COMMENT The market today is not the one we might have predicted this time last year.
Following the end of 2022, where the market had stalled after the shockwaves sent by Liz Truss and Kwasi Kwarteng’s mini-budget, there was a hint of optimism in the air. Our February auction was one of our biggest because – having held onto assets at the end of 2022 – people felt the time was right to offload supply that had been building up.
And then interest rates started to creep up. Suddenly investors realised we were in for tougher times ahead.
Despite the macroeconomic conditions, however, 2023 was not a bad year at all for the auction market.
It is a testament to how auctions can prove a safe haven for deploying capital – providing surety of sale and bypassing the sluggishness of the private treaty market. A lot of how the market has been shifting over the past six months gives us strong reason to feel optimistic that we will continue to see growth in investor confidence in 2024.
Why? Because – paradoxically – of what did happen in 2023 and of what did not happen but was widely expected.
What did not happen in 2023
Let’s start with the latter.
The wave of distressed assets hitting the market, predicted by many, simply did not happen. There has been some, but fundamentally we are not in the same position we were during the global financial crisis 15 years ago.
Banks have signed up to a charter to support people through the cost-of-living crisis – as they should – and there have been substantially fewer loans being placed into receivership or recovery. There is a possibility that initiatives like these are kicking the can down the road, and to some extent this will be the case, but problems will certainly not be widespread.
At our sales in 2023, we did not see a substantially different seller profile. Around half of sellers were private companies and private investors, 14% or so were housing associations, and a further 22% were trusts and funds. Only 12% were administrators & receivers.
This lack of distress has meant more opportunistic investment strategies might not have taken off – but also that lenders can be more confident in the resilience of the market. Without widespread distress, a significant hit to house prices is unlikely.
What happened in 2023
So, what about what did happen in 2023?
With the Bank of England raising its rate month-on-month, higher debt costs were priced in almost from the start of the year. Lenders saw which way the wind was blowing and, looking at the rates on offer in February with the rates on offer today, there is not a substantial shift.
Because the base rate has stayed stable for three months in a row, there is the expectation that we have reached a plateau that is more likely to be a peak than a staging post.
While some optimistically think we may see rates begin to drop in the first half of 2024, we are much more likely to see the Bank of England gradually begin to ease them towards Q4 – but, again seeing which way the wind is blowing, lenders will offer more attractive rates much sooner.
Auction buyers tends to be cash-driven, which is why the market remains so liquid. However, easing of rates will reinforce how the market adapts in the new year, giving buyers the option to buy in cash with the chance to refinance with debt at a later point.
More options of how to finance acquisitions leads to more acquisitions.
The opportunities for 2024
There will be opportunities across the residential property market in 2024. However, we expect what will prove most attractive to buyers (and therefore vendors seeking to raise capital) is in income-producing assets and value-add opportunities.
While buy-to-let landlords might feel hard done-by over the past few years – between rising mortgages, tougher EPC requirements, and generally tighter regulations – the market remains attractive.
In London and the South East, in particular, we are still seeing capital growth. But, generally, across the country, rental growth is still making buy-to-let a very attractive and plausible asset class.
That is particularly true of homes of multiple occupation, multi-let buildings, and small buy-to-let investments in sought after towns.
As across the property market, whether residential or commercial, the flight to quality remains the order of the day. There will always be demand for high quality products in excellent locations – and capital will flock to it.
The outlook for the year ahead
This year will be all things to all people. Some will see the stabilisation of interest rates as the certainty they need to resume deploying capital. Others will see one of the biggest years in global electoral politics and think they need to wait to see what happens.
Either way, there are sizeable opportunities to be had for those who can be opportunistic in their strategies – particularly for equity investors, but also, increasingly, for those using debt.
With stable (and, eventually, falling) financing costs, more buyers will be in the market and, for assets priced sensibly, vendors will not struggle to sell.
The auction market will continue to be a barometer for much of the wider market – and therefore where many of the savviest investors will be spending their time.
Richard Adamson is a partner and auctioneer at Allsop
