The IPF estimates that there is still a £59bn legacy of high loan-to-value lending that needs to be worked through before the UK property investment market can be truly normalised again.
At the current rate of sales of distressed loan books, the Investment Property Forum reckons it will take around four years for the assets underlying this lending to be brought back into what you might call “active| ownership.
Of course, these loan book sales are only the first step in breathing life into “zombie” assets. In most instances, we should only consider the process complete when the new owners sell them on and their value is re-aligned to the current market.
Given the quantum of the assets involved, this seems like an almost insurmountable task, but I think the auction room can play a vital part in the process.
If you analyse the profile of the assets behind the distressed lending in question you find that while some may be large-scale properties – shopping centres or major office blocks – the vast majority are the more run-of-the-mill properties, which are worth up to around £10m and form the lifeblood of our investment market.
Accordingly, the task of transitioning these “zombie” assets to new ownership needs to be approached rather like the old saying about how to eat an elephant – one bite at a time.
It is an area of the business with which Acuitus is closely involved. We are very experienced in providing pricing advice to the would-be purchasers of loan books and the products from these purchases are increasingly flowing through our sales and onward into the private investor sector.
Interestingly, when faced with a mountain of modestly sized assets that you need to sell in the market, your first instinct might be to initiate a series of portfolio sales – package the properties up and try to sell them as a “collection”. There is, of course, definitely a place for assembling the super-large and well-constructed portfolios that attract bidding from buyers looking to place substantial equity investments into the market.
However, what we are beginning to see is administrators, receivers and the new owners of bad loan books take a more granular approach. By using the auction room to sell batches of assets, they are making them available on a property-by-property basis and are therefore able to tap into the huge demand from private investors.
A good example is the group of 17 high street assets that we sold at our auction last week. Located throughout the South East and Midlands, the properties are all occupied by either Lloyds or TSB banks and had been brought to us by administrator Zolfo Cooper. In the auction room, they all sold on the day at an average yield of 5.02% and cumulatively raised £4.6m, which was more than £1m above the best offer they had received in the private treaty market.
Auctions connect sellers with asset-hungry private investors and can achieve enhanced results for properties that are being brought out of distressed situations. Unless a portfolio is well constructed, there is a strong case for assets to be sold individually. Sellers really should not ignore the reach and depth of private equity that the auction room channels.
It certainly seems like an increasingly propitious time to sell, according to the latest Acuitus/IPD Retail Property Auction Index, which measures the capital value change of retail properties sold in the UK at auction.
The figures for the third quarter show a fourth straight quarter of growth in the index and reflects a year-on-year increase of 17.6% in the average capital value of retail property sold at auction. This is the highest year-on-year rise that the index has recorded and reflects the recovery of high street property since last year’s low point in the property cycle.
This performance is being fuelled by concerted buying from private investors who still see property as a better investment medium than gilts, bonds or equities. These investors are the vital last link in the process to work out the £59bn debt mountain that the IPF has identified.
While it may be the big beasts of the investment markets that initiate the process of bringing “zombie” assets back to life, it will be the myriad of private investors who populate our auction room that can help complete the resurrection.
Richard Auterac is chairman and auctioneer at Acuitus
