The FM sector has had a memorable 2007 as its role in the economy has continued to evolve. Despite the potential impact of the global credit crisis on UK economic growth, it looks set to remain buoyant for some time. The expansion of the sector in recent years is likely to continue, with an estimated £200 billion of FM work still carried out in house by companies — although this is believed to be migrating to outsourced service providers at a rate of 6 per cent a year. Government has played a significant part, with the NHS and Ministry of Defence (MoD) continuing to dole out huge contracts. At the time of the Budget in March, future PFI contracts, many of which carry an FM element, committed the government to an outlay of £170 billion.
As the market has grown, so FM firms have evolved, with mergers and acquisitions creating a smaller number of heavyweight hitters able to service ever larger and more complex contracts. In a sign of the growing maturity of the FM market, 2007 has also seen the establishment of the secondary PFI market. Companies that were in the vanguard of early PFI work have been able to hive off assets to cash-rich investment funds looking for solid long-term returns. This has allowed FM specialists to free up cash to plough into winning more service contracts.
Small pond, big fish
The trend towards a smaller group of ever larger companies dominating the FM market appears likely to continue. Carillion is expected to wrap up a takeover of Alfred McAlpine and the property giant Land Securities is to demerge its huge LS Trillium property services business in 2008. Land Securities was one of the pioneers of property management outsourcing in the 1990s and Trillium manages huge property estates for the likes of Barclays Bank and BT.
| FM Quick Facts |
|
Along with Qinetic, Trillium won a monster £16 billion contract to maintain vast swathes of the MoD’s property portfolio earlier this year, taking its total managed floor space to more than 30 million square feet. Trillium is also significant in the secondary PFI market where its spending power has allowed it to amass a 30 per cent market share.
Firms such as Carillion and Trillium are likely to expand their portfolios through acquisition well into 2008, despite the recent credit crunch. With continued mergers and acquisitions activity on the cards, and the secondary market infrastructure funds remaining flush, the state of flux at the top end of the market is set to continue.
But it has not been a bed of roses for all FM players, and at the lower end of the market the likes of Johnson Service Group have struggled to keep pace with their bigger and stronger cousins. This summer saw a meltdown at property services group Erinaceous, which for several years had been an investor favourite thanks to its rapid growth rate. But this seems to have come at a price, with a string of poorly integrated acquisitions leaving management overstretched. Hopes of a takeover were raised earlier in the year when offers of £300 million-plus were believed to be in the ring for the company. But talks failed and Erinaceous limped into autumn, going cap in hand to its banks after breaching banking covenants.
Unable to access new credit easily, Erinaceous became one of the victims of the credit crunch that originated in the US sub-prime housing market but has come to affect nearly all areas of the global economy. The full effect is not yet totally clear, but a significant slowdown in the UK economy in 2008 is anticipated. Government is also indicating a slowing in the growth of public sector expenditure, and this double whammy is unlikely to leave the FM sector unscathed.
Prime position
But in many ways the sector is probably better placed than most for tougher economic conditions. When the purse strings tighten in both the public and private sectors cost savings come to the fore, and outsourcing is often the first option for organisations hoping to reduce hefty cost bases.
Although government spending will tail off to a certain extent over the coming years, it will remain a significant player in the FM world. With the tight fiscal rules it has set itself the government will need to continue its emphasis on efficiency at all levels and is likely to continue outsourcing to the private sector.
The government’s spending plans are spread out over several years and it is almost inevitable that a change of government will come at some point. A Conservative administration, however, may be tempted to outsource even more to the private sector in a bid to reduce the size of central government.
The FM sector will probably continue to enjoy a short-term boost from the trend towards secondary infrastructure funds snapping up assets. Many funds in this sector are sitting on significant cash piles raised before the credit crunch took hold and deals are still happening. Alfred McAlpine, for example, sold six PFI projects for double their £26.1 million book value to Infrastructure Investors Ltd. This activity brings extra funds into the coffers of the FM providers enabling them to reinvest in their businesses and to seek acquisitions of their own.
Although the UK economy faces a more uncertain time and growth is likely to slow in 2008, the FM sector enjoys certain specific qualities that will give it an advantage even in more challenging markets. The sector will probably become dominated by a smaller group of bigger players and some at the lower end may struggle to survive. But 2008 promises to be a period of evolution that will be fascinating to watch.
Graeme Davies writes for Investors Chronicle
