As anticipated at the end of last year, 2017 proved to be much like 2016. Investor demand has continued, largely due to the low returns available elsewhere, whilst the supply of properties has continued as property companies, private equity houses and private investors sell into a strong, cash-rich market. Most of the data sets we measure have remained remarkably steady over the past 24 months, showing only relatively minor fluctuations. The headline figures for the whole year are as follows:
The total Commercial Auction sales for 2017 aggregated £609m (£614.m, 2016). Average lot size £661,000 (£628,000, 2016), 921 lots sold (977, 2016). Average success rate was 86% (88%, 2016) and 85% of buyers have bought before (84%, 2016). Whilst the average number of lots which were sold on reserve, at 25% is slightly below last year’s 26%, the average amount achieved over reserve has remained remarkably stable for the last few years at around 18%.
The most meaningful change has been the average initial yields of “A grade” properties, those let to the best covenants on the longest leases, where yields have moved in from an average of 6.2% in 2016 to an average of 5.7% in 2017. However this only tells part of the story as over the year “A grade” yields softened from 5.6% in February to 6.1% by December, almost back to where they started the year.
On the demand side the most notable change has been in the number of active overseas investors. For many years the percentage of overseas buyers has remained steady at 3-4% of all buyers, however 2017 saw a jump to 13%. Perhaps the post Brexit devaluation has not only stimulated the top end of the market in the City of London and West End but also motivated smaller private investors from overseas.
The individual Auctions for the first half of the year were reported in our Summer Review. In summary though, strong demand in the first two sales in February and March delivered excellent results with average yields ticking down slightly. The May auction saw the trend continue with yields for both the better quality, as well as the more secondary lots continuing to fall.
While the July sale saw “A grade “ yields fall to an average of 5.4%, secondary retail yields moved out, with “B Grade” investments easing from 7.5% in May to 8.2%.
Over the summer, the speculation of an interest rate rise intensified and on 29th September the Bank of England signalled that an increase was imminent.
Our October auction held three weeks later saw 276 properties offered for sale realising a total of £161.4million, our largest sale since the boom years of the “noughties”. Despite the strength of demand and the size of the sale, the October results revealed a softening of average “A grade” yields to 5.8% reversing the trend seen earlier in the year. Average secondary yields remained static at 8.3%. October also saw the successful sale of our largest lot of the year, the Marks and Spencer unit in Bishop Stortford, which achieved a figure of £7.275 million (5.1%).
On 2nd November 2017 interest rates finally increased for the first time in a decade. Rising inflation led the Bank to show some support for sterling as a result of the Brexit vote in 2016.
As previously commented we did not believe a small increase in interest rates would affect investor demand, however it remained to be seen whether there would be any effect on pricing.
The December sale has so far raised £92m (81% success rate) a significant result when some observers have been suggesting at best a rapidly weakening market or at worst the imminent possibility of a crash. The average yield for “A grade” properties moved slightly further out to 6.1% from 5.8%.
Throughout the year we have seen a steady flow of larger lots coming to auction. Two very different properties sold in excess of £7 million in the room. The first was an office building in St Albans, with possible redevelopment potential, which was sold for £7.1m in July. The second was the Marks & Spencer unit in Bishop Stortford, again sold under the hammer for £7.275m. In total we sold 180 lots in excess of £1m compared to 171 in 2016.
In summary 2017 has been a good year for the secondary investment market. Buyer demand continues to be strong and there has been a steady supply of properties. As we have seen in previous years the strongest demand has been and continues to be for the best quality lots, even if pricing has needed to be adjusted slightly. Our Commercial Auction Team has raised over £609m which when combined with our Residential Team, brings the total sales for 2017 to in excess of £1 billion raised through our auction rooms.