The case for commercial property in volatile stock markets
|This month’s Wise Owl contributor|
|Richard Auterac is one of the best-known professional auctioneers and commentators on the UK commercial property auction and private investor markets having overseen the sale of more than £6bn of individual property assets. He has more than 30 years’ real estate advisory experience and was a founding Director of Acuitus in 2010.|
Against a continued backdrop of economic uncertainty, the inherent fragility of equities has been underlined by the dramatic market corrections. The immediate reaction of many investors was to switch into gilts and bonds, but this only served to drive down their yields, and showed the achievable returns on well-let, well-located properties in a more positive light.
Even before the stock market drops, concerted buying by private investors continued to drive activity in the commercial property auction room with the value of assets which sold to them during 2017 rising 7% year-on-year. In total, private investors bought around £3.1bn of commercial property in 2017, and our analysis shows that 27% of those assets were acquired through the auction room – the highest proportion on record.
Private investor demand for quality property assets delivering a secure income return, particularly in the under-supplied £1m-5m price band, will continue as the investment fundamentals are still strong and alternatives to commercial real estate remain few in number.
Investors who are prepared to engage in active asset management are also being attracted by the substantial yield gap between prime and secondary properties selling at auction. The second half of 2017 saw the yield gap between prime and secondary commercial property assets selling at auction rise to its highest level since 2015. By the end of the year, the yield gap reached 365 basis points as average prime yields in the auction sector tightened to 6.04% and secondary remained stuck at 9.69%.
The divergence reflects investors seeking greater income security in these uncertain times. The yield gap has been driven by the demand for prime institutional-quality stock rather than a change in the pricing of more secondary assets which has remained relatively stable over the last 12 months.
Of course, the property investment sector is not immune to the type of macro-economic concern which the recent stock market upheavals are reflecting. In the UK, as we look ahead to the first commercial property auctions of this year, there are early indicators of greater pricing caution in secondary locations arising out of the well-publicised concern around some of the weaker national retailers.
However, investors are increasingly drawn to commercial property not just by its headline yield return, but by the fundamentals of locking in to long-term income secured on a physical asset which can be actively managed.