Total Property - Issue 2 2017
Auctions will continue to play a pivotal role in establishing values as the commercial and industrial property sector faces likely changes in the market, writes John Church, Bayleys’ National Director, Commercial.
Auctions have long been the best way of valuing commercial and industrial property, providing the market with a good picture of where prices and yields sit.
They are also the most effective method of sale for vendors, outperforming other forms by a considerable margin. Last year, Bayleys sold $339 million worth of commercial and industrial properties by auction, with a clearance rate of 73 percent on more than 300 offerings. Most of these sold under the hammer but some sold prior to the scheduled auction date or shortly after.
Our Wellington auctions had the highest clearance rate – 85 percent. The Auckland clearance rate was 75 percent, while the clearance rate in the rest of regions was slightly lower still. Sale prices ranged from $92,000 to $11,850,000, with an average sale price of $1,487,017.
Last year’s auctions produced a stream of new benchmark yields, as strong bidding competition and a continuing decline in interest rates squeezed cap rates lower than many market observers had expected. The traditional yield differential between lower and higher value properties all but disappeared, with larger sales also chalking up some very low yields.
This year we are likely to see some changes in the market. A strong economy and a strong investment environment mean there is plenty of demand for commercial and industrial property, but rising interest rates are likely to put an end to the long run of yield compression that vendors have enjoyed. If anything, we might see cap rates start to nudge up a little.
The Australian-owned banks, which dominate the mortgage market, have also tightened up considerably on their lending, although it is encouraging to see one of the big Chinese banks make a significant move into the commercial property sector.
The increase in the cost of a more limited supply of funding will also put pressure on prices, as we are already seeing with land sales.
In this changing and more uncertain environment, auctions will be an important barometer of where the market is heading and will have a vital role to play in determining values.
They will continue to be the best way for vendors to achieve the maximum possible, unconditional price for their properties; and they will ensure that vendors are not paying “yesterday’s” prices.
Comment is sometimes made that auctions are great for vendors but not so good for buyers. But auctions offer the most transparent method of purchasing property.
Purchasers can see who else is competing for an offering and can make an educated decision on whether to continue with their bidding. With other methods of sale, potential purchasers have no idea what others are offering and are essentially making a “stab in the dark”, which can be risky in a shifting market.
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