Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.

Every year, millions of pounds of retail, commercial and industrial property investments changes hands, far too often to buyers whose expectations never materialise after completion.

Before auctions overtook private treaty as the primary medium for transacting commercial investment property, an average auction lot could be bought at a lower price than in the open market. Nowadays, it is highly unlikely that most lots would fetch anything like the auction price if immediately re-offered for sale in the open market.

Auction has never been for the faint-hearted but in becoming the primary medium it has also become a playground for shrewd operators using sophisticated marketing techniques. The thing to remember about auction is that no matter how convenient for the buyer, sale by auction is solely for the benefit and advantage of the seller. With changes in the law regarding the conduct of auctions, auctioneers have cleaned up their act, but assumptions made by buyers are also a major contributory factor to any dissatisfaction.

As with all forms of investment, basic understanding of the market is essential. Too many investors rely upon popular misconceptions and statistical averages when it comes to appraising propositions, but an increasing number, even those with apparently many years of experience, are being influenced into making erroneous assumptions by not thinking about the subtle manner in which auction details are presented.

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A first principle in selling is to establish the nature and behaviour of the market. Nowadays, this can be categorized into 4 main sectors:

Category 1 – The buyer whose amateurish approach and limited knowledge of property matters puts yield above all other criteria. It is virtually impossible to persuade such buyers to acknowledge that the level of yield is directly related to the degree of risk.

Category 2 – The buyer whose pre-occupation with immediate capital gain means that he is prepared to pay what often transpires as being well over the odds for an immediate or early rent review. Prices have now reached the level at which all evident growth has already been discounted in the purchase price. Assumptions continue to be made that the opportunity to review guarantees an increase. The buyer whose knowledge of yield bands, over wide geographical locations, is limited. Application of average yields to all types of property is also common.

Category 3 – The buyer who confuses the rental worth of the property with the level of trading profit generated by the tenant. Buying ‘covenant’ does not mean a higher rent. Often it is quite the opposite, since major operators use covenant in contention for lower rents.

Auction sales provide a variety of different attractions for buyers. They offer what comes over as being a relaxing alternative to the hassle and (often abortive) cost of private treaty transactions. (Auctions also avoid the major problem of having to establish credibility in the ‘open market’ especially as the access to suitable propositions is carefully guarded). Buyers, at auction, are offered an assortment of propositions in all price ranges and can assess worth from the comfort of their armchairs. Using the added bonus and excitement of being able to barter on purchase price, auctioneers can structure the atmosphere to obtain maximum prices.

It is the ability to read between the lines in auction catalogues that distinguishes professional from amateur. The number of auctions and geographical spread of lots deter many buyers from bothering to inspect. Over reliance on catalogue details imposes upon the respectability of the auctioneer. Numerous false assumptions are constantly made which clearly reflect an absence of knowledge. In issuing guide prices, auctioneers not only remove the problem from (in)experienced buyers of having to formulate their own opinions of value, but encourage buyers to accept that the successful bid will have to be close to estimate. At the sale, it only needs a show of hands to enable auctioneers and vendors to run up the bidding to maintain market confidence.

If buyers were to temper enthusiasm, inspect lots before purchase and pay heed to the fundamental value of a proposition, then overpayment would be a thing of the past. Impartial professional advice is only useful if the valuer has a positive and suspicious outlook, receptive to long-term factors. Meanwhile, by an auction’s psychologically consistent appeal to appetite, the desire to be satisfied outweighs technical criteria and portfolios fill with dud properties. With inexperienced buyers still confusing the value of an investment with their purchase price, and banks willing to risk making the same mistakes as banks always have, many new portfolios must be stuffed with properties which will not stand the test of re-sale; their ‘value’ being completely dependent upon the existence of other similar buyers and a very strong auction market.

Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.
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