COMMENT Less than a month ago, I had the pleasure of being on the panel of a webinar organised by Knight Frank and IPSX which debated the question: “Is now the right time to re-enter the real estate investment market?”
It is testament to how quickly the world situation is moving – never mind the real estate market – that, if we were to have the conversation now, the detail of the arguments put forward could no doubt be different. On that day, 43% of nearly 300 investors, bankers and investment managers on the webinar said they intended to invest in commercial property within three months.
For better or for worse depends on your standpoint but the central truth is that when the factors which impact your market are changing so rapidly your investment strategy needs to be responsive and fast-paced.
My perspective is purely on the commercial property sector but I would suggest that when you consider the question as to whether now is the right time to invest then you can do that only on an individual basis. In such a fractured market as we have today, you cannot make a blanket case for buying. It’s not a one-size-fits-all market.
However, as with the webinar vote, there is clearly a growing constituency of investors who are prepared to re-enter the market.
The auction sector represents a very individualistic group of investors. While the assets traded are in the main not considered to be institutional, their investment-grade quality is sufficient for them to be acquired for long-term investment by high net-worth investors and for SIPPS.
This is very relevant because it is why you tend to see continued buying in the auction room. It is being driven by the particular financial planning needs of buyers and not the kind of criteria that you see in the institutional commercial property investment market.
The size of lots being offered at auction is also pertinent. As they range up to, say, £5m they are well suited to the type of investment application mentioned above. This is why activity in the auction sector continues even at times of major economic disruption.
Of the lots offered at our first live-streamed auction in May, we have now sold 82%, which seems slightly counter-intuitive when you are considering a supposedly beleaguered asset type.
We all talk about economic and financial cycles but there are investor cycles too. How we react to one of these cycles depends upon where we are personally in the cycle and where we are when the music stops or whether we have just arrived at the dance with a bag full of cash, as it were.
To evaluate the situation today, you have to first remember that before Covid-19 arrived the market was showing signs of strain from the woes of the high street and the political and economic uncertainty of Brexit.
Even though there was a partial recovery in confidence following the December 2019 General Election, the pandemic has hugely exacerbated that situation. Perhaps the best we can hope for is that a vaccine for Covid-19 and a final Brexit resolution arrive simultaneously and give the UK a clean slate from which to move forward.
So, is it the right time to invest? Well, commercial property still offers a very high-income yield compared with government bonds with the added ability to borrow off the back of astonishingly low interest rates. But from an analysis of investor demand for our clients assets, it is clear you have to pick wisely and that means a return to first principles in terms of analysing the businesses which occupy the assets you want to buy. The continued relevance of the business to the new world, its likely profitability and ability to pay rent will become central. Then the demographics of an asset’s location and how it is likely to fare in the coming years will also be highly relevant.
There is also an increasingly interesting opportunity to invest in assets where the occupier has been impacted by lockdown but has a business which is intrinsically robust and can flower once spring arrives again.
Investors are sophisticated and entrepreneurial so they will have a view on all these factors and will know what their price is for every asset. The commercial property auction market has remained open throughout this crisis for one simple reason: investors have not stopped wanting to buy. For this reason, I believe we can expect auction activity to continue unabated and serve those who firmly believe that now is the time to invest.
Richard Auterac is chairman and auctioneer at Acuitus