By Nick Duxbury
Frustrated with low interest rates and hungry for income, investors cramming themselves back into the country’s auction rooms have sparked a mini-boom. Retail funds, too, are showing signs of life
Andrew Derrington is an 83-year-old private investor from Hackney, east London. With his straggly white beard, faded pink backpack and crutches, little about him would appear typical of the average auction buyer. But his reasons for bidding at Cushman & Wakefield’s commercial sale last Thursday — the first he has attended in three years — could not be more typical.
“I am earning bugger-all interest on my cash in the bank, so I thought I would get some income through decent property yields,” he explains.
Having just lost out on buying a dental surgery in Norfolk, Derrington is still sitting on around £350,000 of cash which, like millions of other savers, was earning 5% interest in the bank just over a year ago. This all changed after the collapse of Lehman Brothers. Between 8 October and 8 March, interest rates were slashed to a record low of 0.5%. It is no coincidence then, that March also marked the recovery of the auctions market.
While the rest of the investment market was paralysed by a lack of debt finance, desperation for income — combined with a perception that the bottom of the market had been reached — pushed average yields in the auction room down. Auctions Results Analysis Service (ARAS) and Investment Property Databank (IPD) figures show they fell 17 basis points in the first quarter of this year. Since then, the private investor market has gathered momentum. Even those worst-hit investors, the retail funds, are now back in the game (see box).
A glance in the auction room reveals just how hungry investors are. Last Wednesday, Jones Lang LaSalle experienced what auctioneer Richard Auterac says was “the best demand we have seen in years” at its sale at London’s Cumberland Hotel. The auction achieved a sale rate of 82% and raised £34.8m from 32 lots. Most significantly, the average yield on the day reached 6.75%, compared with the IPD all-property average of 7.72%.
A similar 100-basis point difference was evident at Allsop’s bumper £83.2m sale — its largest in 20 months — the previous week. It scored a 92% sale rate and the average yield was 6.7%. Noble analyst Michael Burt described the sale as “first-hand evidence of returning liquidity from cash-backed buyers competing yields downwards”.
Third-quarter ARAS figures from IPD and JLL reveal that the weight of money coming through the auction room has doubled since this time last year.
“The first and second quarters experienced a big bounceback and, based on last week’s sale, I am not convinced that the foot is going to come off the pedal anytime soon,” observes Auterac. “After that we should see a stabilising of prime yields. A few months ago we were seeing a new breed of opportunistic buyers — but now it is mostly those from the last cycle with surplus cash and looking to protect their income.”
One such buyer is Richard Liddiard, a partner at Carter Jonas, who is acting on behalf of a 25-year-old family trust. Bidding at Cushman & Wakefield’s sale last week he won lot 21, Prospect House in Leicester, which is let to the University of Leicester until 2019 at £124,623 a year.
“There were some ludicrously low yields in the room today — but I was happy with what we paid,” he says.
The trust, which did not want to be named, bought the property at a 6.54% yield for £1.79m — without debt. It was an income play that will be used to rebalance the trust’s £13m portfolio — 60% of which comprises commercial property, away from equities and cash — which the trustees say have both failed to provide consistent income.
“We have some nervousness about property still,” a trustee explained after the sale. “But that concern is tempered by the need for income to rebalance the portfolio. For us, the return is income protection.”
While the private investor buyer profile might be consistent, the selling profile has changed. No longer is it distressed private property companies and retail funds. Big names that were covertly buying up until the summer are now taking advantage of what they regard as a pricing window. At Allsop’s sale, private investor Tony Khalastchi sold eight properties — most of which were in London — at prices he says he could not have fetched two years ago.
“In all my years in property I have never seen anything like this,” he says. “The last few weeks have been crazy. I can get more than my money back on the well-let, well-located London properties and banks I bought at auction at the height of the market.
“As far as buying goes, I think the risk outweighs the rewards right now — everyone is going for quality.”
Encouraged by the prices being achieved for well-let London property and the influx of overseas buyers — one family flew in from Pakistan for the Allsop sale — Khalastchi plans to sell some bank lots at the next auctions.
Property Week columnist and chairman of Structadene David Pearl was also selling four central London properties and was “astonished” with the “top of the market” prices he achieved on the day.
Far too demanding
“In all my years in property I have never seen anything like this. The last few weeks have been crazy”
Tony Khalastchi, private investor
In the private treaty market, a surge in demand has left many buyers unable or unwilling to compete, forcing them to look outside the UK to find “value”.
One such investor is Aprirose, the Mayfair-based investment manager. Since September last year it has spent more than £160m on behalf of wealthy individuals — many of whom are based in Africa.
But managing director Manish Gudka concedes it now faces a drop-off in purchases of sub-£10m lots as it struggles to compete with cash buyers.
“In 2006/07 we were being outbid on most of what we looked at. Now, it is starting to head that way again. We are looking to countries like Germany as we think they offer better value. As long as the private cash buyers are paying the current prices, we won’t be able to compete — in the auction room the private investor is paying more for the same type of property.”
As a result of the growing competition, Gudka says Aprirose will move up the risk spectrum and target larger lot sizes that require debt funding. The investment manager is also avoiding the open market and buying instead from receivers off market. For example, last week it bought a portfolio of 11 JD Wetherspoon pubs from receiver Ernst & Young. It co-invested in the pubs with three investors, paying £65m on 25-year leases at a yield of around 7.35%. Gudka notes that this is more than 100 basis points lower that the 6.12% average yield of five Enterprise Inns pubs sold at Allsop’s auction.
Deals like this will only get harder to source, especially given the resurgence of other private investor vehicles such as syndicates. Mayfair-based Hotbed’s 778-strong membership increased by 71 in the last six months — 55 of whom have signed up to property syndicates rather than private equity.
“In the last four months, private investor appetite has definitely grown,” says Ed Henson, investment director at Hotbed. “But we target the sub-£10m market and have found sourcing deals increasingly hard. There is a growing membership, but not the opportunities to meet the demand.”
One of its syndicates, which has placed a West End ground rent under offer, has been oversubscribed, thanks to the bond-like security offered by the transaction.
Bet on the syndicates
The buying power of private investor syndicates has already been proven by companies such as Tritax Securities. The fund manager bought the 97,000 sq ft headquarters of the Intercontinental Hotels Group in Broadwater Park, Denham ,from Invista Real Estate Investment Management in June, after raising £28m from private investors in less than four weeks.
Furthermore, Khalastchi, who has invested in joint ventures with LaSalle Investment Management, says institutions are also moving in on the £2m-£20m market, which until recently was dominated by private investors.
“They have learned that there is more flexibility in the smaller lots and demand from cash-rich investors if they need to sell,” he explains.
So, if the auction rooms are one of the last sanctuaries for the cash buyer, is there a danger that private investors like Derrington will be overpaying?
“For a private investor who would otherwise be earning 0.5% in the bank, these yields are still attractive and rational,” argues Auterac.
“I am unlikely to live to see half the lease lengths I am trying to buy, so the risk is not that great,” jokes Derrington. “I could probably find a more secure way to spend my pension — but not with such good returns. And I think I have reached the age where I can take a few risks now.”
Retail funds: bears come out of hibernation
Retail funds are also back on the acquisition trail. The same funds that, battered by redemptions from private investors looking to exit, were some of the biggest sellers in the market only six months ago, are not only seeing net inflows — they are now also looking to buy again.
Henderson’s New Star UK Property Trust fund expects to invest in long-let property in the next two months — as does the £1.3bn Aviva Norwich Property Trust, which expects to complete a deal before Christmas. Aviva, the largest private investor fund, had its first net inflows since June 2007 in August, and this trend has continued through September and October. Now, with an offer status and a cash weighting of 18%, it is seeking to buy lot sizes of £15m and above.
“As long as private cash buyers are paying the current prices, we won’t be able to compete”
Manish Gudka, Aprirose
But it is not just retail fund managers that are becoming more bullish. The most recent survey of sentiment among independent financial advisers (IFAs) by the Investment Property Forum (IPF) shows an increase in the number recommending a greater allocation of clients’ funds to property.
Fewer IFAs are recommending no allocation to property — down to 11% from 18% in May — and there is an increase in the number that are recommending an increase of between 1% and 15% (see graph).
Illustrative of how quickly sentiment has changed is the view of Mark Dampier, research director at Hargreaves Lansdown, who in his August Property Week column was a self-confessed bear regarding commercial property.
“I have changed my mind,” he now says. “I have moved from deeply bearish to neutral. At the very least there will be a short-term squeeze on capital values. I would say start allocating 2%-5% of portfolios.”
The latest figures from the Investment Management Association (IMA) show property funds’ net retail sales more than doubled in September from August to £261m. So after six months of successive inflows, property now makes up 10% of total net retail sales across all sectors — up from 6% in August.
But improved sentiment and the return of net inflows to funds are not enough to convince some that the man on the street has truly returned.
Philip Nell, head of retail funds at Aviva Investors, certainly thinks not. “The early investors have been funds of funds [operators of open-ended investment companies and listed trusts] and discretionary wealth managers,” he says. “The core IFA community have not returned to us yet. The man on the street fears unemployment and so is protecting his cash.”
Dampier agrees: “Property retail funds were one of the standout burns of the downturn. Investors were badly led down the garden path at the wrong time. The man on the street will return at some point — hopefully before everything gets too expensive again.” (Nick Duxbury, Property Week). http://www.propertyweek.com/story.asp?sectioncode=38&storycode=3152154