Any port in a storm?

During difficult and uncertain times people often seek help and advice from wherever or whoever they can, and as we sail towards the end of the third and into the fourth quarter of 2023 the market has got harder to navigate.  The current mix of economic uncertainty, a rapid rise in the cost of debt and high inflation, together with ongoing long-term structural shifts in demand accelerated by the pandemic are all taking their toll.

In a world where nothing seems to stay the same for long Allsop’s longevity in the property auction markets is truly unique.  The firm has been synonymous with auctions since the early 1960’s and throughout the past 60 years has witnessed first-hand numerous thunderstorms, high winds and heavy rain.  Not to mention the occasional hurricane that came in the form of the Global Financial Crash (GFC), Brexit and a worldwide pandemic in the last 15 years alone.  But it’s the experience gained by being in the market during times of poor visibility that can make all the difference when advising clients and helping them find their way to safer shores.

Our coordinates now

Property has long been one of the most common forms of investment in the UK, and it’s not hard to see why.  Prices are far less volatile than in the stock market and, being a tangible asset, it can serve as a hedge against inflation with the ability to produce stable cash flows from long-term tenants, and high-yielding income from short term ones.  But property investment requires large amounts of capital to buy and maintain it, is more heavily regulated compared to other asset classes and far less liquid than other forms of investment.

The illiquidity of direct property investment is countered by a principal advantage of the auction method of sale - accessibility.  For buyers auctions are a great way to access the market quickly and at a market price.  For sellers they offer unparalleled access to the widest range of cash buyers, transparency and the best market price, speed and certainty of sale.

Strong storms can help make the best sailors and there is no better tool or equipment you can have on board during a storm than well-trained and experienced crew, and since 1986 Allsop has been lucky enough to have two of the best crews in the market - one specifically focused on the commercial sector and one on the residential sector.  Between them they hold 16 auctions a year and since the launch of their first catalogue this year they have sold 1155 properties totalling £490,700,000.  Averaging almost 9 sales and £3,700,000 every working day. Such high sales volumes generate unrivalled real-time knowledge and data which is invaluable when it comes to understanding the market, advising sellers on pricing and finding tomorrow’s buyers.

Destination unknown

There is little visibility on pricing at the moment, so transaction levels are understandably thin and the September rebound in the investment markets that was anticipated earlier in the year is far from being nailed on. 

Buyers have been cautious and in the short term are likely remain so, but they are there and they are ready to take advantage when they see value.  The buyer’s survey we undertook immediately after last commercial auction in July confirmed as such, with all buyers that were surveyed saying they intended to buy again (versus 90% in May).

With regard to supply, given the rapid rise in interest rates, we could see an increase in loan workouts which typically require three things - a stable market and visibility on pricing; lenders with strong enough bank balance sheets to absorb any losses; and buyers with liquidity.

We’re told the balance sheets of the main UK banks are in good shape, thanks to sensible lending practices put in place in the aftermath of the GFC, and that they generally have less exposure to commercial property.  So two of the three key things would appear to be in place.

So might we see an increase in supply towards the end of the year?  It’s not impossible, but my guess is it will start more widely in earnest in 2024 - once financial markets are perceived to have stabilised and we have better visibility on pricing. 

And what about prices? 

There are two principal drivers of commercial property prices – finance costs and tenant demand. 

Due to the timescales involved the vast majority of buyers at our auctions use cash to complete sales.  Nevertheless the cost of finance is relative, and let’s face it a three year fixed rate savings at over 6% is a tempting alternative!

Price rises across the economy, energy subsidies and the post-pandemic jobs market have all played a part in causing inflation to rise which led last week to a 15 year high base rate of 5.25%.  There is little chance of interest rates returning to zero but thankfully tentative signs of stabilisation are beginning to show themselves. Take the 10-year gilt rate for example, generally seen as the benchmark for “risk-free” lending and used as a proxy for the strength of the economy, last week closed at 4.38% down from a 12 month high of 4.67% on 11^th July.  Moreover, expectations of further rises are falling back with markets and commentators now thinking we may be at or near the peak.  But the full effects of rising interest rates take time to filter through and the BOE has warned rates are likely to stay higher for longer before inflation falls back to target. 

Location, sector and the quality of the building itself are all key considerations for tenants, and the better buildings and locations will invariably continue to command the best rents and in turn the best prices.  But given the high interest rate / cost sensitive environment we are in, might we see secondary buildings start to benefit from tenants seeking lower rents?  Or following Labours recent by-election defeat in Uxbridge & South Ruislip, which was blamed on the proposed extension to ULEZ, might there be push back on the financial cost of other net zero policies?

Ultimately there is a price for everything, and those buildings with solid underlying fundamentals that can continue to attract tenants will remain popular with investors, whilst the prices of the buildings that don’t and are in need of repurposing, converting or replacing are likely to be at risk.

We will all have our own views on what may or may not transpire and in reality no one really knows.  The pessimists will always complain about the wind, the optimists will always expect it to change and the realists will adjust the sails, and it’s this wonderful divergence in views and opinions which makes markets.

Finally it mustn’t be forgotten that the Allsop business is so much more than auctions.  Both auction teams have at their disposal a wealth of internal expertise via an extensive range of consultancy services across both sectors including investment, development, valuation, professional services and management. 

So perhaps it’s not simply a case of any port in a storm.  A port with longevity in the market and all the experience that comes with that, together with highly trained and well informed people, who have access to a wealth of internal expertise and are able to provide considered and up to date advice, might well improve your chances of success and lead to better prices being achieved.

Contact

Mark is a Partner in the Commercial Auction Team and has over 25 years experience in the auction market. If you are interested in selling or buying through auction, or are seeking advice on the market, please do not hesitate to get in touch with Mark.