Private investors appear to be deserting the commercial property market as escalating prices and last week’s interest rate rise begin to bite. In figures released on Tuesday from Savills’ largest commercial property auction, a third of properties went unsold, significantly above the long-run average. At a smaller separate auction held by Colliers CRE on Monday, around two-thirds of properties could not find a buyer – a level not seen for at least a decade.
James Cannon, head of the commercial auctions team at Savills, blamed the sales decline on the growing cost of borrowing which, he said, had begun to deter certain groups of investors.
“This was a litmus test,” he said. “Although the fundamentals for investing in property remain strong, clearly the market is being put under some negative price tension by the cost of money.”
In December, Savills generated a sales success rate of 85 per cent and in October of 93 per cent. The average sales rate for the first quarter of this year was 80.6 per cent across all auctions.
Falling rental yields on commercial property combined with rising interest rates have made it difficult for growing numbers of investors to justify deals.
According to the Investment Property Databank and Jones Lang LaSalle Auctions Results Analysis Service the all-property yield fell to 5.57 per cent in the first quarter of this year, compared with 6.15 per cent in the corresponding period last year.
But for the first time in 15 years, five-year swap rates – the benchmark price for borrowing money at auctions – have recently been higher than the initial rental yield. The result is that property is no longer self-financing.
Mr Cannon said: “Thus far the increase in the five and 10-year cost of money by half to three-quarters of a percentage point has seen the cost of borrowing for the private investor rise from 6.25 to 6.5 per cent, subject to status, against an average net initial yield of 5.58 per cent of properties sold in the first quarter of 2007.”
The auction room is seen as a bellwether for the wider commercial property industry, where yields in certain markets such as Central London offices are also reaching historic lows.
Duncan Moir, auctions partner at Allsop, which offers the largest commercial auctions in the market, said it was going through a period of change. Prices were being adjusted to reflect the problems in borrowing and the lower yields.
He said: “Property auctions are a fantastic barometer for the overall appetite for property in the market. It is the only public, instant picture of how supply and demand is changing, and when you see something not selling it’s as interesting as when it does sell well.”
The market will face another stiff test next week when market leader Allsop and Jones Lang LaSalle hold their first auctions since the interest rate change. Mr Moir said that it would demonstrate whether vendors would be prepared to scale back their prices in the interests of a sale.
The Savills auction was the company’s largest to date and included properties with a book value of £60m.
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