Commercial auctions as a portal to liquidity

Since the announcement of the infamous mini-Budget, much of which has been subject to a u-turn by the hastily appointed new Chancellor Jeremy Hunt, the mood among many property investors has been sombre.

That sentiment is completely understandable: a sharp increase in borrowing costs has made it difficult to price property, which has consequently made lending a more complicated affair, leading to a degree of pricing readjustment across the sector. According to some, prices could fall by 20% by the end of 2024, and some maintain that no asset classes will be immune to the doomsday scenario, which will see offices, shops, warehouses and residential property affected. The u-turn is complete, but the damage is done.

Many property funds have been shifting assets as investors seek to exit to meet their own obligations. As a result, some have delayed or suspended redemptions from their institutional real estate funds as they try to free up cash by selling existing property assets in this highly tense market environment. However, what some don’t realise is that property auctions are well insulated from the overall market turmoil, and based on what Allsop has been witnessing for the past couple of months, liquidity has not been an issue. At this point many of you may have raised your eyebrows in disbelief and I understand why – convention dictates that buyers will always want a return that exceeds the cost of finance on their investment, and we’ve been selling assets at 5% or less when borrowing costs have risen to 5% or more.

The figures simply don’t seem to stack up, and it doesn’t take an investment guru to see that. However, things will make more sense when you look at our buyer base: the majority of them buy in cash, which removes the financing hurdle altogether.

But why would someone want to invest in property now, amidst the doom and gloom that we’re constantly being reminded of? Simply because a physical asset with income-producing potential provides a degree of certainty in these tumultuous times, and if you’re not relying on external borrowing, then you’re still in for a comfortable return on your investment. Those who are prepared to hold on to their assets and ride out the wave of instability are not particularly worried about short-term price fluctuations. Needless to say, our buyers appreciate quality assets in good locations and with well-capitalised tenants, and as long as these factors are accounted for, most are happy to continue investing despite the barrage of depressing headlines.

Our auctions are a market within a market and conventional rules don’t always apply. Because of the sheer volume of transactions we handle, we have a good understanding of where values are at any point in time and that makes the auction route an attractive one to a variety of sellers willing to part with their assets on fair terms.

Over the past few months, we’ve sold numerous properties on behalf of an array of sellers, including listed funds, REITS, family offices, private equity firms and propcos, with no signs of panic selling in sight, if prices were anything to go by. Some sellers did better than they thought they would given the overall economic sentiment, and over 50% of the total sales were achieved at auction on the day itself as sellers stuck to their pricing and buyers had to compete.

Of the £125m raised at our September auction, we sold a variety of asset types including a £3.4m gym (NIY 7.6%), an industrial portfolio totalling £18.4 (NIY 6.5%), a mixed-use scheme in London worth £2.4m (NIY 6%), a £9.6m portfolio of veterinary practices (4.9%) and a £4.7m Boots portfolio (NIY 6.7%), which clearly shows that the rules of the private treaty market, inextricably linked to the cost of borrowing, do not apply. Interestingly, the assets from our latest auction were sold at an average of 119% of the guide price for the £1m+ lots, which, again, shows that not everything we read about the state of the property market in the weeks following the mini-Budget (with a maxi-impact) should be taken at face value.

As Allsop is approaching its November commercial auction, we’re bracing ourselves for non-stop calls as buyers and sellers try to get first-hand insights into the market. Luckily, the data-rich auctions market can help with that.

This article has also appeared in Estates Gazette online (20th October 2022) for the full online article click here