UK property auctions guide - Copyright David Lawson - Property Week 2004
Auctions have been dogged by a mixture of ignorance and mistrust. Even experienced professionals still conjure up images of dodgy property, even dodgier money, impenetrable rules and seedy back rooms packed with wheeler-dealers and over-enthusiastic amateurs. There may well be such places still clearing out the dregs of the property market for the benefit of numerous film crews making yet another TV guide to fast fortunes, but they are very much the exception.
Auction rooms have become a favourite hunting ground for a new generation of increasingly sophisticated private buyers fed by top-drawer names. Jones Lang LaSalle Research estimate that since 1995, institutions and property companies have sold more than six thousand properties equivalent to £15bn at an average lot size of £2.5m.
Proceedings have become more transparent with the acceptance of the Common Auction Conditions. It was a struggle to get auction houses to adopt unified rules but most have now come on board, says Graham Slyper of Strettons, who pioneered the change. Such agreement seems all the more remarkable considering the huge network of firms across the UK. ‘But we are different to other parts of the industry,’ says Slyper. ‘We co-operate. We want each other to do well as failure by one reflects on the rest.’
The network is also more unified than it seems at first glance. Something like 90% of commercial property is handled by little more than half a dozen names: Allsop & Co, Cushman & Wakefield Healey & Baker, JLL, Barnett Ross, Nelson Bakewell, Harman Healey and Colliers CRE. On the residential side about half the market goes through the hands of a similar number of names. Sequence UK, the chain recently bought by Skipton Building Society through subsidiary Connells, understandably sits high on the list because it has absorbed long-standing practices like Barnard Marcus and Fox & Sons.
In fact there are remarkably few new names in these lists – which seems bemusing when business has grown so far and fast. Ironically, this is because success is built on trust and confidence – the very factors outsiders might feel are in short supply. ‘Buyers and sellers spend a lot of time and money preparing for auctions,’ says Richard Auterac, auctions head at JLL. ‘They need to know it will be worthwhile and handled properly.
Cost is another factor. Patrick Kerr, head of commercial auctions at Allsop, says a few newcomers have tried to muscle in but they quickly realise it can run into hundreds of thousands of pounds to set up an auction. Allsop, for instance, print and distribute thousands of catalogues alone. There is also a psychological barrier. ‘You are putting your name on a pedestal along with the property,’ says Auterac. ‘Many are not willing to take the risk of a very public humiliation if they fail.’
London’s dominance is explained by a fact dug out of Allsop’s huge database recently. ‘We found that around 40% of buyers live within 20 miles of the property,’ says Kerr. As the south-east has the largest number of people and highest incomes, it is natural they should dominate. Sellers from around the country also send property into London, drawing buyers into the capital.
That is not to say auctions are rare north of Watford. In fact they are proliferating as both commercial and residential property continues to attract investors. A city like Liverpool which may have been ignored by investors a decade ago is now alive with interest. Sutton Kersh took in £8m in their December sale, driven by local investors showing a new skill in reading the market. They snapped up secondary shops which not only offer yields double those of savings accounts but also possibilities for hiving off upper parts for homes and selling those on.
The average lot might not compare with the 40-plus worth more than £1m sold in Allsop’s London sale. They also lag well behind the average of just under £440,000 for all lots in the index run by Investment Property Databank and Auction Results Analysis System [IPD/ARAS]. But the substantial turnover and detailed focus show how far auctions have come.
So who are the buyers and sellers creating this buzz of excitement? Traditionally, they were a tight clique of big landlords dumping bits and pieces of property too small or tired to merit their efforts. Traders picked these up to turn quickly while small developer/investors looked for angles to exploit and resell. A different group had a longer timescale, looking for long-term income through investments such as ground rents.
Today, the balance has shifted. Quick-turn traders were killed off by stamp duty increases. This cut the flow of property coming back for resale but institutions and large property companies have more than made up the difference by accelerating clearance of surplus property, helping push average lot sizes upwards
New buyers have flooded in to soak up the flow. Novice individual investors learned the ropes buying repossessions in the early Nineties, moved heavily into buy-to-let by the end of the decade and are now confident enough to build commercial portfolios. In fact, the two sides have fed off each other. Auctions have finally come full circle to win respect from big landlords as the best access to private buyers.
Auctions may seem an integral part of the property scene yet even experienced professionals need reassurance about the rules of the game. And some manage to break them with impunity. ‘I still get people ringing me to ask whether they should be involved and how to go about it,’ says Patrick Kerr, head of commercial auctions at Allsop & Co. And these are heavyweight investors. As property attracts more newcomers, the phone calls are likely to increase.
There is plenty of advice on auctioneers’ web pages but it must be questionable how much of this gets through when so many are still uncomfortable with new technology. So what are the basic rules? ‘Do your homework,’ says Graham Slyper of Strettons. It should be second nature to any buyer but considering that most people don’t bother with a structural survey when purchasing their own home – perhaps the biggest investment of their lives - it is worth making the point before hitting the auction room.
Physical inspection, title searches and exploration of leases along with a promise of funds from a lender should be in the bag before the sale starts. So should a clear figure about how much you will pay.
Surprisingly, it is not the amateurs and newcomers that break these golden rules. Most are nervously aware of the potential disasters of over-extending or buying a wreck. Professionals often make up their minds to bid at the last minute. ‘You have to remember that the first time most even see a property is in the catalogue,’ says Richard Auterac, director at Jones Lang LaSalle.
They traditionally had a cushion in a rising market, where a dog could be passed on in the next sale. Bigger investors also rely on the law of averages, with losers outweighed by bargains. ‘If they make a profit at the end of the year, they are satisfied,’ says Slyper.
But ‘churning’ is becoming harder and profits more pressured in slower markets, so even the most experienced may need to devote themselves to a lot more homework. The danger is that they will be replaced by amateurs flushed with the success in areas like buy-to-let and now looking to expand portfolios or move into commercial premises.
Sellers face similar dangers of overconfidence after seeing the way auctions have cleared a huge backlog for property companies and institutions over the last few years. It is tempting to lump-and-dump property that has been hanging around unsold, but this can be fatal.
‘It is certainly possible to achieve good prices because auctions attract a wider group of buyers,’ says Slyper. But, yet again, homework is essential to set the right targets. At least there is help available. Auctioneers are keen to advise sellers because not only do they want to dispose of the maximum amount of property at the highest prices but also win repeat business, which won’t happen if sellers are unhappy.
Persuading sellers to set a realistic reserve price – and explaining the relationship between this and guide price – is critical. The reserve is not revealed but potential buyers know it will be around the top of the range of guide prices published in before the sale. Too high a reserve and buyers will be frightened off. ‘They come to auctions for bargains,’ says Slyper. ‘Sellers must be persuaded to take a degree of risk to attract them.’
The temptation is to set low but that can be fatal. Sellers may lose a significant potential profit – which can be shrugged off by bigger landlords with a ‘win-some-lose-some’ attitude. Sellers who have to achieve a set price, perhaps to pay off a mortgage, face disaster.
The problem is that even though the reserve is not published, auctioneers cannot change this without also publishing a new guide price or they could face prosecution under the Property Misdescriptions Act. That is not to say reserves are fixed in stone. Circumstances can change quickly in the days or weeks leading up to a sale but it does mean the auctioneer needs the facility to publish new guides quickly as an addendum to the catalogue.
New technology is helping ease this conundrum, although not in the way many anticipated. Not long ago it was generally predicted that open-room auctions were doomed. Bidders would simply log onto the internet to do the business rather than trundle up to town to jostle with rivals.
Strettons pioneered web-based buying two years ago but have not had a single electronic bid in that time. Live webcasts of sales are popular but bids still come over the phone or in the room. Technology has, however, made sure the information being used is bang up to date. Auterac says preparation of catalogues has been speeded so much that it now takes three days to compile 100 lots compared with three weeks, so more lots can be handled and changes to price guides made much later.
Strettons has put all the paperwork online, including searches, leases and other legal requirement. Potential buyers no longer have an excuse for not doing their homework.
Online auction guides:
Soaring interest in property led to sales of around £3bn by the UK’s top auction houses last year, according to a new index launched this month. Big names continue to dominate. Allsop & Co sold more than the next four largest firms put together and had 38 times the turnover of 20th placed Ward & Partners. The North-South divide also remains a yawning gulf with the vast bulk of business centred around London. But intense activity boosted turnover right across the UK.
The National Auctions Index aims to give a comprehensive view of the sector by amalgamating commercial and housing figures. Graham Slyper of Strettons, who spent sleepless nights since the New Year crunching data collated by Essential Information Group, also ironed out wrinkles by combining figures for firms which merged in the last year, such as Harman Healey and Winkworths. He hopes to produce a commentary every six months to provide an accurate roundup of the industry.
New buyers and a strong supply of fresh property are behind surging growth across the North. Preston-based Pugh and Co shifted almost £50m at its sales held at Manchester Airport last year compared with around £30m in 2002. Managing director Roy Pugh’s December auction was his largest ever, with 154 lots. ‘There are lots of new faces as butchers, bakers and candlestick makers pile property into their personal pension funds,’ he says. ‘Supply is also strong, with property coming along from rail companies and government bodies that has never been on the market.’ Blue chip yields hardened from 7% to less than 5% and he sees little chance these will weaken in 2004.
Sutton Kersh saw similar enthusiasm in Liverpool, with housing selling for more than double the price guide in central areas showing high rent growth. Secondary property was also being gobbled up, according to partner James Kersh. Investors are focussing on high street shops where the upper parts can be sold off as residential while the ground floor makes twice the returns of cash.
More than 80% of the firm’s clients expect to maintain or increase purchases this year, and the potential relaxation in tax restrictions on mixing residential and commercial in personal pension funds could further boost the market. The message is no different among the giants. ‘The message has got across that commercial property is the thing to buy,’ says John Townsend, head of auctions at Cushman& Wakefield Healey & Baker, which edged Jones Lang LaSalle to take second place in the national index after a 27% increase in sale volume last year.
Lot sizes are increasing as well, with one industrial estate near Cambridge making £10m. The firm even saw its first successful internet bid, when a private buyer paid £550,000 for a Tops Tiles site in Burton-on-Trent. But Townsend agrees that pension fund changes rather than electronic bidding will keep the market strong this year. An increasing number of private buyers could come back into the auction room to sell the myriad of smaller properties they have been picking up over the last few years. But this will not mark a withdrawal from the market. ‘They will be looking to consolidate into bigger lots after realising the cost of management,’ says Townsend.
Rising interest rates seem to throw a shadow over all this talk of growth. Research by Jones Lang LaSalle shows buyers have made themselves more vulnerable by shifting from fixed to floating rates over the last five years. But no-one seems to take the threat seriously. It would need significant increases to erode the yield gap, ands this appears unlikely, says JLL Research. While banks have tightened lending criteria, exposure of borrowers is limited. Only 64% require loans and the average loan-to-value level is less than 65%.
Townsend is also upbeat. ‘I don’t see interest rates rising enough to deter buyers. And if equities recover, the groundswell of support for property will continue,’ he says. Pugh believes it will be ‘some time’ before rates rise to a level which could choke off sales.
Perhaps more worrying is the enthusiasm for retail investment. Two-thirds of buyers have piled into the sector because of the perception of lower voids and longer leases than traditional residential purchases. Now there are fears of falling consumer spending, which could hit the high streets hard. But JLL expects only ‘marginal damping’. Overall indicators may wane but investors concentrate on income, which is expected to decline only slightly.
Nor will a recovering stock market draw back the money going into property because investors will retain a distrust of equities after burning their fingers so badly in the slump. Layered over this is the potential boost from personal pension funds, which JLL expects to grow 20% in five years, fed by an increasingly sophisticated approach by individual investors.
Lenders will remain confident, so there will be plenty of resources for both new and old faces to keep auction rooms crowded. And there should be plenty to buy. Institutions and property companies may have sold more than 6,000 properties worth up to £15bn since 1995 but JLL says there is still a ‘significant potential supply’ to come.