Buyer-beware warning for influx of auction investors

COMMENT During the course of the past year, there has been a noticeable influx of new investors into the commercial property auction market and this has accelerated more recently. This is good news but it is important these potential new buyers can access good advice and information so their engagement with commercial property is productive and sustained. In this context, it’s interesting to note that one of the drivers behind the influx has been a growing migration of investors away from the residential buy-to-let sector. It was recently calculated that around one-third of the residential property currently up for sale in London was formerly rented out. It’s nearly a decade since then-chancellor George Osborne announced plans to curtail the tax relief given to buy-to-let landlords and the sector hasn’t had the same momentum since. Today it is the plans of the current chancellor Rachel Reeves which have got private landlords once again running scared, with possible changes in capital gains tax leading many to try and cash in their assets. These investors essentially believe in the benefits that property assets can deliver so it is no surprise that many are now looking at the commercial property sector. However, to appreciate the fundamental differences between the two sectors these entrants will need to be well-informed so there are no misapprehensions about the risk-and-return profile of commercial assets. A high-yielding property may look attractive to a new investor until they realise this figure is as much about the risk it involves as it is the return it generates. The classic current example is small shopping centres where the annual headline rental income can sometimes be more than the price for which it can be bought. An unwary buyer might think this looks like a great deal until they appreciate that it is net operating income they should be looking at and also any contingent financial liabilities that the asset may present. Duty of care Since online auctions became the norm across our sector, it has allowed investment in real estate to become accessible to the widest audience possible. Today, you only need a laptop and an internet connection to bid for properties the length and breadth of the country. This is a great step in bringing more capital into our market but there is a slight risk that buyers don’t look much beyond the basic listings of properties. As auctioneers we have a duty of care not only to our selling clients but also to the buyers, albeit at the end of the day the latter must rely upon their own independent professional advisers. It is vital they are properly informed to ensure they have a stable and successful investment future in our sector. In this respect, the disappearance of in-person auctions is a loss as they provided great learning environments and a platform for information exchange which gave those who were new to the sector valuable perspectives. A successful assimilation of new investors is all the more important as there is growing evidence that the market has turned a corner with strengthening buying power and pricing. On reflection, the end of last year was probably the weakest point in the cycle. The trajectory of yields since then and particularly the signals being given by spot yields, point to us entering a new phase of positivity. And there are good opportunities for the kind of entrepreneurial investors who are now entering our sector. Popular asset types, including trade counters, open storage, mixed-use industrial/retail/residential properties and development are finding willing buyers who have a clear vision of how to work their assets and income streams. For high net-worth investors requiring assets with less asset management and offering longer-term, sustainable income, the “alternatives” segment of the market such as leisure, medical and motor trade are sought after. Brighter outlook As we enter the final quarter of the year, we can start to be a little more positive about the future. Lower costs of finance, progressive pricing and continued economic stabilisation are all contributing towards a brighter outlook than we have had in a number of years. But we also need to remember the new faces in our marketplace and make sure our sector gives them both the right investment opportunities and an understanding of our market’s nuances. Richard Auterac is chairman of Acuitus and chairman of the RICS Real Estate Auction Group