The property investment market needs to wake up to the fact that we may be seeing signs of some injudicious buying being fuelled by the availability of “cheap” money.
Debt finance is a vital component of the property investment sector: it oils the wheels of the market and enables investors to leverage their equity to acquire more assets and release resources for capital expenditure.
The application of debt finance to an acquisition can also produce a return on day one if the cost of money is below the running yield on the asset. It can be a very comfortable feeling if you have financed 70% of your purchase price with debt costing 3.5% all in when the yield on your purchase is, say, 6%.
However, the nature of such comfort zones is that they can take your eye off what the future may hold for your newly purchased asset. To put it bluntly, there are instances now of investors buying an asset because it is easy and “washes its face” on day one, rather than because they know what the medium to long term holds for the property.
To seasoned property investors, this may all sound like very basic stuff, but in the auction sector we are at the forefront of a wave of new high net worth investors. They are often entrepreneurs who are looking to deploy some of the capital made from their businesses in the UK and overseas and unsurprisingly are being attracted by the type of yields they see being generated by commercial property investments.
Although the watchword for anyone operating in property investment must be “buyer beware”, in the high-value commercial property auction arena there clearly is something of a long-term duty to help educate and inform newcomers about the finer points of our sector.
This is not altruism, it is plain good business. Private equity is a hugely important source of demand for us and we need to encourage positive participation, not let investors simply learn hard lessons along the way.
In this respect, the Investment Property Forum has taken a tremendous lead by recently publishing its updated Understanding Commercial Property Investments guide for independent financial advisers.
The IPF has identified IFAs as a vital element in the process of bringing new, private investors into our market. The guide is an excellent and objective overview of the attributes of UK commercial property as a mainstream asset class, and an outline of the direct and indirect routes through which investors are able to access the market.
However, while IFAs can do much to shape the attitudes of their many clients to property investments and hopefully use the IPF guide to help them understand the workings of our sector, the auction business can clearly do a lot at the point of sale to educate buyers in real time.
A large amount of Acuitus’s work is talking to buyers and explaining the nature of the assets for sale and what the ramifications are of their tenure, physical condition and location. What has struck our team over the past 18 months has been the number of new would-be buyers who are showing an interest in buying at auction.
Of course, many of them are, in effect, cash buyers looking to put property assets into self-investing pension plans or similar investment vehicles. However, it would be strange if an increasing number did not begin to avail themselves of the finance that is currently available in the market.
Interest-only finance has returned to the commercial investment sector. There are a number of options for interest-only loans, normally at 50% loan-to-value unless the security is strong – and then 70% is possible.
In this context, it makes absolute sense to go shopping in the debt finance market, but only if you have a clear perspective of the investment you are financing. Just because debt is relatively cheap does not mean it can wash away the inherent challenges of an asset. The relative property inexperience of private investors combined with ready sources of finance could produce some unwanted consequences in the years to come.
The IPF has done a great service to the property investment sector by explaining the routes to market, but we in the auction sector also need to be helping buyers have clarity about what they are buying.
Any enterprise thrives on repeat business and we should make sure that private investors will be coming back for more – and not nursing burnt fingers.
Richard Auterac is chairman and auctioneer, Acuitus
