Published by EG on 29/09/23
Auctions are bringing liquidity to the heart of the commercial property sector
Liquidity is vital in any investment market, and even though property – because of the way in which it is transacted – is seen as a fundamentally illiquid asset, there are still distinct periods when our market is either flowing or faltering.
Against a continuous backdrop of economic disruption since early 2020, the auction market has continued to fulfil a very important role in bringing liquidity to the heart of the commercial property sector. Its ability to match sellers with buyers is a guide to investor sentiment, and also indicates differences between previous value and today’s price.
To investors who are new to our sector – and there are many – any discrepancy between the value of an asset and what it can sell for in the open market can, at first, prove mystifying. However, when they appreciate the rigours and constraints that are placed on property valuers, they begin to understand the source of this mismatch. On this theme, MSCI published a very interesting report last year by Girish Walvekar and Vinay Kakka entitled Private Real Estate: Valuation and Sale Price Comparison, which is well worth a read.
Most recently, we are seeing the gap between market prices and valuations narrowing, which is enabling more owners to realise a sale below the historical valuation. This is due in part to valuers beginning to get the transactional evidence – often through auction sales – that enables them to “catch up” with the market.
It also reflects a greater level of pragmatism on the part of sellers, who are letting go of notional values and accepting what price an asset can command in the market today, whether by auction or by private treaty best offers.
In the case of the latter method of sale, the owner will need to accept the substantially slower process and higher holding and opportunity costs. As such, when an asset comes to auction, it will find its level because there are still enough buyers out there to create a market. This is quite a profound adjustment for some. It is not long since sellers’ expectations around the likely price they could achieve in the market was as much as 20% adrift from what the market price was.
This, however, does not mean it is exclusively a buyer’s market. As our September auction demonstrated, there is still a highly competitive market around assets that offer either secure income or asset management opportunities that can drive future value.
This is being reinforced by a much greater supply of institutional-grade properties. As valuations are adjusted to new market conditions, an increasing number of assets are falling out of the bandwidth that makes them worthwhile for institutions to retain and manage.
The sellers of this segment of assets want to be able to extinguish the holding costs as quickly as possible and recycle the capital that a sale can generate. An auction is a perfect medium to achieve these objectives. A good example of this in our most recent auction was a substantial office building on the high-profile Stockley Park development near Heathrow which was guided at £3m and sold prior to auction on behalf of a major investment manager. Our client wanted to achieve certainty as well as best price, and to do this they reached out to an untapped market of private investors. This approach proved very successful.
While quality is high on the list of buyers’ criteria, that is not to say that there isn’t an appetite for risk, especially with mixed-use properties that have a residential element. High-yielding assets can be an opportunity for creative asset management, even where the property may be over-rented or there are potential voids coming up. Looking through to the end of the year, there will be a continued supply of good assets coming to the market.
It is gradually becoming a market where investors can plan ahead, and especially those who are equity buyers. However, as valuations crystallise and affordable refinancing becomes harder to secure without borrowers injecting their own capital into properties, there will inevitably be a growing group of lenders who look to resolve the situation through asset sales at auction.