"Ultimately, high numbers of cash buyers will help prevent prices from falling too low, particularly those of the better assets"
So how is the market?
Allsop’s Commercial Auctions team are often asked this question, particularly at the start of a new year, as well as ‘Is it a good time to sell, or should I wait until later in the year?’
The stock market definition of ‘normal market conditions’ are market conditions where prices remain stable for an extended period of time, coupled with low levels of volatility. In other words, where demand equals supply.
Allsop Commercial Auctions are often considered a bellwether for the wider secondary commercial investment market. In 2022 we catalogued 1,003 properties and sold 720 of them raising £548m. Our corresponding five-year average is 958 lots catalogued, 740 lots sold and £508m raised. So, our 2022 volumes reflect low levels of volatility and would seem to suggest that demand is meeting supply.
Over the past five years, our average lot size has grown over 20% from £603,000 in 2018 to £761,000 in 2022. This is mainly due to the larger lot sizes being sold at our auctions. In 2022 we sold 177 lots in excess of £1m, against a five-year average of 152.
It is also worth noting the major transition that occurred during this time in the way we hold our auctions. The majority i.e. 22 (63%) of the 35 auctions were held online.
But what about the prices themselves? Are they stable?
Certain sectors and locations have seen a lot more turbulence than others. Take retail and industrial/logistics, for example. By 2016 the UK e-commerce market had already matured to be the most developed e-commerce market in Europe. Good for the industrial/logistics sector but not so good for the retail sector. This and other trends, like hybrid working, were then turbocharged by Covid in 2020/21 but are now rebalancing.
Sentiment is also a powerful thing which drives markets and economies. The UK’s protracted departure from the EU in January 2020 (some 3.5 years after the referendum in June 2016) caused more than its fair share of negativity. As did the arrival of Covid. But positive sentiment certainly helped fuel the recovery in 2022 until Liz Truss got the keys to No.10.
Has the way we approach pricing changed?
There are two main drivers of commercial property prices – finance costs and tenant demand. Due to persistently high inflation, UK interest rates are in the process of establishing a new normal. The days of cheap credit are over, and they are now at levels not seen for 15 years. With regard to tenant demand, high-interest rates, energy costs and taxes are all taking their toll, but tenants will still pay well for the best buildings and the best locations due to their scarcity.
Location, the financial strength of the tenant and the sustainability of the rent they are paying remain as important as ever. Other considerations include a building’s potential for extension and alternative use. But you often cannot beat a simple sense check of the capital value by looking at the rate per square foot.
With EPC standards rising, the EPC rating is also a key consideration and gives an indication of the condition of the building. EPC changes in April and beyond are coming into increasing focus for many and will no doubt affect lending decisions, and ultimately prices, particularly of the older properties. Existing owners of older properties will see this as a reason to sell, and cash buyers will see it as an opportunity to negotiate hard.
Ultimately, high numbers of cash buyers will help prevent prices from falling too low, particularly those of the better assets. Quality invariably holds its value in the most turbulent of markets again, due to limited supply.
Should I be selling now?
Allsop commercial auctions like to debate this question with sellers and will look closely at the property in question as to whether it is right to do so, or if there are ways in which value can be added before doing so.
But it might be the decision has already been made. If so, we will more often than not advise sellers to get on with it. No two auctions are ever the same and as the experiences of recent years have shown, a lot can and often does change in a short space of time.
Examples of motivations for selling include improving cash flow, service a loan, avoiding legislative or government changes, tax reasons, or simply moving to cash in anticipation of something better coming along.
Should I be buying now?
We know that buyers are driven by the deal - if they see value they buy. The majority of buyers buy for the long term, and this generally smooths out any short/medium-term market upheavals.
Buying today invariably requires large amounts of cash, and in our experience, there is no shortage of people with it right now.
Examples of motivations for buying include wanting a hard tangible asset that is capable of producing an income, whilst providing a hedge against inflation or having an angle to add value in some way.
Auctioneers sit at the coal face. Our primary role is to match the expectations of the sellers with those of the buyers within a defined period of time.
There are always reasons to buy and sell, and ultimately, this is what makes a market. It is the shock events that cause the real upheaval, such as a global liquidity crunch or a pandemic because no one sees them coming. In the absence of one of those, I would suggest all appear relatively ‘normal’ right now, so let’s take comfort in that, avoid talking the market down and push on…
