Lots going for us
Former pumping station on more than five acres of land in Enfield, sold by King Sturge for £1.52 million
Property auctioneers had it tough in 2009. While admitting that 2010 may offer an end to recession variously described as “corrugated” or “W-shaped”, they face the year with renewed vigour and cheer. The bumpy ride in 2009 included a continuing slowdown in property transactions, the collapse of the residential housing market, price falls of 40 per cent in the commercial sector and banks unwilling to lend to each other as the LIBOR remained high, putting the cost of borrowing at home beyond many private investors. Volumes continued to fall at auctions nationwide, as many vendors preferred to hold, rather than sell while pricing was volatile. Margins on prices achieved above reserve continued to narrow, hitting revenues. In the first half of 2009 alone, £440 million was wiped off the total revenue of the UK’s top 12 residential sale rooms, a 29 per cent fall on the same period in 2008.
So what’s to be cheerful about? John Weatherall of Andrews & Robertson points out that crisis creates opportunity for enlightened investors with funds and the foresight to take advantage of marked declines in values, recognising that the best time to get into a market is when others are not.
“With talk of a corrugated recession with smaller fluctuations in values and sentiment gathering pace, many would-be buyers only now feel able to recognise and reflect upon the missed opportunities of last year and contemplating where to put their money in 2010,” he says. “While some may say ‘if only’ and ‘I wasn’t sure’, our experience as auctioneers since the crash of 1974 has proved how fortune can favour the brave. For many of those who are now key players in the industry, times of early recovery proved pivotal.”
Andrews & Robertson’s opening sales of 2009 witnessed strong demand for all types of property in London and the South of England, which intensified as the year unfolded. In June, it raised the third-highest price nationally on a single lot, a mixed commercial/residential investment in Balham Hill, London SW12. Guided at £4 million, it sold for £4.3 million.
Andrews & Robertson’s average success rate was 75 per cent in 2009, dipping below national averages in April, following the inclusion of Spanish apartments for a Spanish banking group, which failed to sell. In September, a portfolio of flats and houses in Manchester struggled, but most subsequently sold. “However,” points out Mr Weatherall, “this also reflects that Andrews & Robertson are not primarily motivated by our own success rates and believe in providing a service for clients who are trying, within reason, to exit from difficult circumstances.”
Andrews & Robertson has more than 120 lots in its February 18 sale. “There is a tangible sense of reasonable optimism in the marketplace,” says Mr Weatherall. “Funding is still problematic. Those banks that are lending are looking to offer only 60 to 65 per cent loan to value, requiring buyers of reasonable-sized properties to put a substantial amount of cash into the deal. Banks are also increasing their margins and charging fees on the purchase and fees on exit. With a general election on the horizon — regardless of the outcome — demand for investing in property should remain positive.”
Allsop’s £50 million residential sale in December was the last auction in the UK calendar and is one of the factors putting a smile on other auctioneers’ faces. Success rate was 80 per cent. The auction brings the Allsop residential team’s sales to over £325 million in 2009 and the year’s average success rate to 88 per cent (86 in 2008). Overall sales for its residential and commercial auctions closed at £756 million and 87 per cent (£698 million and 84 per cent in 2008), endorsing the firm’s position as the UK’s largest, most successful property auctioneer.
The sale, which was about 40 per cent distressed stock, was dominated by cash buyers. At the close of the second day, partner and auctioneer, Gary Murphy, commented: “Bank lending remains tight and, although most of our regular buyers have a healthy appetite for sensibly-priced stock, several have remarked on what they consider to be severely protracted procedures for securing debt, even at much-reduced loan-to-value ratios.
“As prices paid require more equity, buying decisions are not being taken lightly. Bidding was disciplined. There is also some concern over market stability as we enter the New Year and a general election looms. As ever in such conditions, quality stock prevails and more edgy, speculative lots become much more sensitive to optimistic reserve pricing. As one buyer put it, now’s the time to be sensible.”
Andrews & Robertson’s record lot of 2009, 17-23 Balham Hill, which sold for £4.3 million
The largest lots of the sale, all in sought-after central London locations, attracted keen interest. For example, 25 Redesdale Street, SW3 is a freehold mid-terrace building with three flats (two let on assured shorthold tenancies; one vacant). Producing £44,440 a year, it sold for £2.25 million, against a guide of £1.9 million. Analysis of the sale showed assured shorthold yields averaging 9.91 per cent, assured at 6.38, regulated at 3.06 and 80-plus-year ground rents at 5.35 per cent.
In its February 17 residential sale, Allsop is offering 66 Myddelton Square, Finsbury, London EC1. On an attractive Georgian garden square, it is a freehold grade II listed end-of-terrace building, with basement, ground and three upper floors and potential for redevelopment, subject to planning consents. It includes four reception rooms and five bedrooms. The guide price is £1.7 million to £1.8 million.
Philip Waterfield of Strettons Edwin Evans says 2009 was “cautious” and adds: “The banks’ reluctance to lend to willing investors has frustrated the market and it has been a challenging 12 months for auctions. The rooms have remained in motion nevertheless, largely because of the depth of cash-rich private investors looking for better returns than could be achieved on bank deposits. Despite this testing background, Strettons disposed of 427 lots and raised £77 million from seven sales. The squeeze on stock pushed down the number of lots offered from 16,416 to 12,877 in the first half year.
“The speed at which values declined continued to make pricing stock difficult, but reduction in residential lot sizes from £143,000 to £113,000 increased buyers’ appetite for property investment, partly underpinned by distressed sales and nationwide falls in value. As investors ask: ‘Has the market reached the bottom?’, there are signs that the rally witnessed in October may be settling down and prices may start to settle going forward into 2010. London seems to be leading the way in recovery.”
Noteworthy in the last year has been the coming together of three auction houses to form a single sale. Brendons, Drivers & Norris and Sutton Kersh Binstock now hold their sales in the same location and on the same day, under the title “Capital Auction Group”.
On December 9, Brendons sold four lots for A2 Dominion, all well in excess of reserves. In Acton W3, a dilapidated terraced house achieved £342,000 (guide, £300,000). Other successful lots for A2 included 2 Oxford Road, Oxford, selling for £242,000 (guide: £150,000); 35 Coley Hill, Reading, selling for £370,000 (guide: £295,000) and 3 Westcote Road, Reading, for £278,000 (guide: £230,000). Bidding was strong.
Phil Arnold of Brendons says: “We are definitely seeing an upturn in business for residential and commercial lots. In the residential sector, run-down properties are achieving some amazing prices, in many cases not far short of what we would have hoped to achieve two years ago. In the commercial sector, investments are proving attractive, as long as there is a good yield — generally six per cent plus for strong covenants and eight per cent plus for normal tenancies. Vacant commerical lots are still proving harder to sell, but I see this as the angle for buyers to pick up some bargains.
“If you are willing to take the risk and buy a vacant commercial building, these are invariably cheaper and that could push your eventual yield well over the 10 per cent mark. There appear to be more tenants in the market, as my commercial division can quantify, having now let all the vacant shop units that they have had on their books from before the new year.”
Another Capital Auctions Group member, Andrew Binstock of Sutton Kersh Binstock, says: “There is still an appetite for good stock in prime locations. In 2009, we noticed an increase in demand across the board half way through the year, when some positivity returned to the market, but this seemed to tail off again towards the end of the year. I expect 2010 to start cautiously, but banks are starting to lend again to their better clients and I expect to see some improvement in the interest levels for secondary stock.”
Sutton Kersh Binstock achieved £700,000 post-auction for 55 Lawrence Gardens, Mill Hill, NW7. This vacant three-bedroom detached chalet bungalow has a separate detached studio and occupies a plot with potential for an extension or re-development.
Wayne Foley, of Drivers & Norris, is noticing that many vendors want to delay until spring. “The weather seems to have killed people’s enthusiasm,” he says. “I have had several vendors saying they would hold off until April. However, we’ve had quite a few buyers ringing up and a lot of our old investors popping in — it sounds like there’s good demand out there.”
Barnett Ross’s outlook is positive. In 2009, despite one of the lowest ebbs in the history of commercial property investment market, the firm continued to sustain its above-85-per-cent average yearly sales rate and sold 88 per cent of all lots offered in its room.
Rising auction agent Greg Corin comments: “The shortage of quality stock has had an impact on the number of lots offered. However, maintaining a good sales rate is of the utmost importance for Barnett Ross and ensuring that vendors are listening to our advice on reserve figures, in line with current market values, has helped maintain our strong sales ratio.
“The second half of 2009 started to see a change in investor sentiment and many buyers, some of whom we hadn’t seen for a good few years, began returning. This was obviously a timely boost and — even though demand slightly dipped towards the back end of last year from its peak in our October sale — we get the feeling we are over the worst of the downturn and at the beginning of slowly climbing back to where the market should be.
“There is obviously a long way to go before prices return to their 2007 peak, however better-quality stock has continued to achieve strong prices in our room and there is no reason why, particularly while there is a shortage of stock, this shouldn’t continue.
“Hopefully we’ll see an increase in confidence in high-street tenants and this will help strengthen investor attitude that property continues to be a good investment medium, especially compared to interest earned in the bank”.
Compared to residential, commercial lots have had a harder time. Simon Parker, of Savills commercial auctions, says he is looking at offering a lot more stock than at any time last year. “Of particular interest are the sellers who are increasingly under pressure from lenders, although we are currently dealing with borrowers rather than banks. I think the trend of prime hardening and secondary stock softening will continue.”
Cushman Wakefield’s David Margolis feels that 2010 “should” be a year of continued recovery, although the private investor will be more selective. “The prime end of the market should see a year of consolidation in pricing and activity, but there will be continuing uncertainty in the more secondary end of the market. These days, the products that sell best are the smaller lots, let to household names, in good locations, with in excess of 10 years unexpired on leases. Properties that have slight quirks or are vacant, let to perceived weaker covenants, in poor locations with little chance of rental growth should still sell, but need to be priced appropriately.
“In 2009, the auction rooms were busy with private investors wanting to part with their cash rather than keeping it in the bank and it should remain this way in 2010, with interest rates staying at historical lows. In 2010, our challenge as auctioneers will be finding willing vendors prepared to sell at realistic prices, although we do expect banks to take back more assets from borrowers in cases where borrowers fail to refinance loans, or when loan values fall below pre-agreed levels.”
Allsop’s commercial team points out that investing in property is currently bringing around 10 times the return on cash deposits. For its last commercial sale of 2009, Allsop released its largest commercial auction catalogue since October 2006, with 173 lots. George Walker, partner for Allsop Commercial Auctions, comments: “Private investors are receiving close to zero return on cash deposits, which means a resurgence of interest in income-producing property assets. Property owners are realising the potential of the market conditions and are coming forward to cash in on well-let or central London investments, which is reflected in the quality of our December catalogue.”
Simon Riggall reports that last year was a poor one for his firm, Colliers CRE, as it tends to concentrate on public-sector sales, secondary investments and building land, all sectors that were hit with a shortage of stock. It did, however, score a remarkable result in its March e-auction for the Nuclear Development Authority, selling three small areas of development land, close to existing nuclear power stations, for £475 million.
“This year, the government and whatever replaces them have firmly nailed their colours to the mast for public-sector disposals,” says Mr Riggall. “We also hope that a return to excess profits by the banks may gear them up to start to sell and write off.Private treaty and auction are fixated on prime stock and short supply and strong demand are squeezing prices.
“Will we get a mini fall?” he asks. “There is no appetite to lend on secondary stock at present, so it’s cash buyers only, although commercial ground rents have held up well — and we are strong there.”
James Cannon, formerly at Nelson Bakewell and Savills, has launched Cannon Capital with two investors. A property broking house, it sells property by auction, private treaty and by portfolio. Its principal client is Severn Trent Properties, which owns 426 properties. “Our philosophy is to put clients first and leave no stone unturned,” says Mr Cannon. He expects the market to stay broadly positive, the only fear being a rise in interest rates. “Money in the bank is not performing as well,” he says. “Property remains the least worst asset in terms of returns.”
The market, says Mr Cannon, is strongly in favour of buying prime property, as secondary property is difficult to finance. To that end, Cannon Capital has tied in with debt broking house Barclay Taylor. However, he has noticed that sub-£100,000 lots are selling well to people looking for long-term capital growth.
“I gave a presentation to a Jewish property owners’ club,” he says. “They agreed that fortune favours the brave. Everyone considers there’s going to be some more volatility this year. We’ll probably see strong activity to the end of the financial year, then it will go quiet until after the election. I suspect that the banks are going to have to sell some of their development sites.”
King Sturge had a good 2009 — but then it had the advantage of a standing start in 2008, when key members of the Harman Healy team moved to the firm. Its market share went from one per cent to seven; it claims to have sold more industrial property than any other firm in 2009 and its auction of industrial properties in July saw a 100 per cent success rate. King Sturge was acting for receivers at Ernst & Young in the sale of the Industrious portfolio run by property company Dunedin. It was the most high-
profile debt-recovery auction of the year. King Sturge put 31 lots into a single special-purpose auction. “It was possibly the busiest room in London for the year,” says auctioneer Felix Rigg. “It was priced on the basis that very little of the portfolio would be fundable.”
Mr Rigg is keen to see what the banks will do with their property portfolios this year. “We’re aware of several property companies under severe pressure from their banks,” he says. “I wonder if 2010 couldn’t shake out some more debt-recovery situations... The forthcoming election might cause a bit of wait-and-see, but in some quarters the belief is there is nothing much to wait for. Whichever party is in power, we can expect tax increases, which may keep inflation down, which may keep interest rates down — so that’s got to be good for property, even though transaction costs may be hit.”
“Property companies tend not to sell unless they have to fund another scheme. We are faced with a market polarised: long, good, secure income commands a premium; anything that isn’t is drifting out in terms of yield.”
In the private treaty market, a 192,000 sq ft warehouse complex on a north London site of seven acres is being sold by Strettons and CBRE, acting on behalf of liquidators at Ernst & Young. While the property is currently occupied, it is being sold with vacant possession, following the collapse of Bridisco in late 2008.
The recently reduced guide price of £7.5 million reflects current market sentiment, say agents Neal Matthews, Strettons and John McDougal, CBRE, who report interest in the freehold from a number of parties. “The guide price of just over £1 million per acre for a large site south of the A406 in north London is not excessive,” they add.