Is Industrial Property a Good Buy at Auction Right Now?

Warren Buffett is credited with saying ‘be fearful when others are greedy and greedy when others are fearful’. By which he meant that it is better to invest in something when everyone is selling it, and vice versa.

Another way of looking at this is as a countercyclical investment strategy.

Property generally has proved itself to be the stereotypical cyclical market. So it is not unrealistic to think that it might also apply in property too. In this article, we will look at how this might apply to industrial property, and at whether the auctions might be the place to invest in it.

The current level of industrial values

Where are we on the cycle at the moment as regards industrial property values? A number of sources suggest that industrial property prices have been on a firm downswing in recent months.

For example, according to the MSCI UK Quarterly Property Index, the industrial real estate market experienced its greatest ever price falls in the second half of 2022. Capital values fell 26% between June and December 2022. The analysts says that ‘the sector has never recorded such a loss of value in such a short time.’

What drives industrial property values?

The drivers in the industrial market are generally a little more complex than the residential property market.

Prices in this sector are affected by factors including supply and demand, the state of the national and global economy, interest rates as they affect commercial borrowing and also refinancing existing loans. Consumer trends, such as the move to online retail are also relevant. Covid has added an extra dimension over the last few years.

Another factor affecting industrial values is yields. Many industrial buyers are investors, rather than occupiers, looking for a good return on their money – often compared to other ways of investing it. When interest rates rise investors look to get a higher return on their property investment. A way to achieve this is to pay less for a property, which pushes property values down.

Has the bottom been reached?

So then, are we at or near the bottom of the industrial property price cycle? And could an upswing be on the horizon? Some experts certainly seem to suggest so.

Nick Montgomery and Mark Callender at Schroders suggest that the makings of a recovery are starting to fall into place in the wider commercial market.

In their latest report they say: ‘UK commercial real estate has seen a sharp correction in prices over the last nine months. Capital values began to fall last summer and are now 21% below their peak in June 2022. That is the sharpest correction since the period immediately following Lehman Brothers failure in 2008.  The key question now for investors is how much further will prices fall before the market finds a floor?’

They say that key factors in the market of late have been the cost of borrowing and inflation. But add that the impact of these should moderate later this year, allowing capital values to find a floor over the summer at around 25-30% below their June 2022 peak. They add that a decline in shopping centre, leisure and secondary office rental values will be offset by a growth in industrial, retail park, prime office and residential rental values.

They suggest that this will encourage buyers into the market and potentially the market will start to rise: ‘The factors that will support a recovery in investor demand for UK real estate are starting to fall into place. Bond yields appear to have found a new post pandemic equilibrium, the UK has re-priced more quickly than other real estate markets and sterling has steadied. Admittedly forecasting is a dangerous business and predicting turning points is particularly hazardous.

‘However, we take comfort from the fact that previous recessions have immediately been followed by periods of strong real estate performance. If UK inflation continues to fall and the recession is relatively mild, then we believe investors should consider deploying capital later this year.’

Thoughts from the auctioneers

Now let us take in some thoughts from commercial auction experts. James Salmon at Allsop says, in their latest Commercial & Residential Market Update, that a fall in industrial values appears to be encouraging buyers to the auctions. He says: ‘After a severe pricing correction during Q3, buyer confidence is returning.

‘Newly completed transactions have set a new tone with prime yields pushed out by c.100 basis points (10-15% in terms of capital values) since the 2022 mid-summer peak.

‘Many sellers are still coming to terms with rebased pricing, limiting supply and ultimately deal flow.’

He continues: ‘The Allsop Industrial team had a busy close to the year selling the Seven Portfolio for Columbia Threadneedle to M7 Real Estate for £30m. They also completed the acquisitions of Powerhouse, Dartford for £25m and Port Road Business Park, Carlisle for £7.5m.

‘Many of the active buyers during the past 24 months have now returned to the market albeit in varying degrees. Several new opportunistic funds have entered the market aimed at capitalising on rebased pricing. Rebased pricing has led to a reduced pricing disconnect between overseas private equity and domestic property companies.’

In summary although, as the experts point out, forecasting any property market is always difficult it does seem that after a period of adjustment industrial property values are either at or near a low point. And that even in a period when the economy overall is still uncertain buyers and investors are now actively looking for opportunities.

Auctions are of course generally considered to be a barometer of the property market. So if industrial property does offer good value right now the auctions are most likely the place to find it.