Half a decade gone and with the annual reporting season well under way, it’s been another strong year for the UK’s commercial auctioneers.
With the sale of more than 5,000 assets last year, the total value raised was in excess of £1.3bn, continuing the upward path of the previous three years. The headline figures make for encouraging reading, representing a 15% increase over 2013, but as with other sectors and transactions in the property industry, the headlines do not necessarily tell the full story. The devil, as ever, is in the detail.
So let’s explore the £525m of commercial sales secured by Allsop, which represents a good proportion of the whole market.
The volume of sales for the year improved by 18% to 850 lots, the volume of £1m lots improved by 30% to 134, and, in line with the other auctioneers, the average lot size improved by 15%.
hese indicators suggest a number of encouraging developments. On the supply side, vendors expressed increasing confidence in the method, by offering larger and better lots to the auction market; on the demand side, the degree to which purchasers were prepared to compete for these better-quality lots was clear in the early sales results.
This in turn drew better stock into the market. As the prospect of an early rise in interest rates receded during the year, the appeal of commercial investment property – both to the saver and cash buyer – became more obvious, particularly as the wider economy showed increasing signs of recovery.
Looking at the individual sectors, retail still predominates, with more than £300m of sales (57% of the total). With lot sizes ranging from £50,000 to £5.2m, locations varying from prime high street positions to suburban parades and stand-alone convenience stores, shop investments are perennially popular. Yields for the better units were remarkably steady at around 6%, against a five-year average of 6.1%. The more secondary investments saw greater fluctuations, given the uncertainties of tenant strength, income security and the limited prospect for rental growth. Yields averaged out at 8.3% (2013: 8.9%).
Although a number of towns have shown signs of improvements in rental levels, there are many where conditions continue to be challenging for the occupiers, which naturally tends to be reflected in the investors’ bid.
The optimism in the UK economy is helping both the office and industrial sectors, with reports of improvements in occupier demand in the regions as well as the South East. Office sales grew by 63% to £77m and industrial sales by 96% to £61m, as sellers took advantage of investor demand. A greater proportion of this activity happened in the regional markets, which accounted for 61% of the volume of sales in the year, up from 56% in 2013.
For some years we have conducted surveys of the buyers at point of exchange in the auction room, which gives us a useful insight into both motivation and future intentions. With interest rates continuing to offer very modest returns on cash and the alternatives of the stock market (in what was a rollercoaster year) or government bonds (the 10-year gilt fell from 3% at the start of 2014 to less than 2% by the end) offering little comfort, it is hardly surprising that real estate remains an attractive option.
This is supported by the survey, which reveals both an increasing number of returning buyers (up to 80% from 70% in 2013) and an increasing number looking to invest in excess of £500,000 (up to 65% from 55% in 2013). While a significant proportion of buyers are located close to the asset, most buyers are from outside the region where the property is located or from overseas.
What is clear from this analysis is that investor appetite for risk is improving. Buyers are always keen to find “value”. With recovery across much of the economy, finding “value” at an acceptable level of risk has moved investors up the risk curve.
This has improved demand both in the secondary market and in the regions. The impending election could well introduce greater volatility into other investment markets, which can only further enhance the lustre of investing in bricks and mortar.
Duncan Moir is partner at Allsop
