Bankrupt landlords, distressed shops and sheds, rows of terraced houses catalogued and carefully numbered for the quickest possible sale. The image of the property auction sale is a familiar one, from the classified section of the specialist press to programmes on daytime TV. But the auctions sector is changing as buyers and sellers realise the attraction of taking property from the prime end of the sector into the sale room.
The speed and transparency of auctions certainly appear to appeal to some in the market. But is this method now challenging others as a way to sell the most expensive and exclusive real estate?
John Townsend, executive director of commercial property auctions at CBRE, thinks vendors are more than ever taking notice of auctions when pondering a marketing campaign for their prize assets, limiting some of the issues that can arise in a private treaty campaign.
“There has been a greater realisation that auctions can reach the right audience and are the best method of sale to achieve the best price in the market in the shortest time possible without any last-minute price renegotiations,” he says.
When considering a definition of prime property, most auctioneers point to superior location, strong covenant, a decent lease length and ultimately a higher sale price. And while the auction is still popular for properties that do not fit those criteria, it may hold some particular advantages for prime stock in a volatile marketplace.
“In many instances it may be more difficult to estimate the likely realisable pricing of primer properties and an auction will ensure that the best price is achieved and importantly, for many clients, is seen to be achieved,” says Townsend.
The sort of purchaser with an eye on a prime asset at auction is likely to be restricted to a certain type of private investor who is typically seeking to place cash in property in the hope of moderate growth. But with plenty of buyers searching for a limited number of lots, sellers appreciate the advantages an auction may bring.
“We tend to deal with high net worth individuals, perhaps with portfolios of around £20m-£50m. Institutions aren’t targeting lots of less than £5m, and they aren’t making instant decisions, so the auction environment generally doesn’t suit them,” says Richard Auterac, chairman and auctioneer at Acuitus, whose average lot size is around £900,000, with about 30% of sales recouping more than £1m.
Debt-funded purchasers are also less likely to favour the auction, since lenders are often unable or unwilling to move in the timeframe an auction requires.
But with plenty of cash-rich investors in the market, Auterac believes the “heat of the auction room” can boost sale prices and this, combined with the ease of access to property that an auction affords, provides comfort for vendors.
Consequently, prime yields on more expensive properties have generally been stable or have hardened in the past two years and now sit at 7.3%, while average yields on lot sizes above £1m are 9% (see Yields by lot size, right).
Among the most highly prized lots are strongly leased retail units. These include a McDonald’s drive thru unit at Cardiff Retail Park, which is let until 2031 and was sold this summer by Acuitus to a high net worth purchaser for £1.17m, reflecting a 5.54%, yield. It was marketed with the promise of completion in six weeks.
Sale prices in central London can be significantly higher. Earlier this year, 50 prospective buyers expressed an interest in and 2 Cavendish Court, EC2. Townsend took 63 consecutive bids on the lot in £25,000 increments, before selling the 6,000 sq ft building for £3.575m, reflecting a net yield of 3%.
It isn’t just the commercial market ?that is booming. Prime residential auctions are also witnessing growth, with 118 lots of more than £1m selling in the UK in the year to August, representing a total value of more than £200m, according to Allsop. New entrants to the market appear to be taking note (see box, below).
“Auction is an effective method of sale in the multi-million pound market,” says Gary Murphy, partner and auctioneer at Allsop. “The finality of the process enables sellers to secure a binding contract within a defined timeframe. Private treaty sales are notoriously susceptible to last-minute renegotiation and, as markets improve and demand for quality hots up, sellers have sought to capitalise on this much-welcome competition.”
While this all suggests the market is hot, there remain some limitations as to what sort of prime stock is considered ripe for the auction room. Large, multilet buildings, for example, tend not to lend themselves to an auction sale.
“The process sets a limit for the lot size you can comfortably deal with,” says Duncan Moir, commercial auctions partner at Allsop. “There is finite time for an auction to take place and large assets, multilet buildings, complex titles generally mean that people haven’t got enough time to put everything in place.”
There is also a need to be careful in terms of how catalogues are formulated, with a need to maintain a sense of exclusivity and prestige around prime lots. A tatty East End lock-up, for example, is probably best positioned on a different page from a prime City office block.
“If you have random items in there, it can put people off,” says Auterac. “I’ve known sellers withdraw items from a sale after they see it in a catalogue because it doesn’t sit comfortably there.”
Profile: Concierge auctions
The heat of high-end residential ?auctions has brought US auction firm Concierge into the European market in recent months. The company, which describes itself as “the top choice for strategic, high-net-worth sellers of luxury real estate”, has tied up with London Real Estate Advisors, with the firm’s Charlie Smith acting as consultant in the capital.
Concierge treats posh houses as one might an antique, producing a one-off glossy brochure for each lot and organising a sale at the property itself rather than in a sale room. Its methods appeal to the sort of seller who has no problem drafting in Sotheby’s to shift their fine art collection – and is comfortable with a similar approach to offloading their house.
Concierge president Laura Brady says: “When we started the company, we were geared towards sellers who needed to sell quickly at a high price. But we’ve shifted over the years and now we find sellers aren’t in distress, there’s no debt on the property, they just want to move on and achieve a high price.”
The company’s thick, black corporate brochure contains many stunning properties, from the surprisingly ?cosy-looking Rockin’s Ranch at Teton Valley, Idaho (sold for $4.18m), to the overwhelmingly grand domed mansion of Champ D’Or in Dallas, Texas, (previously listed at $35m and subsequently sold at an undisclosed price).
Concierge, which claims £500bn in sales in the past five years, is picky about the property it is willing to have on its books, typically agreeing to sell only one in 25 of the homes offered by vendors.
“They need to be high calibre,” says Brady. “We also evaluate the seller’s situation to make sure they fit the profile that works for us and to check they are in the right mindset.”
The company works with local brokers to market the property, which take their fee from the vendor. Concierge charges a buyer’s fee of 10% of the final sale price.
Smith believes the model is a good fit for the UK and European marketplace and is confident that Concierge’s methods will appeal to buyers, partly because of the psychology of the modern purchaser who wants instant access to the property.
For sellers, the attraction lies in certainty. “Market forces have ebbed and flowed and assets are difficult to value but this process crystallises it and shows what a buyer is willing to pay at any given time,” Smith says.
The company has still to select a property in Europe to auction. But all the signs are that when it happens, it will be a biggie.
