stable. Savills Investment Management revenue was down 4%.
The 1.6% margin (H1 2022: 5.7%) reflects the impact of "reduced market volumes and Savills' policy of maintaining bench strength to assist clients in challenging conditions", Savills said.
Speaking to CoStar News, Mark Ridley, group chief executive, said the results have underlined the importance of the strategic direction Savills has taken in recent years, bolstering lines of business that are not focused on deal-making.
"The less transactional business is doing well and property management and facilities management are now 43% of global income and that is the most stabilised income. Consultancy services is stable and a final piece is our investment management income which is stable and much more recurring."
Ridley says the real estate world is responding to an inevitably rising cost of borrowing. "We knew there would be a moment when we came to terms with a higher interest world – almost a cold turkey moment. Investment volumes have stalled worldwide and really that is as bad as the worst part of the [global financial crisis] and worst quarter of COVID. It is how quickly the markets can adjust to that that is important.
"We think London is picking up partially because it is a wonderfully global city and because yields did not compress as much as Continental Europe, for instance because of Brexit. The mark to market has been quicker and the same is being seen in Asia-Pacific. Those are the green shoots. Unfortunately there is more standoff to come elsewhere. Northern Europe commercial transactions are very significantly down."
Ridley says Savills has deliberately maintained its "transactional benchmark", or the size of its transactional teams, despite the difficulties in doing so in terms of costs.
Simon Shaw, group financial chief officer, said there is large pipeline of investment waiting to launch into market and a huge number of buyers waiting on the sidelines. "The dry powder is £1.7 billion with our own investment management business for instance. We are just beginning to see activity in certain sectors in Europe. But this is a timing game in truth as the world gets used to the change in the risk free rate.
"The other factor that is going to catalyse that recalibration more effectively is the refinancing schedule. I think there will be a move from a hands-off gentle 'pretend-and-extend' approach into more action being taken by the lenders through Q4 into next year."
Ridley said in terms of sectors there are positives in the office sector, for instance in improved demand for flexible space and shorter leases. "The sustainability piece is very significant too. For secondary markets and secondary stock that is more difficult. That is going to be one trend that will continue."
He added: "Industrial logistics and multifamily are big areas of growth. Industrial has recalibrated and there is strong occupier demand; multifamily has a shortage of stock and rents are going up. I would not rule out retail and I would say natural capital investment too."
In a statement with the results Ridley said: "Market participants, whether investors or occupiers, seek greater certainty on the trajectory of interest rates over the next 18 months, something which has become somewhat clearer in recent weeks than for much of the period.
"Savills has weathered both the inflationary cost conditions and reduced transaction volumes well, increasing market share and, supported by our strong balance sheet, continuing to undertake selective business development activities to further the group's long term growth strategy."
Ridley added that the group is seeing some positive signs in markets such as the UK and continued strength in certain Asia-Pacific markets including Japan.
"In Continental Europe and mainland China we now expect reduced market volumes to continue through much of the year. In many locations we are carrying very strong capital transaction pipelines awaiting the market conditions for launch. In prolonged uncertain conditions, it remains challenging to predict accurately the timing of individual market recoveries. Accordingly, our range of expectations for the year as a whole has reduced somewhat. We do, however, continue to anticipate a significant improvement in volumes of activity through the balance of the year, and into 2024."
Savills also confirmed Stacey Cartwright will succeed Nicholas Ferguson as chair when he retires from the board on 31 December 2023.
Cartwright has been an independent non-executive director of Savills since October 2018, and senior independent director since January 2021. She was chief executive and then deputy chair of Harvey Nichols from 2014-18, executive vice-president and chief financial officer of Burberry (2004-13) and CFO of Egg.