Lsl Prop Regulatory News (LSL)

25 November 2022

LSL Property Services plc ("LSL" or "Group")

Trading Update

LSL has today issued a Trading Update covering the ten-month period up to 31 October 2022.

David Stewart, Chief Executive, commented:

"As reported in our Interim Results, LSL traded strongly in the first half of the year, with our Surveying & Valuation and Financial Services businesses achieving record revenues. The Estate Agency Division retained the substantial market share gains made in 2021, in doing so building a strong sales pipeline as significant profits were delayed by the continuing slow speed of exchanges across the market. This meant that the Group entered the second half of 2022 well placed to deliver a strong H2 profit performance, ahead of the equivalent period in 2021.

"Since that time, market conditions have been more challenging than previously expected, with the mortgage and housing markets being disrupted by political uncertainty and sharply increasing interest rates. Across the market, this has given rise to a reduction in mortgage activity and new house sales, and an increase in fall-throughs of previously agreed sales.

"This challenging background means that there is a wider range of potential outcomes for the full year than previously expected.

"I am pleased to confirm that LSL's performance has remained resilient, and we are confident that Underlying Group Operating Profit in the second half of 2022 will at least be broadly in line with the second half of 2021, with the possibility of a stronger performance depending on the volume of valuation instructions received from lenders. This includes additional costs incurred due to discretionary payments to over 2,000 colleagues to help alleviate the impact of significant increases in living costs. Around £0.6m of these costs will be reflected in 2022, with a further £0.8m to be paid in 2023 to cover the winter months."

Highlights

· Group revenues for the ten months ended 31 October 2022 were £276.1m (2021: £275.4m).

· Financial Services Network revenue increased 9% in smaller mortgage and protection markets.

· LSL's share of the total UK purchase and re‐mortgage market increased to 10.2%1 (10 months to 31 October 2021: 9.0%) reflecting LSL advisers' strong position in the re-mortgage market, which is expected to support market share during 2023.

· Record Surveying revenue, up 9% in flat mortgage and re-mortgage approvals market.

· Surveying income per job for the ten month period was £175 (2021: £173).

· Estate Agency revenue was down 6% and Financial Services Other revenue down 2%, both of which were impacted by materially smaller purchase and new build markets.

· In Estate Agency, we maintained our market share of instructions across the locations we trade and slightly improved our share of housing transactions on a national level.

· Lettings income is less affected by housing market cycles and increased by 2% in a market with a shortage of new instructions.

· The Group retains a very strong balance sheet, with net cash at 31 October 2022 of £29.1m (31 October 2021: £39.7m). Net cash at the end of the period is after investment made into Pivotal, and shares purchased in the Share Buy Back programme. We expect positive cash inflows in the remaining weeks of the year.

Market backdrop

· Since the mini budget presented by the UK Government in September 2022 there has been a marked slowdown in the market of purchase related front end sales activity, impacting new sales agreed in Estate Agency, mortgage applications in Financial Services and valuation instructions in Surveying.

· Residential sales fall throughs have trended higher in the past few weeks, mainly from more recently agreed sales.

· LSL's residential exchanges in H2 have been in line with our expectations.

· Whilst capacity issues appear to be slightly easing, as we anticipated, the speed of conversion of the residential sales exchange pipeline conversion has remained slow across the market, principally due to the continuing industry‐wide capacity issues in conveyancing.

· In the mortgage market, there has been a shift towards re-mortgaging, a trend that is expected to continue in 2023 as borrowers seek to minimise their monthly payments. However, increased interest rates and lender caution has restricted the number of re-mortgage cases to below previous expectations, with a greater proportion of product transfers.

· The initial impact of economic and political uncertainty was most evident in Surveying & Valuation, as a number of lenders took time to assess the outlook and reduced their appetite for new business, which fed through into a reduction in the number of valuation instructions. The scale of this reduction is expected to be a relatively short-term feature, as lender instruction levels normalise in line with overall lending appetite.

Group Performance

Group revenues for the ten months ended 31 October 2022 were £276.1m, in line with the £275.4m for the same period in 2021. At a divisional level, Financial Services was up 3%, Surveying & Valuation up 9% and Estate Agency down 6%.

Financial Services

Total Financial Services Division revenues for the ten months ended 31 October 2022 increased by 3% to £67.8m over the same period in 2021.

Financial Services Network revenue grew by 9%, reflecting the highly resilient nature of the independent broker business model. This represents a strong performance in the context of smaller mortgage lending and insurance markets, with the Group's share of the total purchase and re-mortgage market increasing substantially from 9.0% to 10.2%. Financial Services Other revenue is largely generated from estate agency and new build referrals. It reduced by 2% as a result of the smaller purchase market.

Surveying & Valuation Division

Revenues for the ten months ended 31 October 2022 were £84.9m, up 9% compared to the same period last year (£78.2m), benefitting from increasing allocations from existing lenders, securing new business from other lenders and an increase in direct-to-consumer revenue. This is a very strong result in the context of a flat market for mortgage and re-mortgage approvals.

Estate Agency

Revenues for the ten months ended 31 October 2022 were £123.4m, a reduction of 6% on the equivalent period in 2021 (£131.6m), reflecting a materially lower residential transaction market. Residential Exchange Income was down 13% compared to an overall transaction market back 18%, as LSL maintained the market share gains made in 2021 in the locations in which we trade, in doing so, slightly improving our national market share. Lettings income was up 2%, reflecting higher rents against a marginally smaller lettings book portfolio reflecting a scarcity of new instructions.

Outlook

As previously reported, the split of H1:H2 profit in 2022 will revert to a more typical profile with a skew to H2, after record housing transactions in H1 2021. The lead-time required to complete transactions means that for Financial Services and Estate Agency, the financial impact of the recent turbulent market conditions will largely be reflected in the first quarter of 2023.

Since valuation instructions are at the beginning of the transaction cycle, there has been a more immediate impact on our Surveying business from reduced purchase activity, which has been exacerbated by some lenders substantially reducing their overall mortgage offers given the current volatile market conditions. This volatility is not expected to persist in 2023 as the overall mortgage market returns to a more normalised profile.

Despite the significant disruption in our markets, we expect H2 profit to at least be broadly in line with H2 2021, with the possibility of a stronger outturn, which would be dependent on a number of factors, notably the volume of lender valuation instructions in the remaining weeks of the year.

Full year profit in both the Financial Services Network and Surveying & Valuations businesses will be significantly ahead of the pre-Covid performance achieved in 2019, highlighting the benefits of the Group's diversification strategy. The overall Group performance is expected to be below our prior expectations with full year profit now anticipated to be in a range just above or just below that reported in 2019, which included a contribution of £1.4m from LMS and TM Group, which were both disposed of during 2021.

Looking ahead, most of the Group's profits are generated by the Financial Services Network and Surveying & Valuation businesses which are impacted by the size of the mortgage market, and in the case of Financial Services, the protection markets, which are expected to be less volatile than the housing market.

As such, our very early estimates are that the total mortgage lending market will reduce in 2023, although the market impact of a smaller purchase market is expected to be considerably offset by higher levels of refinancing activity.

The housing market is heavily impacted by sentiment and has the potential to surprise on the upside. However, with the recent reduction in activity levels and continuing uncertainty over UK economic conditions, until we have greater clarity on the economic backdrop, we are cautious on the market outlook for 2023. A significant reduction in housing transactions would clearly have a material effect on our Estate Agency residential sales business and our direct-to consumer financial services business.

We continue to focus on proactive management of our cost base, to limit the impact of these pressures.

A further update on the 2023 outlook will be provided at the time of LSL's 2022 Preliminary results. 

Notes to trading update

1. LSL's share of the total UK purchase and re‐mortgage market, excluding product transfers, is quoted as at 30 September 2022

For further information, please contact:

This announcement contains inside information.

Notes on LSL

LSL is one of the largest providers of services to mortgage intermediaries and mortgage and protection advice to estate agency customers, completing around £41bn of mortgages in 2021. It represents around 10% of the total purchase and re-mortgage market with around 2,900 financial advisers. PRIMIS was named Best Network by Money Marketing in their 2021 awards and Best Network, 300+ appointed representatives at the 2022 Mortgage Strategy Awards.

LSL is one of the UK's largest providers of surveying and valuation services, supplying seven out of the ten largest lenders in the UK, employing around 500 operational surveyors, and performing over 500,000 valuations and surveys per annum for key lender clients. It was named Best Surveying Firm at the 2022 Mortgage Finance Gazette Awards and Best Surveyor at the 2022 Equity Release Awards with Mortgage Solutions.

LSL also operates a network of 225 owned and 128 franchised estate agency branches.

 For further information please visit LSL's website: lslps.co.uk