COMMENT: The speed and certainty of auctions contrasts with the current lethargy in some areas of the core commercial property investment market.
The chief impact of last June’s EU vote on the market is the fact that transactions are taking much longer to complete. In times of economic volatility, both buyers and sellers have a tendency to proceed at a slow pace,
In normal conditions, a threat from either side to “pull the papers” in the face of perceived foot-dragging would have injected some more speed into the process. Today, however, it is a generally accepted fact that “everything is just taking longer to do”.
A fascinating recent report from Cushman & Wakefield has highlighted this trend. Its report, “Brexit tracker – the final story”, has monitored the progress since the vote of more than 300 asset sales valued at more than £14bn. It notes: “Typically transactions take three months to go under offer. Since Brexit it has taken up to five and six months for deals to progress this far.”
This deceleration has been most marked in London, while in the regions, as the report observes, “the market has shown greater resilience with a higher share of deals progressing and fewer not completing”. Perhaps this also reflects the fact that investment into non-London locations has been slower to recover post-2008 and is underpinned by the strength or otherwise of local economies and personal wealth rather than global capital flows.
However, what is clear is that this sclerosis in the private treaty market has spread and deals are taking longer to complete. As C&W’s research shows, only 54% of the deals the firm has been monitoring since last June have now concluded.
In this respect, commercial property auctions have a major competitive advantage. Properties come up for sale at auction with a great deal of clarity and certainty. The seller has a clear commitment to selling (albeit subject to a valuation base), and for potential purchasers we provide a comprehensive base for due diligence in the form of an information pack and also a legal report service. By the time the hammer goes down in the auction room, it has been less than three to four weeks since the buyer first laid eyes upon the asset: a stark contrast to the five to six months or more that a deal can take otherwise.
Private treaty will remain a dominant method of sale particularly for large and complex investments where timing is not critical and the pool of buyers is limited from the outset. The strict timescale for making decisions and the desire to demonstrate finesse in a negotiation means that auctions are not for everyone. However, against this backdrop of torpor in the private treaty market, the ability to deliver speed and certainty is something the high-end commercial property auction sector should capitalise on.
Another interesting insight from C&W’s report involves investor attitudes to the lease length profile of assets. The firm’s analysis of the sample monitored shows that while close to two-thirds of assets with a known weighted average unexpired lease term (WAULT) of more than ten years have now completed, fewer than half the assets with a WAULT under 10 years have so far sold. This trend has been demonstrated in the auction room for some time. However, this has not just been a manifestation of risk-averse investors; it has also reflected the fact that it has traditionally been difficult to get funding for the purchase of assets with short-term lease profiles.
In the rare previous instances where lenders were prepared to finance properties with a low WAULT, the loan-to-values offered were very modest.
However, we are seeing an end to this mismatch as an increasing number of lenders take a new attitude to short leases. In one instance, a borrower was able to secure a loan of 60% LTV on a regional town centre property that had a single tenant and fewer than three years remaining on the lease.
With speed and an increasingly congenial finance market on its side, the auction sector can meet the needs of the growing numbers of investors who want to access commercial property but are often frustrated by the time it takes to do so through the mainstream market.
Richard Auterac is chairman and auctioneer of Acuitus
