London auctions make a comeback

Auction sales are on the rise as market sentiment in London continues to improve.

This year saw a return of popularity for auctions after a period of relative inactivity in 2008. Despite the current lack of mortgage funding, lots and prices are being bid upwards and success rates are high again, according to international property consultant Savills in its recent Spotlight on Residential Auctions report.

Savills’ analysis on what auction buyers are looking for in August 2009 shows that standard types of property are in high demand, particularly small houses and apartments.

According to Savills, restrictions on the availability of mortgage finance, cash buyers and those with limited mortgage requirements will continue to drive demand and dominate the residential market until mortgage availability improves in the medium term.

“With the uncertainty of recovery in the market and the investment objectives of these buyers, it is likely they will consciously try to secure best value, bidding relatively cautiously on properties where the cost of refurbishment is a major variable over the next 24 months,” says Savills in the report.

In the short term, Savills does not expect interest rates rises to bring in additional distressed or repossessed stock to the auction rooms, thus limiting prospects of further significant downward pressure on auction prices.

In 2008, the sale of residential properties by auction stood at 20,000 transactions or 3% of the entire market, making sales by auction an increasingly popular means of property disposal, according to the report.

In the late summer and early autumn of 2008, sales of properties in proportion to the lots offered fell by 58% in UK auction houses, amid some of the sharpest falls in UK house prices on record. The numbers have bounced back since then, recording an increase of 71% and 72% in the last two quarters respectively.  The price falls have led to a higher turnover in the auction than in the general market where vendors are able to suppress sales level far longer.

A rise in the national levels of stock for purchase at auctions was noted in 2Q2009, as diminishing and low stock levels prevail in the rest of the market, making auctions an increasingly important contributor to turnover.

Cash is king
Savills found that about 40% of all transactions in the residential market as a whole are cash purchasers, while in the auction room the numbers are higher at 67%. As for the remainder, the majority of mortgages are under 60% loan to value.

Developers and professional investors with large portfolios make up 80% and 70% respectively of those with the biggest cash reserves, using 100% cash to fund their purchases. The buyers are moving towards smaller lots and plots due to the credit crunch, and 6% of first-time auction buyers are still primarily cash-funded, with half of them using 100% cash funding and the other half taking on no more than a 60% mortgage.

The high percentage of cash buyers coupled with an optimistic outlook on the house prices has boosted sales. Savills’ own residential auction in July this year achieved an 85% success rate. The limited stock in the broader market, the speed of sale and certainty of purchase are attracting people unfamiliar with auctions, with 51% of them having never bought at an auction before.

A July 2009 auction survey reveals that investment buyers who continue to add properties to their  rental portfolios stand at 29%, while new investment buyers account for 20%. As most of the lots on offer are vacant possessions, investors are bidding against other types of buyers, which include owner-occupiers who constitute 18% of the buyers. Of this market, first-time buyers are a minority at 6%.

Changes in developer activity
The number of property dealers and developer bidders has increased to one-third of those buying at auction in July 2009 from 12% in June 2009, says Savills. High costs and lack of development funding for larger projects are important factors in this increase, as developers turn to smaller, more easily fundable plots, refurbishments and development schemes such as those offered at auctions.

Developers are also proving to be more opportunistic in their selection of properties, seeking out more unusual propositions in the market and taking on smaller scale projects. A notable trend is the merging of roles between investors and developers.

Developers are showing investor behaviour and vice versa in order to enhance yield. This is evidenced by the developers’ shift of strategy to “buying, doing up and renting” as they wait for the capital value to increase before selling.

Savills notes that the more experienced auction buyers are seeking medium and long-term holds, while the inexperienced ones (22%) such as first-time buyers and first-time investors, aim to “flip” the property in under six months.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 773, Sep 21-27, 2009.