Transactional Advice

Our Transactional Advice business comprises four major elements:

• Capital Markets - we advise a wide range of investors including institutions, REITS, sovereign funds, property companies and private clients on buying or selling commercial property throughout Europe, Asia and the US.
• Occupational/Corporate Services - we provide letting advice to property owners and represent tenants and owner occupiers in negotiations on acquiring/disposing of their accommodation including offices, retail and industrial as well as leisure, hotels and healthcare facilities. We continue to support the business needs of global corporate occupiers in providing a full range of strategic, advisory, professional, transactional and management services across varied property portfolios and asset classes.
• Residential - we act for vendors of residential properties and also have a specialist purchasing business in the UK.
• Development - we advise on acquisitions and disposal of development land/sites, optimising transactions from the client's perspective, maximising proceeds, minimising costs and applying best-case financial modelling.

By the end of 2008, all transactional markets were feeling the effect of the global financial crisis. Overall, transactional revenues were £208.4m (2007: £304.1m) and underlying profits were £3.2m (2007: £48.6m).

Trading conditions in our UK Commercial business were tough throughout the year and worsened considerably in the fourth quarter following the collapse of Lehman Brothers in September and the resultant shocks that then went through the UK banking system. The deals which were completed were struck at significantly discounted levels compared to those of 2007, with an increasing focus on long-dated prime property with high quality tenants. The lack of bank finance has combined with uncertainty over values to keep those equity investors looking to invest in UK real estate on the sidelines.

Our Occupational business in the UK benefited from a good start to the year. The regional markets started to lose momentum in the second half of the year with a number of transactions being put on hold. The South East and Central London office markets were most quickly impacted by the downturn. The London City market experienced very little take up with significant rental falls, while the London West End market proved more stable, although rents came under pressure in the second half of the year. Industrial and distribution markets proved more resilient throughout the year, although this was dependent on location, and finalising deals was slow. Across the retail markets, whilst there have been a number of failed retailers this has had minimal impact on our results.

Commercial Development activity slowed rapidly during the year, with sources of development finance drying up, although a number of transactions were completed.

Overall, revenues in our UK Commercial transactional businesses were down 35% to £51.9m and underlying profit before tax fell 56% to £7.8m (2007: £17.7m).

In the first half of 2008, European investment markets were still active with all asset classes in demand from both local and international investors, resulting in falling yields. As 2008 progressed, the markets progressively worsened and the relatively low yields resulted in Europe being seen by many investors as less attractive than the UK, a view compounded by the less attractive lease structures prevalent in many markets. Revenues were down 25% to £34.2m resulting in an underlying loss before tax of £7.8m (2007: profit before tax £3.8m).

The US transactional markets were effectively closed for much of the year, with our revenues down 46% on the previous period. Savills LLC did not complete any transactions in the fourth quarter as a result of the combination of tenant defaults and lack of bank debt combined with a severe loss of confidence by investors. We enter 2009 with a stronger pipeline of opportunities from a range of high quality institutional clients. We opened an office in Mexico during 2008 and are working on several assignments in that country. After charging acquisition related finance costs, the underlying loss before tax for 2008 was £3.9m (2007: profit before tax £0.2m).

Asia proved resilient for most of 2008 with many local private buyers providing much of the buyer interest in the region. Hong Kong, Singapore and China continued to be strong markets for Savills and we were pleased with the progress made by our newer businesses in Taiwan and Vietnam. Following the collapse of Lehman Brothers, and the further tightening in the credit markets, Asian markets retreated sharply with few buyers able, or prepared, to raise finance to make further acquisitions.

Notwithstanding the difficulties of the final quarter, Asia Pacific recorded an underlying profit before tax of £4.3m (2007: £9.6m) on revenues down 7% to £56.2m. This result benefited from favourable currency movements. The increase in underlying profits in local currency was 59%.

2008 was a difficult year for our Residential business, with both values and transaction volumes falling as the economic downturn continued and mortgage finance became more scarce. More specifically, prime markets were hit by job losses and reduced earning expectations in the City which, together with a lack of finance in the lower tiers of the prime markets, resulted in significantly reduced demand.

The highest value markets generally fared better than other sectors of the market across 2008, albeit weakened demand was evident in the final quarter even in the ultra prime sector. As a consequence, overall transaction volumes in 2008 were 44% lower than 2007.

New Homes transactions fell dramatically as it became increasingly difficult to sell new developments. This area of our business was particularly affected by the withdrawal of investors from the market and the reluctance of the UK banks to lend against this asset class.

In response to the current market conditions, our Residential Transactional business teams have been reduced in size and, where possible, amalgamated. We have announced a small number of office closures where the business would not be sustainable in the medium term.

Development land values fell by just under 50% during 2008 in response to significantly reduced house prices, scarcity of development finance and the financial pressure on developers resulting from reduced rates of sale of completed units. In order to respond to current market difficulties, we have created a new business stream providing advice on distressed properties using in-house professional advisory skills along with LPA receivership advice.

In 2008, UK Residential transactional revenues were down 44% to £64.2m and, notwithstanding significant cost saving initiatives, underlying profits before tax fell 84% to £2.8m (2007: £17.3m).

We expect transactional revenues to be further tested in 2009 as the financial crisis continues and debt finance remains scarce. We will continue to develop our Transactional businesses within the existing footprint, focusing on working closely with clients to identify all opportunities in the market.

We will continue to invest in our US business in 2009. We believe that the US will lead the way out of this global recession, and when it does, we aim to be well positioned to take advantage of capital flows both into, and out of, North America.