Affected market: Estate agency services
The OFT's decision on reference under section 22 given on 27 January
Connells Ltd (Connells) is part of the Skipton Group which includes
Skipton Building Society, who supply estate agency services including
conveyancing, residential lettings, sale of residential and business
properties, mortgage broking and valuations.
Sequence UK Ltd (Sequence) supplies estate agency services including
conveyancing, residential lettings, sale of residential and business
properties, mortgage broking and valuations. Sequence's UK turnover in
2002 was approximately £102 million.
Connells acquired Sequence from Royal Insurance Holdings plc on 22
The transaction was notified on 1 December 2003. The administrative
deadline is 30 January 2004 and the statutory deadline is 20 February
As a result of this transaction Connells and Sequence have ceased to be
distinct. The UK turnover of Sequence exceeds £70 million, so the
turnover test in section 23(1)(b) of the Enterprise Act 2002 is
satisfied. A relevant merger situation has been created.
The parties overlap in the supply of estate agency services. The
principal role of an estate agent is to market residential property for
sale and to obtain an offer for the property. Estate agents also offer
a variety of services associated with the sale of a property, including
financial services, conveyancing, and property management services. For
example only 56 per cent of Connells total turnover was generated from
residential sales (see [note 1]).
Many estate agents now advertise properties for sale on their own
websites. There has also been a significant growth in property portals,
where customers can search for a property by themselves (see [note
2]). The parties have submitted that there are also a number of
websites that compete directly, but who do not have a high street
office. It has been estimated by the Keynote report that 5 per cent of
properties are sold without the mediation of an estate agent.
The parties and third parties have commented that internet sites are
complementary to the business as they provide an additional advertising
medium. As such, it appears unlikely that internet sites place a
competitive constraint on estate agency offices.
Property owners generally look to local estate agents in order to sell
their property. This is, in part, because these agents know the area
well which is important in the process of aiming property at the right
The parties submit, and third parties confirm, that for a branch located
in a densely populated area, sellers would typically be located less
than two miles from the office. For rural areas, approximately 50 per
cent would be within a five mile radius, 25 per cent between five and
ten miles and the rest in excess of ten miles. Thus if fees charged by
estate agents in a local area were to rise, it would seem unlikely that
customers would switch to neighbouring regions.
The appropriate frame of reference appears to be the local supply of
estate agency services, within a five mile radius. However, it is
possible that in certain areas the geographic scope could be wider.
The parties overlap in 53 local regions. The parties submit that local
shares of supply for these areas are not available, however the parties
do submit that post-merger shares of supply would not exceed 10 per cent
in any region.
Data has been provided to the Office by the parties which details, in
each of the overlap areas, how many competitors would remain
post-merger. This information has been obtained using yell.com and, as
such, it may not necessarily reflect all the competitors in an
area. Thus a cautious view needs to be taken when interpreting the data.
The data illustrates that, post-merger, a number of competitors remain
at the local level, both independents and chains. However, according to
this data there are 11 areas post-merger where there are less than five
competing agents, and two areas where there are no competing agents. The
OFT carried out some basic research into these specific areas using the
website UpMyStreet.co.uk, which connects to the Thompson Directory, and
found that according to this data source there were only four areas
where there would be less than five competing agents post-merger and no
areas where there were no other competing agents. This indicates that
the data provided to the Office may not fully reflect all competitors in
a local area.
In these four areas of overlap there may be prima facie concerns
relating to the ability of the parties to increase prices or decrease
the quality of service. However, when assessing whether a merger results
in a substantial lessening of competition, barriers to entry and buyer
power must also be considered.
The parties and third parties maintain that it is relatively easy to set
up an estate agency office. The parties estimate that leasing and
advertising costs are approximately £5,000. The company would also need
a vehicle for market viewings, 3-4 members of staff and the normal
administration and accounting facilities. One third party estimated that
the cost for setting up an office was approximately £50-75,000, with a
weekly running cost of £2,000. They estimated that annual costs were in
the region of £150,000 and that annual income would be between
£175-200,000. The parties and third parties have also submitted to the
Office that there are no regulatory restrictions or professional
qualification requirements needed to enter this sector. However, one
third party submitted that although entry into the sector was easy, it
was difficult for smaller firms to remain in business due to the
regulatory requirements which impose a compliance burden.
There do not appear to be any significant switching costs. Sellers are
usually under contract for a set period, although multiple agency
agreements are available. Overall, there do not appear to be significant
barriers to entry or expansion.
Some third parties submitted that the transaction may strengthen the
national presence of Connells, who post-merger have a share of supply of
total branches of 4.2 per cent an increase of 1.3 per cent and this may
give rise to network effects. Firstly, it was put to the Office that the
merger may strengthen Connells position with regard, in particular, to
the sale of financial products. Secondly, another competitor asserted
that the transaction may, as a result of referrals, ie transferring
seller details between branches, and brand strengthening lead to network
effects. Connells may build up a critical mass of properties and
prospective buyers, gaining local economies of scale. It may be
difficult for other companies to replicate this network due to the
amount of investment required.
However, currently the impact of national branding seems limited due to
the desire to retain local brands, for example Sequence trades under
various names including Allen & Harris, Fox & Sons, Swetenhams
Ltd etc. Clients are not locked into the network and are able to seek
the advice and services of other providers and affinity groups such as
TEAM Association. Such affinity groups exist where independent estate
agencies can benefit from network effects. It would, therefore, seem
unlikely that any network effects that may arise as a result of the
merger pose a substantial concern.
As buyers of estate agency services are individual consumers it is
unlikely that they would have any buyer power.
This merger does not appear to raise any vertical concerns.
THIRD PARTY VIEWS
The majority of third parties had no concerns regarding this merger. Two
competitors had concerns regarding possible network effects associated
with this merger through the sale of financial products, referrals and
branding and that regulatory requirements made it difficult for smaller
firms to remain in the market.
The transaction qualifies on the turnover test of the Act and the
parties overlap in the supply of estate agency services. However the
parties' shares of supply will remain low post-merger and they continue
to face competition from other estate agents in the majority of areas of
overlap. In those areas where there are fewer competing agents, barriers
to entry or expansion do not appear to be significant.
The OFT does not therefore believe that there is a significant prospect
that the merger would substantially lessen competition within a market
or markets in the United Kingdom for goods or services. Nor does it
believe that there is a credible alternative view that the merger might
substantially lessen competition.
This merger will therefore not be referred to the Competition Commission
under section 22(1) of the Act.
- Estate Agents’ Keynote report 2003 page 27.
- Estate Agents’ Keynote report 2003 page 17.