“If everyone believes that prices have been hit by all this political nonsense – and if this has already been factored into price – then why wouldn’t you invest now? Prices can only go up once Brexit is behind us!”, said a leading researcher to me the other day, as he closed his laptop with an emphatic click.
Indeed, his idea is redolent of the glass half-full theory doing the rounds in some quarters of the property investment world at present. While I don’t think I can subscribe to this wholeheartedly, the wishful logic may not be far off the mark.
Either way, as we pass the mid-point of the year, it makes sense to look at how our sector has progressed and what we might expect through to the year-end.
Dampened spirits?
Despite the wet blanket that Brexit continues to place over market confidence, activity in the auction room over the last 12 months remains above the prevailing average pre-2015.
The EU Referendum pressed pause on a surge in activity, which took hold as institutions and asset managers that were restructuring portfolios released good quality stock into the auction rooms where it was snapped up by professional private investors and small property companies.
We started this year with the – as it transpired – forlorn hope that there would be political resolution. In anticipation of that, the market sat on its hands ahead of the outcome. It was indeed a slow start, but each of the subsequent auction rounds has felt progressively better as the market has become more normalised.
In addition to Brexit, the challenges facing the retail sector have taken their toll on values. The Retail Property Auction Series that we produce with MSCI stood at 104.8 at the end of Q1 2019 – a 7.8% quarter-on-quarter drop. The MSCI Retail Shops Index fell by 8.4% over the same period, underlining the universal impact of retail restructuring across the market as a whole.
Yields for assets let to independent retailers continue to fare better than the wider market – a demonstration of the fear surrounding CVAs and retailer failures. Long income assets retain their price premium, although the last quarter suggested a return to speculative interest in properties with less than five years of income, but only where the retail prospects are stronger.
The rebasing of retail rents which is opening the way for new occupiers to enter the high street is providing a coherent reason for long-term investors with robust local knowledge to look to the future.
The office sector comprised 21.5% of sales in the Q1 auctions this year. This was the highest proportion of total sales since 2015, and well ahead of the long-term average of 15%.
This activity reflects a wider market demand for offices and the rental growth they are attracting in a growing number of locations. The quality of the assets brought to the room undoubtedly drove sales, and saw the average lot price achieved rise to around £1.5m. Investors appear more comfortable with this sector – especially as so much obsolete stock has been converted to residential and fostered a more realistic supply-demand equation.
Meeting demand
The Q1 auctions also saw a sharp increase in the volume of London assets sold, which represented 28.1% of all lots sold by value – well ahead of the long-term average of just under 18%. Institutional and property company disposals are meeting strong private investor demand for suburban London assets with a story beyond Brexit. The average lot size across the whole market was £637,230 – 20% up on the 2018 average.
The dominance of experienced property investors in the current market continues to deliver a degree of stability. There remains a focus on assets providing longer term income and opportunity that can, as much as possible, transcend Brexit. Assets with redevelopment or repositioning opportunities are once again attracting skilled property investors trying to look beyond the current uncertainty.
The new occupant of 10 Downing Street will not be able to deliver the immediate ‘Brexit bounce’ that my researcher friend envisages, but there is still a substantial pool of capital looking to buy through the auction room.
Richard Auterac is chairman of Acuitus
