Since at least the mid-1800s, London-based commercial estate agents have sat at the centre of most UK property and land deals.
But many of the largest agents are now having to adapt their business models for fear they could fall victim to a technology-enabled removal of the middleman, a trend that has already reshaped consumer industries such as retail.
On the one hand, there are shared workspace groups such as New York-based WeWork, which last week unveiled plans for its largest location globally, with a deal to lease 280,000 square feet on London’s South Bank. Using apps to market flexible offices, they have cut agents out of smaller leasing deals. On the other hand, multibillion-pound landlords are bringing functions in-house for which they once relied on agents.
The resulting pincer movement has prompted the largest UK and US agents to shift focus to long-term advisory income as they anticipate a reduction in one-off deal fees.
“We are facing the impact of a fourth industrial revolution,” says John Forrester, chief executive for the Europe, Middle East and Africa region at Cushman & Wakefield, the Chicago-based real estate services group.
“There has been a surge of energy in the past 12 months, but we need to make up for 10 years in which we [the industry] were asleep at the wheel.”
Cushman this year set up a “transformation team” in the region to deal with disruption. Mr Forrester says the removal of the middleman from parts of the market has already begun.
“Two years ago, [the serviced office group] Regus were paying us to deal with them. Now, we are seeing business-to-business deals without intermediation.”
Chris Lewis, head of office agency and consulting at DeVono Cresa, says: “Five to 10 years ago, if a company had a requirement for 150 people for two years, they would speak to their real estate adviser. Now they can go to The Office Group, WeWork, Regus or an intermediary broker.”
Such deals would previously have earned agents a fee of about 10 per cent of one year’s rent, he says. In a parallel shift, services such as Appear Here, a digital market for pop-up shops, are taking over some small retail leasing deals.
When it comes to bigger transactions, the threat comes from large landlords — the likes of Blackstone and British Land — which are now handling functions once carried out by external agents, says Simon Prichard, senior partner at Gerald Eve, a London agency.
“To justify their fees, property managers need to show they’re doing something. They’ve taken away from agents what agents used to do,” he says. For example, he says, in-house leasing teams handle marketing campaigns, attend meetings with lawyers and agree terms with tenants, although agents are able to provide the all-important contacts.
Commercial property sales have not yet moved online, but digital offerings in the residential market are forcing established agents there to change their models, offering a clue to how the commercial market may change.
Agents emphasise that the big-ticket leasing and investment deals that provide a significant chunk of their income do not appear to be at risk.
“We don’t believe there is going to be wholesale disintermediation of the sector, as there has been in some others,” says Bob Sulentic, global chief executive of CBRE, the largest group in the sector worldwide.
Andrew Miles, co-founder of Realla, a search engine for commercial property, says: “Agents need to think about what they do that adds value. Armies of grads creating brochures doesn’t really add value. Running a complex transaction on behalf of a major property company does — and you won’t be able to do that with artificial intelligence.”
In the UK, the market shock that followed last year’s vote to leave the EU served as a reminder of the pain that can result from a drop in transaction fees. For example, Chicago-based JLL in February reported that a decline in annual profits “was primarily UK-focused and driven by the decline in capital markets transaction volumes [amounting to] nearly $35m of capital markets performance fees earned in 2015 that did not recur in 2016”.
Agencies have been quietly shifting into areas such as property management, which entail long-term contracts rather than one-off fees. Over the past two years Savills, the London-listed agency, has acquired Collier & Madge, managers of commercial properties; Chainbow, which manages residential blocks; and Smith & Gore, which specialises in rural estate management.
CBRE, meanwhile, said in its annual results that it “continued to shift toward more recurring revenue in 2016”, increasing such fees to 42 per cent from 37 per cent of its total.
Nabarro, a law firm, says agents are “seeking to move up the food chain by providing complex financial advice, which has traditionally been the territory of investment banks”. CBRE and JLL, for example, have corporate finance teams.
Mr Lewis, however, says agents’ role in broking deals will survive — if only because companies’ property directors will always want to share responsibility and take expert advice.
“For corporates and for landlords, if anyone ever says ‘we want to look at this deal and see how you got to this point’, it’s good to be able to point at a third party who has given you advice and support rather than take it all on yourself.”