Residential Auction Market
2023 got off to a very healthy start for Allsop Residential Auctions. Two online sales have been held (February and March), so far raising a combined total of £106M from the sale of 332 lots. The overall success rate was 75%.
The February sale was the largest by volume since December 2020 and demonstrated buyers’ continuing confidence in residential property, particularly when bidding for assets in good locations, investments with stabilised income, and land or buildings with obvious ‘value-add’ potential.
The mood was encouraging, particularly given the economic backdrop. The Bank of England base rate at the time of the February auction was 4%. By the March sale it was 4.25%. Consumer price inflation in February was at 10.4% and rising. Construction costs were also escalating, unemployment was rising and strikes were taking place across multiple sectors. So it was no surprise that the March sale presented pricing challenges. And sellers will need to listen carefully to the market’s messages from that sale if they hope to achieve successful transactions over the remainder of the year.
Let’s be clear though. There is still an active market. But what are the messages it is delivering? In a nutshell, quality is resilient - quality of location, building, tenant covenant, life and security of income and development potential. And cash is king.
Many investment portfolios built during the last 15 years have been reliant on a stable, low interest rate environment. Investors have benefitted from ‘total’ returns – capital growth and a healthy margin between borrowing costs and net income. Today that model is history. Debt leveraged ‘buy to let’ investment is now a risky business. The higher cost of borrowing is exacerbated by further challenges such as stricter Energy Performance standards, cladding issues, penal ground rent structures, rising living costs and the potential abolition of no fault evictions.
Quality is resilient - quality of location, building, tenant covenant, life and security of income and development potential. And cash is king.
Raised
Lots sold
Success rate
We have entered a period of price correction and auctions will be the first place where evidence of that will be established.
Consequently, those with higher loan to value ratios are seeking to divest. And cash rich buyers are sensing opportunity. So, when it comes to pricing for sale, net yield is absolutely central. Only in locations where values are robust and capital growth anticipated, can this requirement be relaxed. Those locations would include central London, the Home Counties and major commercial conurbations. The shift in working practices post pandemic continues to shape the demand for residential. So outside space, home working facilities and access to efficient commuter routes are all valuable benefits.
There is a perceptible sense that auction buyers, whilst not risk averse, are becoming increasingly risk aware. And allowance for risk impacts value. For example, the demand for development opportunities exists – but assets with planning permission are prioritised. Speculative development opportunities need to be modestly priced. Partially completed developments too, whilst now increasingly available in the market, must offer generous compensation for risk if they are going to attract serious bidders.
Long term secure income has always remained a safe haven for investment during periods of price correction. Ground rents and reversions have historically offered low volatility, as well as affordability due to low unit prices. Impending legislation however will potentially reduce investment values by making leasehold enfranchisement cheaper. Rising ground rents can no longer be charged for new property.
There will be some distress in the occupier and investment markets this year. So we are likely to see supply from receivers and mortgagees. Large scale domestic repossessions however are a thing of past recessions. Lenders today will exercise forbearance in favour of homeowners. Impaired investors though will be encouraged to sell or face the inevitable.
Recent auctions have shown that the demand for real estate remains healthy but is shifting. We have entered a period of price correction and auctions will be the first place where evidence of that will be established.
Allsop is very excited to be returning to the ballroom for live multi-channel auctions with effect from our next sale.
This follows a period of three years of exclusively online sales. There has never been a better indicator of market sentiment and value than the real time, physically present, eye to eye battle between competing bidders. And confidence will be delivered to sellers that the best possible price has ultimately been obtained as they watch, in the same room, an experienced auctioneer squeezing the last few bids for their property from determined bidders.
There will no better place to see the residential market place in action than the ballroom of The Berkeley Hotel in Knightsbridge on 11 May.