Originally published in the EG 02.09.24
In property it’s tempting to adhere to the old adage ‘plus ça change, plus c’est la même chose’ – things change, things stay the same. But every cycle has different characteristics and the transition from bust to boom gives different signals.
In this context, the commercial property auction sector has a proven track record of signalling changes in sentiment and pricing.
Our analysis of auction market data across the past three decades indicates that auction room pricing can anticipate valuations shifts by as much as nine months, but you also have to take into account the type of stock which is coming to market and macro factors such as the cost of borrowing.
Those caveats aside, it’s interesting to consider recent auction data to assess where we are in the curve towards a more normalised market.
Several data points are starting to indicate that we have reached a turning point. Towards the end of last year, the spot yields identified by our Commercial Property Auction data research (cPad) were starting to imply that we were reaching the bottom of the market, largely because yields had not been at this elevated level for a decade.
By Q4 2023, the Acuitus cPad prime yield had risen by 29 bps to 6.52% – its highest level since 2013-14 – while the Acuitus cPad secondary yield rose by 44 bps to 10.41%.
The last time we saw a yield gap of this magnitude was in the mide-1990s following the market collapse of 1989-1992. Our view after 1996 was that secondary was undervalued and with hindsight this was indeed the case. It was the gradual return of the lending market from 1996 onwards which empowered investor demand.
At present, increased debt availability and lower borrowing costs are helping sentiment and supporting greater transaction volume. The industry at large welcomed the Bank of England’s recent decision to lower interest rates at 5%. Analysts in the City are divided on what to expect for the rest of this year. Reuters has recently reported 65% of economists predict that the Bank will only cut rates once more this year, leaving borrowing costs at 4.75%. Expectations for further falls across 2025 are high.
Recent auction data has indicated that property prices started to recover in January and have remained stable or progressive every month since. Past experience tells us that periods of price dislocation have then produced some of the best opportunities for returns for investors, and we believe we are on the threshold of such a period. However, the uptick in cycle is still weak. The next stage is to see a growing and sustained improvement in sentiment across various sectors.
Despite the prolonged negative sentiment towards the sector, many investors are now targeting retail assets and anticipating a substantial bounce back. While the sector is still very much in the recovery room, we have not seen any further recent decline. Patience here might very well be a virtue in terms of long-term reward.
Similarly, other sectors that might have been previously out of favour are beginning to look more promising.
The ‘Alternatives’ basket of assets has seen more than £100m of transactions since the beginning of the year with buyers particularly targeting medical, leisure and motor trade properties. It’s a strategy driven by the proliferation of ‘sticky’ occupiers in these sectors who tend to sign for longer leases and are also more likely to renew.
Another area that is being strongly backed by investors is London. In the second quarter of this year, £86.7m of assets in the capital were sold to bring the year to date total to £167.3m – the highest on record, surpassing the previous high of £156.2m in H2 2022. This growing confidence, while at the moment predominant in London and the south-east will continue to grow, especially as other regions begin to demonstrate some serious value opportunities.
The next tranche of commercial property auctions scheduled between now and the end of the year will provide us with the data we need to ‘read the runes’ and establish whether we have fully entered the beginning of a new cycle in the property market. At present, the indicators point to a period of transition where the entrepreneurial buyer may find reward from a well-judged appetite for risk.
