Improved residential market sentiment is clearly reflected in boosted activity levels in London auction rooms, traditionally a reliable barometer of future market movements. Increasing cash buyer confidence in the London residential property market has led to both higher auction sales success rates and prices, according to new analysis from Savills Research.
In the first two quarters of 2009 auction sales success rates (or properties sold as a percentage of lots) averaged 71% and 72%* respectively, while in the last Savills auction (July 27) 85% and over half of the buyers were investors.
This is a significant uplift on the position seen in late summer and early autumn 2008, when market sentiment and capital values plummeted across the capital and auction sales success rates fell sharply to just 58%*. In a low turnover market, auctions have become a more popular and numerically significant means of property disposal. A total of 20,000 properties were sold via auction in 2008, a rising share of the total residential market.
As in the broader residential sales market, stock for sale at auction remained low over the early months of the year, confounding expectations of a flood of repossessed stock as occurred in previous downturns. In part, this reflects the fact that low interest rates have kept repossession numbers well below forecast levels, and the fact that lenders have been dealing with repossessions in a much more diverse manner than has historically been the case.
However, in the last quarter stock available to purchase at auction rose by 9%. This suggests increased vendor pragmatism as prices have firmed, coupled with the benefits of a rapid completion process, assuming the lot is sold on the day.
Lucian Cook of Savills Research comments, “The auction market is dominated by cash and equity rich buyers. Mortgage funding is and has always been especially difficult to secure on a sale where the buyer must pay 10% of the purchase price on the day of the sale and complete within 28 days. In a market that continues to be credit-constrained, auction activity is arguably a more potent indicator of broader market trends and sentiment than historically.
“Analysis of buyers at Savills auction in July showed 51% were investment buyers, of whom four out of ten were new to property investment, a real indicator of the growing appeal of London bricks and mortar in the current broader economic environment, further highlighted by 50% of attendees being new to the auction room. A further third of buyers were developers (compared to 12% as recently as June), their return to the auction rooms suggesting a belief that prices will not fall lower. Just 20% of buyers were buying properties for their own use, reflecting the lack of credit in the market.”
Savills Research anticipates that auction activity will continue to rise ahead of the broader market. Auction buyers are a highly discretionary group, driven by opportunity rather than need. Their activity will remain a key indicator of broader market sentiment, particularly against a backdrop of a market dominated by cash-buyers.
Restrictions on the availability of mortgage finance, particularly within the buy to let and refurbishment/redevelopment sectors is likely to mean that cash buyers, and those with limited mortgage requirements, will continue to drive demand.
However, the investment objectives of the majority of buyers, combined with continued uncertainty over the timing and strength of any recovery in the market as a whole, is likely to mean that such buyers remain conscious of the need to secure best value over the course of the next 24 months.
We expect that they will continue to bid cautiously, particularly on properties where the cost of refurbishment is a major variable. In the short term at least, it is unlikely that interest rate rises will be a significant driver in bringing additional distressed or repossessed stock to the auction rooms. Against this backdrop there is little prospect of further significant downward pressure on auction prices and we may well have seen the bottom within this market sector.
Christopher Coleman-Smith of Savills Auctions comments: “At our forthcoming auction on 14th September, we have the best ground rent portfolios to come to auction in years. There will be 181 lots offered at auction with 45% of these being grounds rents. Seventy-nine of these grounds rents will be auctioned with no reserve. Ground rents have always proven popular at auctions with professional people, but private investors are now beginning to show interest. They are an ideal long term asset for children or grandchildren as they are both affordable and sound forms of investment for those with a long term view.
“The popularity of buying at auction was proven this week when a property in north London had 102 people walk through the door in 20 minutes.”
* Source: EiG – Essential Information Group, specialist in the collation of auction data