As the dust settles on the last commercial auctions of 2016, we can reflect that it has been a positive year for the sector but that new challenges await in 2017.
Ahead of this week’s final round of auctions, commercial property auctions had already equalled 2015 volumes and look set to comfortably break the £1bn mark for the first time since 2008.
By the end of November, just over £950m of commercial property assets had sold in the room. With sale rates and the number of lots offered looking to be around par with 2015, it is clear that the average price achieved by lots in the room has risen year on year. By the end of November, the average sale price of a lot was around £600,000, and 2016 featured the sale of the greatest number of properties in the £1m-£5m range since 2007.
The average lot price achieved this year is at a level which – perhaps not coincidentally – is around the “sweet spot” of pricing for many of the private investors who have become first-time auction buyers in 2016. This year will be remembered in part as the point when private investors really began to make their presence felt once again in the auction room. In 2015, auctions were the conduit for around 20% of all private investor commercial property buying in the UK and we expect that to have risen this year as portfolio sales gave way to individual asset sales.
While looking back at 2015, I also revisited what I was saying in these columns 12 months ago. At that time, the major global economic concerns were around the Chinese economy and the plummeting cost of oil. A year on and Brexit and the US economy (or rather what the president elect will do next) are the main causes of uncertainty, while the price of oil is back on the rise.
What a difference a year makes. I also noticed that a year ago nowhere did I mention the possible impact of the EU referendum. So much for my crystal ball skills.
However, in our business we must look forward and it is interesting to ponder what 2017 will bring to the commercial property auction sector. Paradoxically, the continued geopolitical uncertainty in Europe and North America has only served to reinforce property’s investment proposition. It still can argue a compelling case against other investment media while the inflows of international private investor capital have been stimulated by a weaker pound.
At their most basic level, commercial property auctions are a very effective vehicle for bringing a pool of would-be buyers together with investment-grade assets. We currently have plenty of buyers and – while we could do with more supply – the market is functioning healthily. The final ingredient is finance and this is where investors would do well to plan ahead for next year.
Following the introduction of “slotting” after the financial crash, most banks moved to a five-year loan term to keep interest rate margins at reasonable levels. There has to be a complete break in the loan after the specified term – there is no automatic renewal.
Accordingly, each passing year will now bring a growing number of borrowers who have the opportunity to shop around for a new deal. In some instances, this will be forced upon them. For example, Nationwide has stopped all commercial property lending and moved back to a mainstream retail building society strategy.
On a more positive note, there are now more lenders in the market than there were five years ago and there is some very attractive long-term, fixed-rate money available.
Against this backdrop, if an investor is holding assets for the long term, it may be appropriate to use fixed rates for all or part of its portfolio finance as an insurance policy against future rate fluctuations. For example, pension fund finance from £3m can be fixed for up to 15 years.
So it really makes sense for borrowers facing a loan expiry to review their options now – especially as it can take five to six months to identify an appropriate product and progress through the loan process. To have the flexibility and financial ability to buy in the auction room, it is essential that investors have structured the debt secured on existing holdings in the most advantageous manner.
Hopefully this festive season can give us a brief still point in a turning world – a chance to catch our breath and plan for next year.
• Richard Auterac is chairman and auctioneer at Acuitus
