The headline news from the first few days of 2016 did not encourage positivity as the price of oil plummeted and China’s economy continued to wobble.
More locally in our market, JLL has predicted that total property returns will fall to around 10% this year because of national and global political and economic uncertainties.
However, it has also pointed out that this level of return is well ahead of the 10-year average of about 7%, and that a dip in volumes will be a “pause in the cycle rather than the beginning of its end”.
So where does that leave the commercial property auction sector? Our perspective is very different from that of the institutional and global investment fund market. While the “big-ticket market” may be experiencing something of a pause this year, having sated itself after the buying spree of the past four years, commercial property auctions are providing the entry point for a substantial influx of equity from private investors who are turning their backs on the equity and gilts markets.
Having been largely excluded from the headline-grabbing property deals, these investors now sense an opportunity to buy the assets that have been released by portfolio break-ups, receiverships and asset rationalisations.
Against this backdrop, the volume of assets selling at Acuitus auctions last year was up by nearly 20% and the average success rate rose to 91% as investors turned to property in growing numbers.
We expect the momentum to continue this year. On the face of it, this prediction might appear to contradict JLL’s prognostication regarding falling investment volumes in 2016, but it does not.
What it reflects is a greater emphasis on individual private equity rather than global capital. This is especially significant at the granular individual asset level where the typical lot size is less than £10m and assets can be sweated with the passion that only an individual can put into them. Accordingly, it will not be surprising this year if the volume of assets selling at auction rises again even though – as per JLL’s contention – the overall trend in the commercial property investment market is towards a reduction in activity.
Similarly, yields are now sharpening in the sale room and this is encouraging more sellers to use auctions as the route to market. Auctions are providing excellent opportunities for the buyers and sellers who specialise in assets in the sub-£10m bracket.
Sellers see that investors are prepared to take more risk for properties that offer active management opportunities and are meeting this demand with secondary properties that fit this profile. At our auction last July, this trend was reflected in the 100% sale rate of office properties – many of which provided opportunities for alternative use.
Many of the sales in our December auction demonstrated that secondary high street retail investments appear also to be making a recovery. However, we need to see whether this is sustainable and which retailers and locations are on the upgrade.
Another factor having a galvanising effect on the auction room is the increased availability of finance. At no time since 2007 has the lending market felt as “normal” as it does today. Even the Chinese stock market crash has had a slightly positive impact by reducing fixed-rate cost of funds as interest rate rise expectations are delayed.
The clearing banks know what they want to lend on and have stabilised pricing. Specialist lenders have established their presence and are now evolving their products into more creative and tailor-made loans for the sectors in which they have chosen to specialise. And new lenders, looking to fill the remaining gaps in the funding marketplace, continue to appear.
However, although there is now a greater variety of funding sources, investors have to recognise that the finance and property marketplaces operate at different speeds.
The completion times in the property market are speeding up, but in the finance world, the drawdown times are lengthening to, typically, three months or more. In an increasingly competitive auction room you don’t want to lose out because your finance isn’t in place.
Therefore, with enthusiastic buyers, a growing number of sellers and a ready supply of debt and equity, the outlook is positive for commercial property auctions as we head into 2016.
Of course, it would be ridiculous to suggest that our sector will not also be buffeted by global economic factors. However, it will be operating in a segment of the investment market in which the attitudes of buyers and sellers are more closely aligned than they have been for some considerable time.
Richard Auterac is chairman and auctioneer at Acuitus
