2018 - What happened in the auction room
As the year draws to a close, it is time for us in the Commercial Auction team to reflect on the results of our sales over the last year, what we have learned and how the market might look in the early part of next year.
Before commenting on the wider market we look at the result of our last two sales of the year held in October and December.
On the 3rd August 2018 the Bank of England raised interest rates by a massive 50% to 0.75%, the second increase in a decade! Despite promise of further “gradual and limited” increases to come, so far there have been none and interest rates remain at historically low levels.
The summer passed and although it’s hard to believe, on the 15th September 2018 we remembered the 10th Anniversary of the demise of Lehman Brothers and the start of the Global financial crisis which ultimately lead to the ultra-low interest rate regime we now enjoy.
The 17th September saw the second Allsop Online Auction, when on behalf of Principal Real Estate Europe, we offered 17 lots, selling 16, raising a total of £3.23m. This result building on the success of the inaugural sale held in April.
On the 16th October we held our biggest sale of the year offering a total of 270 lots which resulted in total sales on the day of £97.03m with a success rate of 73%.
With sales after, the result has improved to £115m and an 81% success rate. The overall result was somewhat below expectations and substantially down on the total sales figure of £167.3m achieved at the October sale a year before.
The continuing downbeat news emanating from the retail sector, increasing uncertainty surrounding the Brexit negotiations and the rise in interest rates two months earlier, have all weighed heavily on Investors’ confidence.
What was clear from the October result was that good quality, well let stock was in strong demand and despite the challenging news climate, with a shortage of supply, overall retail yields were steady at 7.8%. The same could not be said for the high-risk assets where yields rose to over 15%, a level not seen for over 5 years. Investors sought out areas of the market which might prove to be resilient to the current uncertainties in High Street retailing. Premises used for convenience stores, medical/dental practices, motor trade, funeral parlours and care homes were all sought after. This group of properties has become known as “Alternative investments” and now forms some 17% of our catalogues.
The rest of October saw the FTSE fall below 7,000 for the first time since March, whilst 5 year Treasury Bond yields reached a peak on 10th October at 1.3% (10 year Treasury Bonds rose to 1.75%). Both have subsequently fallen to 0.9% and 1.3% respectively as prospects recede for further interest rate rises.
In the retail sector Evans Cycles was bought by Sports Direct following a “cash crunch” and Debenhams confirmed they would close up to 50 stores following a financial loss of £491.5m for the year.
At the end of the month, the Budget was widely seen as a non event, although there was a little relief for hard pressed small retailers with the announcement of a 33% reduction in rates payable on premises with a rateable value below £51,000. To use the strapline from a wellknown grocers advert “Every little helps”.
December 4th saw our sixth and final sale of 2018. Against our expectations the sale became one of the strongest of the year with total sales now exceeding £76m and perhaps more pleasingly a success rate of 90%. Those present will recall the positive atmosphere with competitive bidding for the wide range of properties on offer. Stars of the show were undoubtedly assets located in London and the South East and anything let on long leases to good covenants.
2018 has proved to be a challenging year with fewer lots offered and total sales easing by some 17%, most of this adjustment being seen over the second half of the year.
Rental values in the retail sector continue to be under pressure as an increasing number of empty units litter the country’s high streets. Investors continue to favour locations they are familiar with, as evidenced in our buyers survey. 45% of Buyers live within the same region as the property purchased, an increase from 37% last year. Average retail initial yields for all retail rose from 7.3% to 7.7% over the year. A modest difference, but it hides the increasing gap between A-Grade investments where average yields fell from a peak of 6.3% in 2016 to a figure of 5.9% in 2018. This compared to weaker multi let retail investments whose yields have moved from 7.8% in 2016 to 9% in 2018.
Quite clearly investors are still prepared to pay for good quality retail investments whilst for properties let on shorter leases in secondary/tertiary locations demand and yields continue to weaken, reflecting the increasing risk of owning such assets.
Supply of property across all sectors has tightened, as predicted, as continued political uncertainty dogs the market. Demand though has remained strong as mentioned earlier.
In summary the year has ended slightly below expectations in terms of total sales but about as expected in terms of the number of lots offered. We have had some ups and downs in the success rates achieved, with the more successful sellers being those vendors who have responded to the changing market conditions.
The stronger result of our December sale highlights the capacity of the market to adapt to changing conditions.
Finally our total sales of £518m combined with our residential teams total of £408m add up to a grand total of £926m raised under the hammer in our sale rooms during the course of 2018.
As always, we would like to thank all our clients for their instructions during the course of 2018 and our buyers for making the auction room such an exciting place to sell property. We wish everyone a healthy and prosperous 2019.