In the past 12 months, investors have bought £1bn of UK commercial property through auction, down 17% from £1.4bn for the same period a year ago, according to Essential Information Group.
To mark the publication of the fifth edition of EG’s Property Auction Buyers’ Guide, we brought together four key figures in commercial auctions to discuss the state of the market, where future growth might come from, and the role of both room and online auctions.
Allsop and Acuitus, the two largest auction houses for commercial stock, were represented by auctioneers George Walker and Richard Auterac respectively. The online auction market was represented by Simon Bailey, who recently moved to online auction house BidX1 with the rest of the Lambert Smith Hampton auction team, and Jeremy Green, who is now heading up LSH’s auction business with a purely online focus.
High street retail
High street retail accounts for more than 70% of stock handled by Allsop and Acuitus, so discussion focussed initially on retailer distress sentiment.
Walker and Auterac agreed that by October this year, the market had accepted a significant change in demand and in the yields that could be attained for high street retail.
“The challenge underlying any asset class is ‘where’s the occupational demand for that rental income?’ How’s it going to be filled when the lease has three, four, five years to run? That’s the question we’re all asking ourselves on every high street,” said Walker. “Where yields creep out, we can find the buyers, but sellers are accepting a different level of yield.”
Buyers continue to chase after assets perceived as high quality, safe purchases, offering slight diversity, he said. A bank with 10 years on the lease and a couple of flats above in an affluent South East town, for example, could still sell at a yield of 4-5%. By contrast, a tertiary shopping centre is likely to sell at or close to land value.
“If the owners want to transact these assets, then the yield is going to have to be very generous,” added Walker. “We sold £8.5m of tertiary shopping centres in our October sale at yields of 17-21%. But the buyers are there. That’s a transformation of where values were three or four years ago.”
Auterac said the proportion of retail properties in Acuitus sales now reaches 85%, up from a 30-year average of around two-thirds. “You wouldn’t expect that, bearing in mind the torrent of negative news about the retail market for the last three or four years,” he said.
“What we’re seeing is very high sale rates of 85-90% for retail, except in moments of dire stress, as when we had 10 CVAs in one week. That adjustment has taken place.
“Yes, buyers are risk averse; they are being very careful and selective and vendors are recognising where the buying market is – and that’s when you get trades taking place.”
However, both auctioneers said that some vendors – particularly institutions – had been holding back from selling assets because of the drop in market prices.
Auterac said there may be a need for valuers to act decisively now as they had done in response to the financial crisis of 2008-09. However, Walker highlighted the fact that there is currently no “finance-driven pressure to sell”.
Future growth
With auction volumes down since the Brexit vote in 2016, where might growth in auction stock come from in 2019?
“There’s still a very large private buyer market with equity, with debt, and they want to do trades. So it’s inevitable that sellers will want to reach into that market,” said Auterac.
End of year valuations could be a key driver but if valuations are above market prices then some institutional sellers will remain keen to delay, he said.
Walker said some funds had made tremendous [valuation] gains away from retail, with one such client taking the decision to put some of its retail stock in the December auction “because they could see these end of year valuations coming”.
Auterac said that loan expiries and the valuations necessary to refinance could also lead to more stock coming to market: “A lot of loans written after the financial crisis have been for a maximum of five years and those are steadily coming in now,” he said.
Walker suggested that problems stemming from the huge growth in bridging finance could trigger sales: “It’s an unregulated sector and it has been a little cavalier. That could lead to stock coming to market, but I don’t sense it yet,” he said.
Bailey was optimistic that volumes would pick up in 2019.
“There is an element of holding back at the moment, but I think for Q1 next year – once the worst of this Brexit fiasco is behind us – hopefully we will see some of that coming back,” he said.
“We have traditionally done a lot with the public sector and the conversations we’re having with clients in that sector indicate there will be a lot more stock coming to market next year.
“Speaking to clients in the receivership and liquidation sector, a lot of them are bolstering teams and recruiting very heavily into certain areas and that’s an indication of where they think the market is going next year.”
Green said LSH’s public sector and utility company clients remained keen to get properties off their books that were weighing them down.
He also highlighted the continuing drive for institutions to sell out of the smaller, more management-intensive lots.
In-room and online
With LSH’s auction business now focussed fully online, Green said he anticipated a widening in the pool of buyers. “So whereas activity in the market as a whole may be reducing, values may be falling, the pool for buyers is expanding and that’s the element that is exciting us the most at the moment,” he said.
“There’s a lot more focus these days on customer due diligence and the process behind vetting a buyer, which is for anti-money laundering purposes but is actually very beneficial to the seller. It gives us much greater knowledge as to the identity and wherewithal of the buyer, which creates much greater certainty about who we are talking to and their ability to close on a deal.”
Bailey said he expected to see “massive growth” for online auctions going forward.
“We’ve been doing online auctions alongside room auctions for the past two-and-a-half years and have seen the organic growth. A lot of the feedback we were getting was from clients very much focussed on the flexibility and the ability to bespoke something for a portfolio,” he said.
The transparency offered by online auctions was a significant draw for perspective sellers, such as private equity houses, Bailey said. “The vetting process, the anti-money laundering protocols – that’s massive for them. That can be replicated in a ballroom, of course it can, but being able to automate all of that and gear it around an online platform streamlines the process and that’s where we saw the future going and we wanted to be part of something that perhaps was going to lead the charge on that,” Bailey explained. There was also significant potential to encroach on some parts of the private treaty market, particularly for larger assets, he said, because online sales could offer longer marketing periods than the three weeks typically offered by room sales.
However, he stressed that room and online auctions were all part of the same market. “I think a lot of people are trying to make this big distinction between room and online, but we are all part of the same market; we are the same people behind it, the same professional advisers. It is the same process; it’s just the delivery to market at the end that is different,” he said.
Auterac agreed: “What we’re talking about is the final closing mechanism… and I think as an auction industry it does us no service that we seem to end up being polarised between one and the other when that is absolutely not the case at all.”
Technology is the second largest spend for Acuitus after staff: “If you look at our room auctions, we are investing heavily in technology and we’re providing facilities for people to bid into the room by internet, by phone, by proxy,” said Auterac.
“What is clear from room auctions is that the biggest buyers form and create relationships in the room; they talk to people. It’s a room full of activity, where marketplaces are formed; they enjoy coming to the auctions. What we do of course recognise is that it is a relatively small number of potential buyers and certainly we want to grow our core base from a few thousand to tens of thousands or hundreds of thousands and that is where technology investment comes into play.”
As to whether Acuitus might offer online-only sales, Auterac said it would remain client-led.
“I’m not going to throw away three or four hundred million pounds worth of sales a year by going online. I want to make that three or four hundred million pounds into a billion pounds a year by making sure we use technology and empower our buyers to use technology,” he said.
Walker said the multi-channel approach developed by Allsop and Acuitus remained hugely successful.
“At our last auction there were 143 transactions, 6 of which were sold to online bidders. We had 230 people who wished to bid remotely, be that by phone, proxy or online. At the same time we are chatting constantly to the overseas buyers who arrive for the ‘auction week’ and who want to look you in the eye and ask: ‘why should I buy this, why should I buy that?’ and they’ll chat and see someone else bidding in the room and they’ll buy it. It’s a heady mix and that’s what delivers it,” he said.
Allsop has also developed single-vendor online-only auctions and Walker said he saw the potential to build on that.
But he cautioned: “I think there are more clients who are concerned about rates relief on high street retailers or the stamp duty surcharge on buy to let assets than there are demanding that we go online.
Green said analysis of LSH sales data had shown that an 18% premium had been achieved online versus in the room on a particular type of asset for a single client. However, Walker and Auterac warned that such a statistic could be misleading.
Green said the premium had applied to small plots of land with development potential, which were uniquely suited to local buyers who had not previously bought at auction and who could be reached through local marketing and an online sale.
Auterac concluded: “As time goes on there will be better evidence about what works better online but when it comes to the larger investment assets that George and I deal with, that type of asset has a different buyer base.”
Read the latest edition of the EG Property Auction Buyers’ Guide >>
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