We read every day about the waves of money from the sovereign wealth funds, US investment houses and UK financial institutions trying to access the commercial property sector.
These investors are driven by the prospect of higher returns than they can get on gilts and bonds, capital preservation and the UK’s status as a safe haven. The private investors and property entrepreneurs who populate the auction room are not dissimilar in their aims.
Sales across the auction sector were up by 30% during 2014 but it was not just the total volume that was on the increase.
The auction market has traditionally been characterised by a focus on smaller lot sizes as the principal buyers have tended to be private investors and private property companies. However, the average lot sale price in 2014 was £656,000, compared with £564,000 in 2013. Just over 16% of all properties sold for more than £1m during the year and in some auctions this size of lot accounted for 40% of sales.
Retail investment continues to be the dominant asset class in the room and represented 64% of the total amount invested through auctions in 2014. The relative simplicity and wider knowledge of retail among investors makes this the preferred property sector for high-net-worth investors.
The office sector was the second largest sector, representing 20% of total volume. From a private investor’s viewpoint, offices are arguably the most complex investment to deal with. In contrast, they are popular with property companies, who see them as an excellent opportunity to add value by reletting vacant space, renewing short-term leases, or by providing serviced offices. The prospect of conversion to residential is also in the front of many minds.
The leisure sector was the third largest component of 2014 auction sales and showed the biggest increase during the year, with the amount invested in the sector doubling. After several turbulent years, the licensed premises and gym sectors are regaining investor confidence. The sector is also popular because operators usually require long leases which, in turn, provide long-term income for investors.
Industrial, warehouse and trade counter investments are popular with investors as they can offer straightforward single-let properties with a low risk of obsolescence. Also, the sector has not generally suffered the same over-renting that we have seen in the retail sector. Unfortunately, the supply of suitable investments has been low for the past two years as owners have been holding assets or bundling them for portfolio sales.
In terms of returns, the average all-property yield for 2014 was 8.46%. This reflected average prime yields of 6.46% and 10.08% for secondary. This is an average yield gap of 362bps, which has reduced substantially since 2013, when the yield gap was 452bps.
Another encouraging facet of the sector is the change in the level – and terms – of finance. There have been significant changes in the type of finance on offer from a number of lenders compared with the same time in 2014.
One of the main changes has been a reduction by certain lenders of the “stress testing” used, which determines the level of loan that can be arranged from the rental income of an investment property.
The sources of lending are growing and getting more innovative and the “one-size-fits-all” approach is being replaced by terms which are tailored more closely to borrowers’ needs. This is bringing more choice, keener margins and quicker approval times.
Two lenders in particular are increasing their loan-to-value ratios and, interestingly, one specialises in commercial investment property and the other in residential portfolios.
Encouragingly, some lenders are now able to lend within the six-week auction timeframe – as lenders have to work harder to lend money they are starting to provide the service that clients are looking for. This easing of finance requirements can only help to bring more dynamism into the auction room.
As we head into 2015, there is clear evidence that the commercial property auction sector is continuing to strengthen and mature.
Growing numbers of investors are using the auction transactional platform. With more stock now flowing into the room, more readily available debt finance and new investors utilising auctions, it looks like being a good year for the serious buyers and sellers to come together under the commercial property auction umbrella.
Richard Auterac is chairman and an auctioneer at Acuitus
