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This report is the latest in our series charting the evolution of the UK's commercial auction market and trends in private sector investment. The report utilises IPD and Jones Lang LaSalle's research capability with data from EIG.
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Q4 2010
UK Auction Results
Analysis System Report
(ARAS)
The UK economy unexpectedly contracted by -0.5% in the fourth
quarter of 2010, the first contraction since Q3 2009. Growth was
mainly hit by the severe weather conditions in December. On the
positive side, record-low interest rates, a competitive pound,
modest recovery in global trade and buoyant manufacturing
sector are expected to underpin growth in H1 2011.
In the wider UK commercial property market, volumes of
occupier demand for offices fell at the end of 2010, however
demand for distribution style units reached a ten-year high. The
British Retail Consortium reported a decline in like-for-like sales,
yet a number of prominent retailers experienced a bumper
Christmas.
The Auctions sector ended 2010 with a significant uptick in
performance: sales rates returned to figures seen at the start of
the year, large lot sizes experienced an increase in demand and
yields hardened for both prime and secondary properties.
2 On Point • UK Auction Results Analysis System Report • Q4 2010
ARAS Results
Economic Overview
Although many were expecting a soft number, the 0.5% decline in
Q4 GDP took all by surprise and was well below the median market
forecast of 0.4% growth. The underlying weakness suggested in the
latest figures point to consumers reining back their spending in the
face of higher prices, subdued wages growth, looming public sector
cuts and job insecurity. Despite a sluggish economy, the Consumer
Price Index (CPI) continued its upward trend, reaching 3.7% in
December 2010 from 3.3% a month earlier.
The outlook for the labour market remains bleak in 2011 due to a
combination of below-trend growth, weak business confidence, and
significant cuts in public spending. The latest labour market data
remain mixed. The claimant count fell further by 4,100 in December
following a drop of 1,200 in November. This took the total down to a
20 month low of 1.46 million. The unemployment rate in the UK
remained unchanged at 7.9%.
A more encouraging implication for recent weak growth numbers is
that, despite headline inflation well above the Bank of England’s
target, it is now unlikely we will see a rate hike until the economy is
firmly back on a growth path. Maintaining the base rate at 0.5% will
help to contain mortgage rates, although the outlook for mortgage
lending shows little sign of improving in H1 2011.
Sharp Recovery in Sales Rate
568 properties were offered in the Auction room in Q4, of which 423
sold reflecting a sales rate of 75%. This is marginally below the long
term average, as can be seen in the chart below and brings the
sales rate in line with figures seen at the start of the year. Retail lots
continued to dominate the room in the final quarter of 2010,
accounting for 64% of properties offered. The number of pubs
brought to auction increased again in Q4, accounting for almost
10% of the total number of properties offered in the room. This
represents a 42% rise from levels seen at the end of 2009.
Amounts realised in Q4 2010 are 25% down on Q4 2009 levels.
This uncertainty is in line with sentiment in the wider commercial
property market: the Q4 Jones Lang LaSalle Investor Confidence
Index remained static for a further quarter in December 2010.
Sale Rate 1985 – 2010 and Long Term Average
50
55
60
65
70
75
80
85
90
95
Q1 1985
Q3 1987
Q1 1990
Q3 1992
Q1 1995
Q3 1997
Q1 2000
Q3 2002
Q1 2005
Q3 2007
Q1 2010
%Sale Rate
Long Term Average
Source: IPD; Jones Lang LaSalle, EIGroup
Total number of properties sold this quarter approaching the
long term average
Pubs and bars remained popular lots with purchasers in Q4, turning
over more than office and industrial lots combined, but amounts
realised were 18% down on the same period in 2009. 51 pub and
bar lots were offered in Q4 2010, a 42% increase on 2009 figures
and was the only sector not experience a decline in the number of
properties brought in to the room over the past year.
This is contrary to activity witnessed in the wider investment market:
the Jones Lang LaSalle Capital Flows model confirms that office
assets attracted the greatest direct investment volumes in 2010.
Large Lots Back in Demand
All lot sizes experienced an increase in demand in Q4, with the
greatest proportion of sales (17%) occurring within the £100,000 -
£199,999 bracket. This is in line with figures from the previous
quarter. The waning in demand for large lots over £1m seen in Q3
was reversed in the final three months of 2010, with the number of
properties in the room exceeding this value increasing from 25 to
59.
Yields Move in Across the Board
ARAS yields moved in during the final quarter of the year for both
prime and secondary properties. Yields for prime properties reflect
the greatest increase in confidence, moving in 17 basis points to
5.48%. The margin between prime and secondary yields widened by
10 basis points in Q4, after a slight contraction in the previous
quarter but secondary yields remain the most volatile. The ARAS
average yield remained static in the final quarter of 2010, at 7.31%.
On Point • UK Auction Results Analysis System Report • Q4 2010 3
ARAS Lower and Upper Yields
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Q1 19
85
Q3 19
87
Q1 19
90
Q3 19
92
Q1 19
95
Q3 19
97
Q1 20
00
Q3 20
02
Q1 20
05
Q3 20
07
Q1 20
10
% ARAS Lower Yield ARAS Upper Yield
Source: IPD; Jones Lang LaSalle, EIGroup
The margin between prime and secondary yields widened
slightly by 10 basis points this quarter
The distribution of properties sold across the yield bands in Q4 was
relatively evenly balanced, with 14% achieving yields sub 5% and
19% sub 6%. This is in contrast to figures collected for Q3, where
the majority of lots in the room achieved yields of between 6% and
7%.
“Bank” Tenants Back in Demand
Yields achieved on retail properties in Q4 recovered from the slight
softening seen in Q3, moving in 18 basis points to 7.28%. Office lots
also enjoyed a strengthening in demand, with yields hardening to
8.06% from 8.64% in the previous quarter, in line with the Jones
Lang LaSalle Capital Flows model. A softening in yields was seen
for industrial and pub lots brought to the room, most notably for pub
and bar properties, which moved out 30 basis points to 6.88%.
In line with figures seen in the previous quarter, properties with
“Independent” traders (usually occupying secondary assets)
accounted for the greatest proportion of properties selling in the
room (41%) in Q4, reflecting a coming together of pricing opinions
from purchasers and vendors. The number of lots with “Bank”
tenants increased significantly in the final quarter of 2010. The
strong demand for properties with “Bank” tenants was evidenced by
yields for these lots moving in 62 basis points to 5.65%. This
indicates that investor confidence is returning whilst vendors are
also pricing their assets more realistically.
In the final quarter of 2010, properties with leases of between 10
and 14 years hardened to the greatest extent, moving in 76 basis
points to 6.49%. This yield band was the only group where yields
moved in compared to figures for Q4 2009. Lots with unexpired
leases of 5 years or less have seen the greatest softening, moving
out one percentage point over the past 12 months.
Prices in the Auction Room Fall for Three Consecutive
Quarters
The ARAS Retail Property Price Index (RPPI) fell for the third
consecutive quarter in Q4, down to 111 from 117 in Q3. The
slowdown of the IPD Shops Capital Value Index seen in the
previous quarter continued in to Q4, with the Index remaining static
at 127.
RPPI vs IPD Shop Capital Value Index
80.0
90.0
100.0
110.0
120.0
130.0
140.0
150.0
160.0
170.0
2003
2004
2005
2006
2007
2008
2009
2010
Decem
ber 1990=100
ARAS RPPI IPD Shop CVI
Source: IPD; Jones Lang LaSalle, EIGroup
Shop prices in the auction room fell this quarter by 5.1%
Outlook
Despite the ongoing uncertainty seen in the economy and wider
commercial property market, the Auctions sector ended 2010 with a
significant uptick in performance: sales rates returned to figures
seen at the start of the year, large lot sizes experienced an increase
in demand and yields hardened for both prime and secondary
properties.
The price expectations of purchasers and vendors have harmonised
over the past quarter to a far greater extent that seen in the Q3
results. The anticipated unwinding of bank receiverships and
distressed-debt situations will continue to bring good quality lots in
to the room, which when combined with the attractive yields
currently being achieved, will further strengthen interest and
demand in the sector. Now more than ever banks with non-
performing loans will listen closely to Auctioneer rhetoric as part of
their decision making process.
In the wider property market, after the rapid bounce back in capital
values in 2010, we expect 2011 to be relatively more subdued.
Further rental growth will return to more asset classes and more
locations, providing the product is good and the supply environment
is favourable.
Jones Lang LaSalle Contacts
Eleanor Jukes
Senior Analyst
EMEA Research
London
+44 (0)20 3147 1624
Jimmy Bell
Associate Director
National Investment and Auctions
London
+44 (0)20 7399 5953
IPD Acuitus Ltd
EI Group
Shan Lee
Research Manager
IPD
1 St John's Lane
London
+44 (0)20 7336 9345
Richard Auterac
Chairman & Auctioneer
Acuitus Ltd
Real Estate Auctioneering & Investment
+44 (0)020 703 4851
David Sandeman
Essential Information Group
Managing Director
Charter House, 9 Castlefield Road,
Reigate, Surrey, RH2 0SA.
01737 232289
OnPoint reports from Jones Lang LaSalle include quarterly and annual highlights of real estate activity, performance and specialised
surveys and forecasts that uncover emerging trends.
Essential Information Group (EI Group) has collated full information on every property that goes to auction since 1991. Currently there
are over 400,000 lots with over 70 searchable fields for each lot in the database
IPD aims to increase real estate market transparency through independent and comparable performance analysis with investors, managers,
consultants and occupiers globally.
www.joneslanglasalle.co.uk
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