COMMENT The disruption of the commercial property market has put the valuation profession – on whom so much of the sector relies –centre stage. Valuation guidance from the RICS on 15 April warned of the “material valuation uncertainty” which applies in current market conditions and that a “higher degree of caution” should be attached to valuations.
Of course, in some respects we have been here before: the 2008 Financial Crisis, Black Friday, Black Wednesday, and the bursting of the DotCom Bubble. However, while the causes of both those and the crisis were different (and this is without doubt the most serious), how investors react will be broadly the same as previous cycles. And it will once again shine a spotlight on the pricing information that the commercial property auction sector provides.
When transactions in the “private treaty” UK commercial property investment market have almost entirely seized up, experience of similar crises shows that the auction market continues and provides valuable insights into where pricing – and ultimately valuations – is headed.
The commercial property auction market enables transactions to take place, and while the volume may be relatively low in comparison to a fully functioning market, there is price discovery. Assets are fully exposed to the market and a wide spectrum of buyers.
In this context, auctions are going to play a vital role for commercial property investors in the coming months. The fact that we have huge market reach and have moved seamlessly to live-streamed sales with multi-channel bidding means that investors can access the market without being hampered by the pandemic regulations which are making so much of normal business life extremely difficult.
No matter what the economic or, in this case, international situation becomes there are always investors committed to buying and selling assets. Currently, some will want to increase their cash reserves in the face of the general economic uncertainty, while others will need to realise capital to support other non-property related businesses with which they are involved. Other sellers may be concerned about where the value of their assets is headed and the difficulty of asset management and feel that now is the time to sell. Institutional investors will be looking at their liquidity positions and may also look to selectively dispose of assets through to the end of the year.
These sellers want results – a binding unconditional contract which guarantees a sale. This seller activity will generate opportunities for buyers who have perhaps struggled to access the market previously or have differing opinions on how the pandemic will impact UK commercial property values long-term.
The continuous activity of auctions brings insights into the pricing of assets and the direction of travel – what a property will command in today’s market and what it may command in the future. In times of disruption, this constitutes a crucial step towards normalising the market.
It is certainly a process in which many property lenders will be taking a close interest in during the coming weeks. The March Quarter Day saw average rent collections fall sharply – particularly in the retail and leisure sectors; this trend is almost certainly going to continue at the June Quarter Day. This will leave many borrowers with a double hit of being uncertain of what their asset is worth, and also with a diminished ability to pay the interest on their borrowings.
Incredibly, we may have gone in a few short months from a situation where most lenders were comfortable with their loan books and there were few, if any, ‘forced sellers’ to a scenario where we could start seeing distressed loans. Whether this leads to a proliferation of asset sales depends on how much support lenders can give their borrowers and over what time frame.
By way of comparison in terms of what may lie ahead, the period from 2011 to 2016 is perhaps relevant. There was substantial appetite at that time – particularly from private equity houses and their bankers – to have insight into the prices and robustness of the assets that underpinned loans in a market where transactions were not taking place in large volumes. During this period, we gave advice to clients who went on to acquire billions worth of loans and it seems that we may now be entering a similar period.
Looking ahead, forthcoming auctions will generate pricing data and will show how pre-pandemic values have been impacted. This will enable the application of pricing methodologies to be applied and hopefully the journey back to normality can begin.
Richard Auterac is auctioneer and chairman at Acuitus
