Investing Through Auctions: Investing smartly in 2022

The latest commercial auction market data shows a robust bounce-back in activity levels, putting 2021 on track to reach a total of £800bn if the fourth quarter lives up to expectations. “In a historical context, this is well above the 10-year average and starting to approach the peak levels that we saw in 2017,” said Malcolm White, director at BW Investor Services. Presenting the Acuitus Commercial Property Auction Data Report at an EG Investing Through Auctions webinar, White said the market initially saw a gentle climb from the low point of Q2 2020. However, the report, which uses Essential Information Group data, shows that this has been followed by a sharp upturn in activity in Q2 and Q3 this year to £202m and £232m respectively. Despite the difficulties blighting the sector, retail property has played a key part in this uptick. Indeed, retail has accounted for three-quarters of stock traded in 2021, compared with two-thirds in 2020. Growth in larger lots of £1m-plus has also been crucial. A quarter of lots sold in Q3 2021 made £1m-plus, accounting for around £134m of sales – a historic high. “There is a real change in the way that vendors are using the auction market to sell larger lots,” White said.  Data for the pandemic and post-pandemic periods shows auctions accounting for around 17% of sales into the private investor market, compared with around 11-12% historically. “Clearly, the auction market is providing a very important role within the current market, allowing investors to free up capital or realign capital much more speedily,” White said. Post-pandemic distortion? So is the current growth a post-pandemic distortion or will it continue into 2022 and beyond? EG brought together a panel of experts to discuss the research and give their take on what the future holds for the sector. Acuitus chairman Richard Auterac said that, rather than a distortion, the market was now coming out of a relatively low point in the cycle and moving into an upward phase. “Demand has exceeded supply for a long time. I think what’s happened in the last two quarters is that supply has increased dramatically,” he said. “I don’t believe that there is any saturation in the market. That level of sales volume could grow and would be absorbed by the investors. There simply isn’t enough stock for investors to invest in at the moment.” OLIM Property investment manager Jo Seth-Smith, who regularly puts assets into auction for OLIM, said she expects to see continued recovery moving into 2022. “The key thing is that almost all properties are now open and trading. Rent collection should very much be following suit. Short of any further Covid outbreaks, recovery – particularly in certain sectors – should really accelerate,” she said. Deekay Group managing director Neel Shah, who often turns to the auction room to grow Deekay’s portfolio, also anticipates continued recovery. “Sellers have held back in the pandemic and are now coming to the market at once,” he said. “Digital auctions mean there are more auctions in the year, and that has naturally brought more volume to the market and more overseas buyers.” However, he pointed out that the mix of assets available has changed. “The traditional sale and leasebacks in the auction market have now gone away. You’re not seeing the well-let investments come in for the traditional investor, and most of the properties are now more asset management-led, where it will require some sort of value-add and rolling up their sleeves to do some work,” Shah explained. While banks are not currently putting pressure on leveraged property owners to sell where values have taken a hit, Auterac said more sales were likely to be triggered as property owners seek to refinance portfolios. “If there’s a high percentage of retail in that portfolio, it looks like the clearers won’t be that happy to provide finance,” Auterac said. This could lead to certain assets being identified for sale. “I think the other issue going forward is always going to be valuation… getting the valuations at levels that allow vendors to sell will still be an issue going into 2022,” he added. Sweet spots Sticking with retail, the panellists agreed the sector offered some real “sweet spots” for private investors going forward. “Retail is on its back and, frankly, that must be a wonderful opportunity to buy,” said Auterac. “We are seeing some very interesting purchases of savagely rebased rents, where the national tenant retailer is now paying maybe 80% below what the previous rent was and is also taking a more flexible lease.” Such lots are regularly selling at 8% or 9% yields, he said. Seth-Smith said market towns – particularly affluent market towns – with a varied mix of retailers, both national and independent, and convenient parking offered excellent opportunities. “You’ll find that they recover very quickly, and there’s definitely an opportunity to make money given where we’re seeing yields at the moment if you are investing in those types of places, but they are few and far between, in our view,” she said. “Convenience stores and supermarkets remain highly sought after and particularly if they have indexation, which is driving a lot of demand at the moment and will continue to do so,” she said. “Shopping locally, I think, is still very important. That helps the argument that your local market town or something close by is going to prove to be a good investment going forward.” Shah said his focus remains on the £1m-plus assets and says auctions are increasingly drawing his attention because of the growing supply of chunkier assets. “It is the absence of the big funds now investing in the retail sector that is giving the private investor a better opportunity,” he said. “As a private investor, we couldn’t compete with the big funds, so there are more opportunities for us in the auctions at the moment.” Casting the net as yields start to fluctuate Net initial yields for sub-£10m private treaty sales have tightened slightly this year, whereas for auction lots they have continued the outward drift that began in mid-2020 (see chart “Auction net initial yields – prime vs secondary, 2012-21”, below). However, Malcolm White, director at BW Investor Services, told the Investing Through Auctions webinar that auction yields may now be peaking and we may see some downward drift. Within that picture, upper-quartile (secondary, active asset management) properties are starting to see yields come in, while lower-quartile (prime assets) are seeing yields move out. “So there may be a real differential in terms of the way the market is responding,” White said. In terms of geography, strong investor demand for lots in the capital has continued to tighten yields on lots sold in Greater London. Yields on lots outside the capital have continued to drift out. However, the past three to six months has seen a slight levelling off in terms of that outward drift in the rest of the UK, and White said he believes that there could be “some sort of turning points coming over the next 12 to 18 months”. Expert speakers Richard Auterac, chairman, Acuitus Malcolm White, director, BW Investor Services Jo Seth-Smith, investment manager, OLIM Property Neel Shah, managing director, Deekay Group In partnership with           To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews