The lenders fold their cards: Richard Thomson looks into the story behind Abbey National's sale of its disastrous estate agency venture

IN 1985 the Prudential, Britain's biggest financial services group, bought a medium-sized estate agency called Ekins, Dilley & Handley for pounds 12m - the kind of money a group like the Pru could lose in petty cash without even noticing. This modest deal began an extraordinary sequence of events that has left Britain's leading financial services companies with egg all over their faces and losses of more than pounds 1bn in only eight years.

When word of the deal got round the financial services industry, a shiver of panic ran down the spines of insurance and building society executives. After a little thought - but only a very little - they decided to follow the leader. Suddenly, all hell broke lose.

For the next four years they vied with each other to buy up estate agency chains throughout the country, spending well over pounds 1bn. When the housing market collapsed in 1989, it all went wrong. Total losses, though hard to gauge precisely, must comfortably exceed the amount originally spent. In 1990, the Pru finally sold out for a total loss of pounds 340m. Last week, Abbey National got rid of its 347-branch Cornerstone chain for a mere pounds 8m, clocking up a loss of pounds 250m since 1987.

How is it that some of Britain's largest professional investment groups came to make such a colossally bad investment? Gold-rush fever.

With its original acquisition, the Pru was trying to test a theory that it could sell more mortgage-linked endowment policies through its own estate agency offices. These policies were proving extremely lucrative for insurance companies but the Pru had been left behind because the big building societies, who saw it as a financial services competitor, refused to offer Prudential policies to their mortgage clients.

'It was a plausible hypothesis,' says Mick Newmarch, now chief executive of the Pru, who was not directly involved in the estate agency decisions in the 1980s but was on the board.

The experiment was never completed. As soon as other insurers saw what the Pru was up to, they decided to copy it. A Klondike-style rush began, stimulated by the new Financial Services Act which obliged insurers to sell their products either through tied agents or independent brokers. Estate agents looked as though they could be converted into instant chains of tied agents.

General Accident, Royal Insurance and Provident Life started hunting for estate agents to buy. Without waiting for the results of its experiment, the Pru decided to get in first. 'It is understandable that we got in big once the market started boiling,' says Mr Newmarch. 'Was it sensible? That's another matter.'

The Pru, together with Lloyds Bank, which had started down this route before anyone else, snapped up the biggest and best agencies at some of the fanciest prices. In a couple of years, the Pru had a chain of more than 800 branches while Royal and GA had about 700 and 600 respectively.

The big building societies also caught the bug. 'Frankly, we went into it because others were doing it,' admits Charles Toner, managing director of new business at Abbey National and the man responsible for selling off its estate agencies.

As with the insurers, there was a fig leaf of strategic thinking. 'Some 50 per cent of our mortgage business was introduced to us by estate agents. If the whole sector got tied up to other lenders, the danger was that our lending tap would be turned off.'

The societies were already panicky because, by 1986, their share of the mortgage market had slumped from 80 per cent to only 50 per cent because of competition from banks.

'We wanted to defend our market,' says Toner. 'We were rattled when the Nationwide announced it had tied up a deal with over 200 agencies the day the new Building Societies Act came into force. Everyone was.'

The race was on. Within four years, the Halifax and Abbey each had about 500 branches. (Because it had moved too late to buy any big players, Abbey ended up with 112 different chains.) Nationwide had more than 500 branches. The TSB also piled in and other societies hoovered up whatever was left. No one had time to evaluate policy because of the danger of being left behind.

For the estate agents, it was both bewildering and delightful to find teams of negotiators from the City pounding on their doors. 'We were approached by six major players,' says Steve Minchin, who eventually sold his firm, Reeds Rains, to the Pru for around pounds 24m. The Pru was the highest bidder, so it got the prize.

As the bidding intensified through 1987 and 1988, the prices went mad - in many cases, pounds 400,000 per office. Tony Snarey sold his Midlands chain to Royal for pounds 90m when the firm was making annual profits of only pounds 6m. 'They were paying high prices for goodwill,' says Snarey. 'But maybe there never was much goodwill. Certainly, the prices were unjustified. That's why so many estate agents sold out.'

Initially, the agents were impressed by their new partners. 'They brought in a lot of expertise,' says Minchin. 'We thought they knew what they were doing. We were wrong. They didn't know anything at all about estate agency. I don't think any of them realised what a local business it is.'

Some buyers, such as the Pru, immediately threw away most of the goodwill they had bought by replacing the names of their agencies with that of the Prudential itself, which carried no weight with local house buyers and sellers.

This cost even more money. 'They spent pounds 60,000 refurbishing some branches - new carpets and furniture, logos everywhere, computers - where the most we used to do was replace the noticeboard in the window every 10 years,' says Mr Minchin.

This was necessary because in using the company's brand name, the Pru had to ensure strict quality control. 'We put in systems and computers which imposed a fixed cost on the agencies which they could not sustain,' Mr Newmarch admits. Joe Bradley, a former employee of the Town & Country building society, was responsible for this policy. He has since left.

In a desperate attempt to keep costs down, companies began closing many of the offices that had cost them so dear only a few months before.

The senior estate agents switched from selling houses to being administrators, handling the screeds of paperwork demanded by their new owners. The incentives that drive self- employed businessmen also vanished when they were taken over. 'Our error was in trying to create a corporate environment where it was not appropriate,' says Mr Newmarch.

In the attempt to make the agencies pay their way, the philosophy of 'one-stop financial shopping' was born. The idea was that the house-buyer was a captive audience to whom the agency would sell all the legal, insurance and investment requirements. But it never worked. Joe Public did not like the idea of an estate agent selling him insurance. He preferred independent advice.

Moreover, it gradually became clear that the agencies were not even much good at boosting the mortgage business of building societies or the endowment business of insurers. The big chains did not generate much new business, and they continued to recommend business to rivals because that was what the public demanded. Abbey National's large agency chain, for example, never accounted for more than 5 per cent of its total mortgage lending. In short, the whole strategy, which had never been tested in the first place, turned out to be fundamentally flawed.

Then, in 1989, the housing market collapsed. Home purchases slumped from 2.1 million a year in 1988 to 1.5 million the following year. As a high- volume, low-margin business, estate agency was devastated. Profits of pounds 17.2m in 1988 in the Pru's agency chain turned into losses of pounds 48.9m the following year. At Royal, profits of pounds 8m became losses of pounds 26m.

The Pru was again the first to move. 'We decided to get out immediately because of the large operational costs,' says Mr Newmarch. The company began selling in 1990. It was a desperate decision based on the belief that there was no value in owning estate agencies after all. It was better to get out immediately even at a massive loss. And what a loss] Mr Minchin, for example, paid pounds 3.3m to buy back Reeds Rains, which he had sold to the Pru for pounds 24m five years before.

Nationwide and Abbey have now also sold out, although by hanging on longer they have got even worse prices. In some cases, they have sold offices for a twentieth of what they paid for them.

Most companies have drastically cut back their branches. Others, such as Royal, Halifax and GA, claim still to be committed to estate agency. On the other hand, it is very doubtful they could find any buyers if they wanted to sell out now. In the meantime, their chains are worth a fraction of their original value and it could be years before they make much of a profit, if they ever do.

(Photographs omitted)