Finance, Banking and Insurance Magazine (Asian Voice), June 2010
The commercial auction market has seen a rapid change in fortunes for many and with that has brought about more cautious investors into the room. In the years leading to the boom in 2007, many novice investors were attracted to the room due to the liquidity present as a result of the irresponsible lending on behalf of the banks. Subsequently prices were driven up for not only prime blue chip investments but also the more risky investments in secondary or even tertiary locations. At one stage there was not a big difference in the yield profile between prime investments and secondary investments and yields of 5% were considered the norm. Therefore if an amateur investor bought anything at a yield of 6%, it was considered a bargain regardless of location, tenant profile or even lease length. The novices were seen to be out bidding many auction regulars and this was all down to the banks unrestricted lending criteria’s.
One must also bear in mind that the interest rates were in the region of 4% plus the bank’s margin on top so there was no real cash outflow from the investments. This still did not discourage the general investors as banks were giving you up to 80% loan to value on pretty much any investments so it seemed to make sense that by gearing up to these levels one could have access to an investment that normally would not be within their financial capabilities and to add to that they were doing so on an interest only basis so the mortgage was just about covered by the rent.
The problem with the over gearing was that it created a false market as once the recession came upon us, values had gone in the opposite direction as liquidity had all but dried up. Banks tightened the screws on their lending criteria therefore as a result investors were not able to buy the secondary riskier assets as readily as before. The banks have now become extremely risk averse and will not lend on anything with a lease of less than 5 years to secondary tenants. As a result of all of this we are now seeing secondary yields moving out drastically from prime investments.
The many investors who purchased in the height of the market particularly with investments in secondary location to secondary tenants have seen their values plummet up to 30%-50%. There have been many scenarios where the banks have requested the investors to inject capital into the assets to meet their loan to value ratios otherwise they would be in breach of their loan agreements and this would result in the banks repossessing the properties. For the relatively new investors who put his hard earned savings into properties at the height of the market will most definitely think twice before buying in the auction.
We are now seeing the values of prime investments increasing as banks are lending up to 65% loan to values on investments let on good leases to solid covenants. The terms are different as capital repayments are required but it is evident at these levels that the bank’s position is safe if ever a crash were to happen and also the investors position is also safe as he will be under less pressure from the lenders to meet the loan to value ratios.
The positive position of the markets now is that with record low interest rates, investors who acquire investments today will be seeing a positive cash flow after interest and capital repayments.
Auctions offer transparency to many investors and allow the novices’ access to properties that they otherwise would not be able to obtain. It is a simple way of marketing properties to the general public and puts everything down in a very manageable way of understanding what is on offer. The private treaty markets act very different and many deals are done purely on the basis of a strong relationship with the selling agent. There are strict time restrictions with auction properties and in general once the hammers falls you have 4-6 weeks to finance the deal and complete.
What the recession has taught us is to be selective on what you buy and not to think that by buying in the auction you will acquire a bargain as many have found out. It is also important that you seek the necessary advice on any investment before going into the room and simply putting up your hand. That finger in the air or wave of the catalogue could be your costliest mistake.
By Vishal Patel