As we start the run-up to the next round of commercial property auctions in October, it will be fascinating to see the evolving role that private investors play in the saleroom.
In terms of who I mean by “private investors”, it is the high net-worth individuals who are going to have an increasing public presence on the auctions scene.
During the last five years, the UK has seen an enormous influx of global and institutional money investing in prime assets. However, this activity has focused generally on assets with values of more than £50m located in a relatively narrow geographic band. In contrast, high net-worth investors typically target lot sizes of £250,000-£10m and are often more flexible on both asset type and location. Given this purchase price sweet spot, private investors are increasingly using the auction room to access the market because it is relatively liquid and transparent – and frankly, the easiest and most efficient way to invest.
The supply of the type of assets favoured by HNWI has been fed by widespread disinvestment from segments of the commercial property market by institutional investors and US opportunity funds.
HNWI buying has also been enabled by an improved finance and lending landscape, and evolving tax and pension regimes. Disillusion with traditional pension products and the volatility of equities have also led to an increasing number of investors wanting to take control. The new pensions freedom – retired people can now use 100% of their pension pot as they wish – is likely to give rise to more investors looking to invest directly in commercial property. This all chimes with the tangibility of property and the transparency as to what you have actually invested in.
Having knowledge as well as cash is often the key to success
So, not surprisingly, an ever-growing volume of HNWI is finding its way to the auction room. Investment into commercial property by private investors is at the highest level since 2007. Last year, private investors spent around £3.6bn on UK commercial property, so no one should underestimate their buying power.
We have just concluded a major research study into HNWI investment into commercial property and it was interesting to note that – in contrast to the institutional market – private investor buying remained strong during the run up to the referendum and this momentum was sustained in the auction room immediately following the vote result.
This illustrates the HNWI sector’s appetite for investment assets that will provide a long-term income during an inevitable period of uncertainty and at a return that is simply not available from bonds.
So where will they be buying? Well, as mentioned above, HNWI are not seeing value in the super-prime markets – predominantly in London – where there has been most global activity in recent years. Instead they are more likely to be looking for value in the commercial property market outside the capital, although obviously then would invest with alacrity if the right opportunity came along in London which offered value. These markets were much slower to recover post-2008, and have largely been passed over by institutional and global capital because of the limited opportunities to invest significant tranches of capital.
Also, the occupier market remained weaker for longer in many regional towns and cities – a reflection of the unevenness of the post-recession economic recovery.
The continual growth in rents since the early 1990s came to an abrupt end in 2008, leaving many shops and offices substantially over-rented. This over-rentedness was up to 70% in some towns and minor cities outside London and the South East. However, the process of rebasing rents is taking place and this is contributing to the affordability of property for occupiers and the sustainability of rent. This, in turn, enables investors to have a more confident view of what the secure long-term income prospects are. This rebasing of rents now presents a major opportunity for investment in secondary and non-institutional assets.
Also, although direct investment in smaller and secondary property assets is less liquid than investing in institutional property funds, it is less likely to display the sort of short-term volatility we saw during the summer with the open-ended funds that are mostly invested in large, prime assets.
Of course, no investment comes without risk, and HNWI buyers will do well to remember that having knowledge as well as cash is often the key to success. While commercial property investment holds many attractions for the private investor, recent history is a reminder that this sector requires an understanding of the asset class, its specific dynamics and also the drivers of any local occupier market.
Richard Auterac is charman and auctioneer at Acuitus
