You’ve got to be bidding

By Yolande Barnes

A residential property shortage has given rise to a boom in auction sales

The residential market is characterised by a severe shortage of properties in many locations.

Even though demand is limited by a lack of mortgage funding, prices are increasing on the back of very thin turnover of properties.

It is hardly surprising, therefore, that auctions are growing in popularity this year, having experienced a period of relative inactivity in 2008. Here, too, lots are being bid upwards and success rates are consequently high.

Savills’ analysis of auction buyers has revealed three themes that show auctions to be a microcosm of what is happening in the wider market.

Cash is king
In the market as a whole, 40% of transactions are cash purchases but, in the auction room, the proportion is 67%. Those with the biggest cash reserves are developers and ‘professional’ investors with large portfolios, 80% and 70% of whom, respectively, were using 100% cash to fund their purchases.

The credit crunch has pushed these buyers towards smaller lots and plots, which they can fund with capital instead of commercial borrowing (graph 1). Purchasing power is enhanced by those able to pay with cash, and cash buyers are well placed to buy at auction. Even first-time buyers, who constituted a surprising 6% of those buying in the auction, are still primarily cash funded: half using 100% cash and the other half using no more than a 60% mortgage.

Developers are back
The number of developers looking for small-scale plots is increasing (graph 2). One-third of those buying at auction in July were property dealers and developers, compared with only 12% in June. This is despite the fact most of the lots were neither plots nor billed as development sites.

It would seem that developers are being opportunistic and looking for more unusual propositions in a market where anecdotal evidence suggests that ‘oven-ready’ plots are selling like hot cakes before auction.

Stock shortages prevail
Although most auction buyers are looking for value, several are attracted by a ready source of suitable property unmatched by many high street agents.

In addition, the speed of sale and certainty of purchase are again unmatched by more conventional means of sale.

The pressure of stock scarcity appears to be attracting people hitherto unfamiliar with auctions. Just more than half – 51% – had never bought at auction before (graph 3). There was a significant divide between those with greater experience who were looking for medium- and long-term ‘holds’ and those buying at auction for the first time, who had a higher proportion of short-term ‘flippers’ among them (graph 4).

Overwhelmingly, buyers were looking for vacant possession – even those buying long-term letting investments – and buyers favoured smaller flats and houses. (Yolande Barnes, Savills Research/Property Week) http://www.propertyweek.com/story.asp?sectioncode=530&storycode=3148126

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