As we head into the final rounds of 2021 commercial property auctions, it’s worth asking whether the trends we have seen during the year to date are simply a manifestation of a post-lockdown adjustment or are more long-term in nature.
It was inevitable that the commercial property auction room would see a surge in investor demand once society began to see a way out of the pandemic and back towards normality. However, the depth of latent demand was unexpectedly substantial and drove the volumes of transactions to record levels in the first half of this year. With auctions scheduled for the end of this month, we are about to find out if this buying pattern is being sustained.
Small is beautiful
We’ve seen particularly sustained demand throughout this year for small to medium-sized investments in the £250,000 to £1m range. In the second quarter of this year, this size of asset accounted for 55% of the total volume of properties sold – the highest proportion since Q3 2018. Small is indeed beautiful for many investors as this price bracket offers a range and choice of investments that match buyers’ financial fire power.
Whilst the investment case for London is well-known and also reflects the number of active investors for whom the capital is their neighbourhood, we are now also seeing considerable confidence in the reletting prospects of many suburban locations and the future resumption of GDP growth. Many of these suburban assets also offer a potential or immediate residential angle to add value and are the most popular because they offer risk diversification. We believe that this trend will continue through to the end of the year and strengthen in 2022.
In terms of returns, we saw the prime all-property yield that we track across commercial property auction sales harden to 5.72% – its lowest in 10 years. In contrast, the yield gap between the prime and secondary yield is now around 430 basis points which is the widest since the end of 2013. If business confidence continues to improve and the return to the office gathers momentum through the final months of this year, we would expect the gap between prime and secondary auction yields to narrow as more buyers target the latter. This trend will be in part fuelled by investors capitalising on the strength of the residential market and targeting properties that have good current income and future repositioning/redevelopment potential.
Demand and supply imbalance
Auction sale rates remain high. Although they were down from 94% in Q1 to 90% in Q2, the rate is still high in relation to the 10-year average. This reflects both investor demand and the relatively constrained volume of stock that is finding its way to the auction room. This imbalance is gradually improving and we hope that it will continue to be redressed through into 2022.
Recognising the unsatisfied investor demand for mainstream commercial property assets has prompted a growing number of sellers to bring properties into the auction room. These sellers included international investment and asset managers as well as corporate occupiers wishing to utilise capital more productively in their core businesses through sale-and-leasebacks.
Auctions have enabled these sellers to exit their positions in an orderly, efficient and timely way using a programme of sales to achieve best prices unconditionally.
Since the onset of the pandemic in March 2020 the number of active buyers at auction has increased substantially, not least because of the new reach that online sales have brought. The proliferation of online platforms across various forms of investment has made investors increasingly comfortable with this mode of acquisition.
Open outcry versus digital trading
The past 18 months have been for property auctions what 1986 was for the London Stock Exchange when it moved to electronic trading. Open outcry auctions may still be held by those auction businesses that have the skill to bring together and hold the attention of an audience of motivated buyers who are in turn attracted by showmanship and want the reassurance of human traders.
But electronic trading has reduced the cost and friction of buying commercial real estate and opened up the market to retail investors, which can now add commercial property to their investment portfolios at the click of a button.
With the economy gaining some momentum and investors now comfortable with the new mode of auction trading, it should be a fascinating period through to the end of the year.
Richard Auterac is chairman of Acuitus
