Rising demand and an increase in supply combined to result in a very strong year for the commercial auction market, with many auctioneers having their best sales totals for a decade.
In 2016, sales across all the commercial auctioneers totalled £1.17bn, according to Essential Information Group. Here at Allsop, commercial sales realised a total of £610m – some 33% above our 10-year average of £450m.
As we look forward to 2017, it is worth reviewing the end of 2016 and some of the fundamentals of the commercial property market, which remained largely unchanged over the year.
Interest rates and the returns available to savers remained – and continue to remain – low. Many are predicting an increase this year, but would a doubling of the base rate to 0.5% really affect values that much? The cost of borrowing is starting to increase but, with so many cash buyers in our market, we see no reason for demand from private investors to diminish substantially.
Over the past few years the economy has continued to grow and despite some dire predictions of economic disaster, 2016 was no exception. As a result, rental values in most of the southern half of the country have been gently rising, along with selected locations in the North.
However, it is fair to say that during 2016 rental growth has not been enjoyed across the whole country, with rents remaining static or falling in some areas of the North West, North East, Wales and Scotland, particularly as the number of voids has increased. The average yields achieved in the regions clearly show this disparity.
Were it not for the business rate revaluation, which is due to be implemented on 1 April, we would have expected rental growth to continue to tick slowly upwards. However, the rating revaluation is going to produce some hefty increases in rates bills, particularly in the better locations, which could act as a brake on rental growth. Conversely, of course, there will be areas that will see rate reductions, which may act as a catalyst for rent increases.
While inflation has not been a word which has appeared too often in the press over recent years, it looks as though inflation is on the rise, caused mainly by the increase in oil prices and also a weakening currency. As a result, any index-linked properties will be more keenly sought-after over the course of 2017.
There will be some nervousness in the financial markets around the end of March, when Article 50 is finally triggered and negotiations start in earnest for the UK’s departure from the EU. Sentiment in the secondary property market may be affected in the short term, in the same way as it was at the time of the referendum. Yet, unless interest rates rise substantially, which no one is predicting, we see no reason for the commercial property auction market to be adversely affected by any minor tremors in the financial markets, particularly for better-quality lots. As always, a little uncertainty can bring opportunities.
At our December sale we detected a slight cooling of demand for secondary properties – primarily those let on shorter leases in weaker locations – and this trend is likely to continue into the new year. This slowing of both investor and occupier demand could lead to a readjustment in pricing for weaker lots. We still envisage strong demand for properties located in London and the South, but cannot at present see any reason for yields to fall further, especially as residential values are growing more slowly.
In summary, we are cautiously optimistic about the prospects for 2017 and do not anticipate any let-up in demand for well-located properties, be they let on long or shorter leases. The rising incidence of shorter lease commitments has a more modest effect in strong locations. We expect further cooling in demand for properties in secondary and tertiary locations.
We would be surprised if the 2017 total sales surpassed 2016’s figure; however, with a notable increase in the number of larger lots now being offered at auction and procrastination again creeping into private treaty sales, it might not be too far short.
