Where are the auction properties
Where are all the commercial and industrial property auctions?
An auction is a liquidity event for a seller of an investment property and/or where the seller is in financial distress.
In the property investment cycle, in an upswing i.e. where yields are falling as property prices are rising, an auction plays an important role in bringing the property to the attention of the investment market buyer. (This presumes a tenant is in occupancy, who is paying and in good standing with the owner).
In a downswing, a buyer with cash and/or strong balance sheet can buy a property asset in distress at higher yields due to lower prices (again presuming an occupant).
An empty/vacant building has no forward income value or cap rate value and is then either sold to a developer who can see a specific use opportunity or to an owner-occupier who seeks to partly swap rent for debt service payments whilst running his business from the site. Perhaps there is a fixed land and buildings value, however with no income stream that value becomes tenuous as holding costs begin to eat into capital.
In a scan of the 37 upcoming auction properties (mainly online) in the Western Cape 10 to 15% are tenanted with the remainder vacant.
Where are the auction buyers - more specifically the investor, the developer, the owner occupier?
Have investors pulled inn their horns waiting for economic indicators to pick up - we can argue that they are now defensively positioning around cash flow management and capital preservation.
Have most developers retreated - are they are no longer banking land or buildings as they cannot "see" into the future? I would argue that is so.
That leaves the owner occupiers - office blocks are empty and WFH continues to grow, retail malls still have footfall, industrial continues to show promise, as does logistics and warehousing businesses.
We have seen an increase in demand for smaller buildings as business owners who have ridden the Covid wave and restructured their business now seek to take advantage of the lower interest rates and seek to own their own building.
In distress sales where usually the gearing structure has inverted and the owner cannot cover the debt service repayments there should have been a flood of properties coming to auction - but they have not!
One would expect given current trading conditions that the market would be flooded with properties on auction, however owners are adopting positions as follows:
- Hold the property as vacant and wait for the next upswing
- Wait for a new tenant who can and will meet their lease obligations
- Offering current tenants a rebate on their rentals to remain on site
- Incentivise lease-brokers to bring tenants to their property first
- Offer the property as an "off-market" via a private placement
In all, the normal thinking that the property market would be inundated with distressed auction properties has not happened in the Western Cape.