‘Never mind the quality; feel the width’ is an old saying from the tailoring business suggesting that – at the modest end of the market – it is volume not value that you should be looking for.
However, it is not an axiom that holds good in the commercial property auction business. While the volume of properties sold in the room is one of the metrics most frequently referenced in our sector, it is not, paradoxically, an indicator of either the depth of investor demand or the value being placed on the properties being sold.
If you look back at Acuitus’s sales in 2018, the volume of assets sold was down 18% but the average success rate of sales rose slightly from 85% to 86%. This shows that supply is constrained while buyer demand remains robust.
Strong retail sales
The latest Commercial Property Auction Data (cPad) analysis from Acuitus and MSCI also confounds the preconception that retail property is a friendless asset.
Retail assets have comprised the highest proportion of all sales since the start of the cPad series in 2010. In 2018, 76% of sales at auction involved retail assets compared with 73% in 2017 and a long-term average of 69%. By the end of 2018, the sale rate for retail assets reached its highest level since early 2015.
This reflects both the adjustment in pricing that has been accepted by sellers and buyers, and professional private investors seeing beyond the negativity of press headlines to the longer-term opportunities for town centres.
Against this backdrop, it is more pertinent to look at what prices are doing rather than sales volumes.
When looking at the values of properties selling at auction, it is important to remember that ‘one swallow doesn’t make a summer’ and not to simply look at the yield profile of an individual sale.
Since the nature of the stock moving through the auction room varies between auction rounds, the cPad series provides a rolling average yield (RAY) rather than a spot yield. This smooths out variations caused by the sample size and the differences in the basket of properties sold at different auctions.
By the end of 2018, the cPad all-property RAY stood at 8.28%. This was up by only 17 basis points year on year, which will be surprising to many given the economic and political tumult of the past 12 months.
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Despite the challenging backdrop, the average yield for retail properties selling at auction was 8.32% by the year end. This represents an outward movement of 22bps across 2018; a reflection of the quality and saleability of stock coming forward from vendors and the management experience of purchasers in the market.
Stock shortages in the industrial sector produced the greatest price movement with yields for the sector moving inwards by 70bps over the year to 7.53%.
“The latest cPad analysis confounds the preconception that retail property is a friendless asset”
Pricing for assets outside the capital remained stable in 2018, but prices in London softened by 39bps to 6.12%.
The gap between prime and secondary commercial property values in the auction room has narrowed slightly since the start of 2018. The lower-quartile RAY, which reflects the higher-quality segment of the market, moved out by 26bps over the last 12 months to 6.26%, while the upper-quartile segment of the market rose by just 10bps to 9.68%. Again, this suggests the assets flowing through the room meet investor demand.
In fact, it is the dominance of experienced property investors in the current market that is delivering a degree of stability. They are focusing on assets that provide longer-term income and opportunities that can, as much as possible, transcend political uncertainty. We expect this trend to continue.
We also expect transactional volumes to increase in 2019, but for us this is not the key metric. It will be the values that assets are achieving and what those assets are that tell us more about the UK commercial property sector.
Richard Auterac, chairman and auctioneer at Acuitus
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2019 forecast: ‘it’s sales prices not volumes we should look for at auctions'