For those who have bought at our auctions over the past five years, the buyers’ questionnaire will be a familiar feature of the process. We have assembled data from hundreds of purchasers, during sales that have raised £2.1bn from 3,650 lots sold.
Higher-value assets remain popular and in the past six months, which cover four auctions, we have sold 96 lots at above £1m. Notably, though, we have also seen a 20% rise in buyers with up to £1m to invest.
Many of these, having already had success in the residential world, are looking to build a portfolio of commercial investments.
“Does the tenant really take on the repairs?” is a common question raised by these investors when looking at a commercial building let on a full repairing lease.
“Do I really just send a quarterly invoice?” This will be familiar territory for most, but these investors do sound as though they have found the key to the magic box of net income and consistent long-term yields.
Are they being pushed or pulled?
The last government revised the tax treatment on privately held residential assets to reduce investor appetite for the residential sector and by spring 2017 this will be fully phased in.
The increase in stamp duty by a further 3% on second residential properties has added £15,000 to the cost of a £500,000 purchase.
By spring next year, higher-rate tax payers can only deduct interest from residential rental income at a rate of 20% rather than 45%. Put simply, a high earner with borrowings of 75% or more will make little profit on an annual basis from income, before any repairs or void periods are factored in.
Our analysis shows an average gross yield on residential lettings at auction of 9.1% for 2015. Netted back by 25% to account for fees, repairs and voids, this gives 6.8%, which compares to the average retail yield of 6.5% for the same period.
So, with comparable annual yields (albeit with significant regional variations) the real draw must be the longevity of the income.
Take one example: a Clarks shoe shop let at £36,000 pa in an attractive Dorset market town. We sold this in our July sale at £500,000 to a local investor, and the new 10-year lease gives the buyer solid income until 2026. In that period, they will simply need to send out 40 rental invoices.
This calculation assumes a flat income stream, ignoring the possibility of increasing the rent to prevailing market values in 2021.
In this period an initial investment of, say, £520,000 allowing for costs will generate rent of £360,000.
NatWest currently offers 0.5% pa on savings of £250,000 or more, so in 10 years £520,000, even with compound interest, would grow to £546,000.
Investors also tell us that nearly a third intend to use finance, which makes returns even more compelling.
At a 50% loan-to-value ratio with finance costs of 4% pa, the return on cash invested, now just £270,000, would be £260,000 or just over 9.5% pa without factoring in any rental growth.
So investors are finding returns on commercial assets very attractive. By realising some of their significant residential gains over the past two decades – via refinancing and perhaps some disposals – their transfer into the commercial sector can make a lot of sense.
Building a portfolio in this way creates diversification and allows these investors to increase their returns, build more resilience into their income and stop worrying about boilers.
For Allsop partner Gary Murphy, the EU referendum vote has done next to nothing to dampen buyers’ enthusiasm for auctions, which has been stoked further by online bidding
Auctions have, for a long time, been regarded as a barometer for the property market. With potential buyers openly bidding against one another in real time, conclusions can quickly be drawn in terms of demand, pricing levels and confidence.
Our 20 July sale – the UK’s first major residential property auction after the Brexit vote – was hotly anticipated. Few really knew what to expect, but the results were very encouraging: we raised a total of £51m, including selling 17 lots for more than £1m each. The sale of the Elms Lawn Tennis Club in Stanmore, near Watford, for £830,000 off a guide price of £250,000-plus demonstrates that there was no shortage of confidence in the room.
A similar sentiment prevails today. Our 15 September sale saw 146 lots sold, with 16 raising £1m or more. Development opportunities are currently the most sought-after type of lot, with particularly strong appetite for those priced between £1m and £5m with planning consent, permitted development or obvious potential.
We have, in actual fact, met few buyers for whom the Brexit vote has been a major turn-off. Like much of the rest of the world, we have found that life goes on after the EU referendum. The regular faces we see at our auctions keep on coming because buying and selling property is what they do. And for the majority, who are UK buyers, buying UK properties to sell or rent to UK citizens, there is no reason for them to stop.
Instead, the principal cause for concern among investors we speak to relates to the tax structure. With mortgage tax relief being phased out and stamp duty at penal levels, this is little surprise.
With a new prime minister and chancellor in place, there is hope that, come the Autumn Statement on 23 November, there may be a reversal – or at least a softening – of the recent measures that have cooled the property market in the autumn statement. There is certainly call for it within the industry.
But taxation too has not stopped the residential auction room from being exceptionally busy. A combination of low interest rates, an ingrained affection for property in the UK’s psyche and a history of strong capital growth on residential investments means demand is still there.
While some are considering commercial property investment as an alternative because of its friendlier tax regime, residential remains a more approachable, easily understood and more trusted investment for many. It is also one where demand from purchasers is more consistent and demand from tenants is less critical: residential properties retain their value and remain attractive to a broad range of buyers regardless of whether or not they are tenanted.
In short, while taxation has led to the market softening slightly compared with the heady days we saw six to 12 months ago, the Brexit vote appears to be having very little effect and the view from the rostrum remains one of a busy room of buyers who still have no hesitation in bidding for sensibly priced assets where they see an opportunity.
Online auctions
Most auctions today are multi-channel: buyers can bid in the room, by proxy, over the phone and online. The majority of bidders still make the effort to turn up on the day. But while ballroom auctions are still the method of choice for domestic investors, the international market is a different matter.
I believe the online auction model is highly effective for the sale of new-build property in particular; it offers fairness and transparency by providing a level playing field for all buyers, irrespective of their location. The model we have developed creates a secure, live market for global investors and the fall of the virtual hammer results in a binding contract, giving buyers and vendors certainty of sale. When compared with international roadshows and exhibitions, it is also very cost-effective for developers.
But, the proof of the pudding is in the eating. Last year we held our first online auction, for 36 apartments in West Drayton, London. In the four-week marketing period before the auction there were more than 28,000 visitors to the auction and developer websites, with 15% of the traffic originating from outside the UK. The online process had a 100% success rate and the prices achieved were 10% higher than the first phase sold a few months earlier.
This shows what potential online auctions have to change the way off-plan homes are sold around the world.
