Well, it depends on who you want at the party and the economic cycle.
What we have found is that auctioning commercial property in South Africa attracts a certain calibre of property investor and, more importantly, chases away another calibre of property investor.
So who is attracted? ... Predominantly, but not exclusively, the bargain hunter hoping to clinch property at a decent yield. These are invariably private investors on a specific budget with no specific property in mind. A vast majority of these investors are very professional and will have done a full due diligence ... but only to the extent of information available pre-auction.
So why do we not see more top property investors at auctions? It’s all about exclusivity, or near exclusivity, of information. Top property investors simply prefer to look at off-market, or near off-market, opportunities with a good chance of closing on a commercial property should it suit their profile. These astute investors are very specific, do intensive market research and will not be put into an auction arena to bid against their industry piers.
Having said that, the calibre of properties top commercial property investors pursue is very different from the small to medium size private investors. There is no distinct boundary between properties suited for small/medium investors vs. large private property investors, institutions and funds; however, it is safe to say budget plays a significant role. Top end investors lean towards high end properties of substance with voluminous GLA, good tenant profile and location whereas smaller investors are more yield driven with budgetary constraints.
So if smaller commercial property investments are more suited to the small/medium size investor, is it then appropriate to take such properties to auction? Well, here is where the economic cycle comes into play. With interest rates where they are at present, small/medium size property investors are finding it increasingly difficult to come up with the budget. They simply cannot afford the reserve price vs. the risk profile of the property, given that the finance house will advance a certain loan to value taking into account, amongst other things, the property's risk profile. Then there is the shortfall of net income after funding cost!
This dilemma will be evident to anyone following property auctions across the country. Bidders are being converted to look-see side liners as the economic cycle takes it toll with price expectations remaining where they were a year ago. In some instances, the auctioneer may come away with a sale or two but predominantly, sales are baseline.
This then brings into play another dilemma for the property owner....the property is now tainted as one that could not sell on auction and the entire market knows what the top bid price was. It is now unlikely that it will be sold at the reserve price, let alone the hope for above-reserve price.
The above scenario is generalised and there are some exceptions, however, we believe the risk is currently too high for sellers of commercial property to contemplate. The alternative old fashioned methodology is much more palatable...place the property with a commercial property specialist broker who is honest enough to council on pricing and recommend not going to market if the price expectation is not in line with the market.
Should the reason for selling be property specific, avoid being tempted into non-disclosure of negative impact information. Such information will come to market at some stage which more often than not leads to damaged reputations. It could also result in costly litigation post due diligence and transfer.
Profile the property to 10 suitors. The broker can either consult direct to database, mail to database or via web promotion. The trick is to close off with 10 genuine suitors to give a high degree of exclusivity. If one of these suitors does not purchase the property, there is something amiss. Take to heart the feedback, remove the property from the market and try a year later. If the sale is imperative, let one of the 10 have it on terms negotiated.
What we have found is that auctioning commercial property in South Africa attracts a certain calibre of property investor and, more importantly, chases away another calibre of property investor.
So who is attracted? ... Predominantly, but not exclusively, the bargain hunter hoping to clinch property at a decent yield. These are invariably private investors on a specific budget with no specific property in mind. A vast majority of these investors are very professional and will have done a full due diligence ... but only to the extent of information available pre-auction.
So why do we not see more top property investors at auctions? It’s all about exclusivity, or near exclusivity, of information. Top property investors simply prefer to look at off-market, or near off-market, opportunities with a good chance of closing on a commercial property should it suit their profile. These astute investors are very specific, do intensive market research and will not be put into an auction arena to bid against their industry piers.
Having said that, the calibre of properties top commercial property investors pursue is very different from the small to medium size private investors. There is no distinct boundary between properties suited for small/medium investors vs. large private property investors, institutions and funds; however, it is safe to say budget plays a significant role. Top end investors lean towards high end properties of substance with voluminous GLA, good tenant profile and location whereas smaller investors are more yield driven with budgetary constraints.
So if smaller commercial property investments are more suited to the small/medium size investor, is it then appropriate to take such properties to auction? Well, here is where the economic cycle comes into play. With interest rates where they are at present, small/medium size property investors are finding it increasingly difficult to come up with the budget. They simply cannot afford the reserve price vs. the risk profile of the property, given that the finance house will advance a certain loan to value taking into account, amongst other things, the property's risk profile. Then there is the shortfall of net income after funding cost!
This dilemma will be evident to anyone following property auctions across the country. Bidders are being converted to look-see side liners as the economic cycle takes it toll with price expectations remaining where they were a year ago. In some instances, the auctioneer may come away with a sale or two but predominantly, sales are baseline.
This then brings into play another dilemma for the property owner....the property is now tainted as one that could not sell on auction and the entire market knows what the top bid price was. It is now unlikely that it will be sold at the reserve price, let alone the hope for above-reserve price.
The above scenario is generalised and there are some exceptions, however, we believe the risk is currently too high for sellers of commercial property to contemplate. The alternative old fashioned methodology is much more palatable...place the property with a commercial property specialist broker who is honest enough to council on pricing and recommend not going to market if the price expectation is not in line with the market.
Should the reason for selling be property specific, avoid being tempted into non-disclosure of negative impact information. Such information will come to market at some stage which more often than not leads to damaged reputations. It could also result in costly litigation post due diligence and transfer.
Profile the property to 10 suitors. The broker can either consult direct to database, mail to database or via web promotion. The trick is to close off with 10 genuine suitors to give a high degree of exclusivity. If one of these suitors does not purchase the property, there is something amiss. Take to heart the feedback, remove the property from the market and try a year later. If the sale is imperative, let one of the 10 have it on terms negotiated.
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