Further to part 1 of our series of auction buying interviews with Alan Kirkman, Director at the Tudor Network, we were very pleased to be able to interview Gary Murphy from who has a vast amount of experience as an auctioneer through being responsible for the running and expansion of the Residential Auction Department of Allsop since 1986. He is also Vice-Chair of the Auctioneering Group of the RICS and is also a member of the RICS Estate Agency Group. Formerly, Gary has served as Chair and Vice-Chair of the ISVA Auctioneering Committee and Chair of the RICS Agency Skills Panel. As a consultant to the British Property Federation, he has suggested amendments to the Landlord and Tenant Act 1987 to enable landlords to sell qualifying investments more easily by auction sale. These suggestions have been enacted as Schedule 6 of the Housing Act 1996. We discuss the current housing market; countrywide auction levels; post-credit crunch challenges when buying at auctions; housing affordability; the repercussions of the low bank base rate; issues with lending; due diligence amongst other topics.
1) As the property market has recently showed renewed signs of comparatively marginal weakness – how severe do you think things are going to get in the coming months and moving into 2011? As I write this, we have just concluded our 14 and 16 September residential sales. We raised £38m and 77% of the catalogue was sold. This was the first auction after the summer recess and there is no doubt that the correction that we witnessed at our July sales (£43m and 83%) heralded tougher times ahead. The market has weakened further.
2) How have auction levels and the level of interest beared up on a country-wide level? We are increasingly noticing a difference in buyer sentiment to lots in the south-east and those in the regions. We have historically held two day sales, one day offering regional stock, the other concentrating on London and the home counties. The recession has brought with it a flight to quality as debt starved investors shun risk and stick to the safer locations. This was evidenced by a strong attendance at our 16 September sale when 230 south-east lots were offered. 82% were sold.
3) Do you think there are more modern / post credit-crunch risks that have appeared when buying auction property? There are always risks associated with property investment. In a rising market poor buying decisions can be hidden by inflation. In a recession, however, investors must look for genuine opportunities to add real value through asset improvement. The obvious risk is future falls in price. The wise buyers should expect further dips. Market confidence is key and presently there is increasing caution. That said, those with cash or access to finance will be able to take advantage of the large numbers of distressed sellers forced to realise assets at the best prices they can achieve in a weak climate. Auctions are a favourite hunting ground. Of the 480 lots in our September sale, over half were entered by receivers or mortgagees.
4) What are your thoughts on average market values at the moment – do you think property remains overpriced, particularly from an affordability perspective? It’s true that those owners of less popular lots who don’t have to sell today will prefer not to do so. Optimistic pricing by sellers is as big an obstacle to transactional activity as lack of funding is to buyers. However, prices have held up exceptionally well in central London and many commentators agree that values of homes above £1m have returned to pre credit crunch levels.
5) With the bank base rate remaining historically low, how do you think the market is going to be affected when they start to increase – will there be an onslaught of fire sales and repossessions? Interest rates cannot go any lower. Yet the market remains disturbingly unpredictable. Lenders have continued to show forbearance towards borrowers struggling to service mortgage debt. This is particularly true of the partly nationalised institutions for whom large scale repossessions would cause political embarrassment. Many have opted for the fixed charge receivership route to recovery. The appointment of a receiver leaves the mortgagor in possession whilst offering a fast track route to market to the lender. Our in house insolvency team specialises now in such a service and is one of the firm’s busiest departments. We see this continuing for some years to come.
6) Do you think the banks are acting sufficiently proactively to encourage the market (particularly as it was recently several major institution profit levels have seen increases in 2010)? Increased bank lending is absolutely key to recovery in the investment market. Yet there are only limited signs that this is easing. Lenders are continuing to take advantage of the massive arbitrage in lending rates in order to improve their balance sheets. Charges also have risen to record levels. These factors are stemming improvement in both the commercial and residential sectors.
7) With future base rate rises impending – how do you think property investors can best prepare themselves? Servicing debt should be a priority. Consequently, investors should keep a keen eye on gross to net yields. Income should remain the focus. Property inflation, when it comes, will not meet loan interest commitments.
8)What about the new regulation of housing finance – what kinds of strains to Allsops envisage being placed on the market as a result? Actually a tighter housing finance regime is to be welcomed. High loan to value debt was the major cause of distress in the market. It does seem, however, that we have gone from feast to famine.
9) In terms of due diligence for auction property purchasing, are there any new factors that need to be considered in a post-recessionary housing climate? As ever, homework is vital when buying at auction. We do everything possible to ensure that full legal documentation is available to buyers at an early stage of our marketing. Buyers are encouraged to view all lots where possible and to conclude finance arrangements before bidding. In this post recession climate, the increased volumes of distressed lots, whilst presenting new opportunities, are also creating challenges for buyers. Non cooperative sellers will often withhold important information such as tenancy terms or internal descriptions. Due diligence is difficult under such circumstances and buyers are often forced to take a view in the absence of confirmed details.
10) With a weak pound and a bottoming housing market – are Allsop witnessing an increased about of foreign buyers coming in to the market? Not noticeably. The mix of auction buyers has always been eclectic. Central London postcodes are, however, attracting overseas money for lots sizes above £1m.