HOW DO AUCTIONS FIT INTO THE SOUTH AFRICAN PROPERTY PUZZLE?

HOW DO AUCTIONS FIT INTO THE SOUTH AFRICAN PROPERTY PUZZLE?

By Michelle Funke

Auctions in South Africa have typically been viewed as an effective means to dispose of properties in liquidation or deceased estates, but auctioneers believe that auctions always have, and always will be, a viable way of selling property. Property Professional did a Q&A with four of the country’s leading auction companies to get their views

Lightstone findings on auctions as a sales mechanism for distressed properties

Lightstone, a provider of comprehensive data, analytics and systems on property, took a look at the behaviour of distressed homeowners who could no longer afford the monthly mortgage payments and were issued with a Sale in Execution notice (SIE).

Lightstone’s findings showed that the Distressed Sales Factor (DSF) of distressed sales that transact in the market are on average 13.2% higher than the DSF of properties sold at auction. The findings also indicate that the average DSF for properties currently sold at auction is 55% (slightly up from 53% in 2012) and that of market transactions being 68% (slightly up from 66% in 2012).

Another implication of this finding is that a distressed property transacting in the market will fetch on average 24% more than it would at an auction.

Hayley Ivins Downes, head of property at Lightstone, says that a possible reason why the DSF of market transacted distressed sales are higher than that of auctioned distress sales is due to different forms of supply and demand dynamics. “There are, for example, more potential buyers who participate in distressed market transactions than there are at auctions,” says Downes. “This increase in the competition should in general lead to an increase in the DSF of a property. The demand for properties in some suburbs is, however, very high, which makes it possible for a distressed property to be sold before the indicated date of auction. If the demand for a distressed property is very high, the distressed owner should be able to sell the distressed property at a value closer to market value.”

This difference between the median DSF of auctioned and market distress sales has been constant over the period of 2007 and 2012 and is not currently decreasing.

When comparing the DSF of market transacted and auction distressed sales it is clear that market transacted distressed sales sell at a price closer to market value than those properties sold at auctions. Downes notes that even if the property is situated in a suburb where there is a lower demand for properties, the market still outperforms auctions by about 10%.

Jonathan Russell Smiedt - ClareMart Auction Group

Jonathan Smiedt, CEO of ClareMart Auction Group

Q:        What, in your opinion, is the difference in perception between residential property auctions and commercial property auctions and is the perception correct?

A:        There has traditionally been a perception in the minds of the public that most residential property being marketed by auctioneers falls within the distressed sale category. Contrary to that belief, the public has in the past also maintained a perception that auction was the mechanism of choice to sell commercial property – a perception substantiated by our group submitting up to 35 investment properties at our monthly multiple auctions. In reality, these perceptions are not entirely true as we are often instructed by private sellers of residential property, who simply prefer the auction vehicle as a means of sale, and likewise we are marketing various commercial properties within our deceased estate, legal instruction, liquidation and insolvency estate categories.

Q:        What percentage of your auctions are distressed sales versus ‘normal’ sales in both the commercial and residential market?

A:        Regarding commercial property, approximately 90% of our mandated properties are private and 10% distressed instructions. We are seeing that, on average, 60% of our residential instructions come from the private sector and 40% are of a distressed nature. This percentage has a variance, though, as we find that many of our properties in excess of a R3-million mandate price tend to come from private sellers.

Q:        What would your response be to Lightstone’s findings?

A:        We consider the Lightstone’s findings surprising as our group has often sold property on auction for a far higher price than the property was able to achieve during the real estate mandate period. Some properties, both distressed and private instructions, have at auction achieved prices in excess of 30% of the expected outcome.

It is also important to note that the understanding of a distressed sale may differ between the two industries.

Also, distressed sale prices must always be viewed against the actual situation. For a distressed seller who cannot find a buyer through the out-of-hand process, a result at any reasonable price level would be a success. Auctions often provide this ability to conclude a sale where traditional sales methods could not produce any form of result. Prices used to compare with auction sale prices are often the advertised price and this is a figure that is often not achievable.

Finally, it should be taken into account that the Lightstone assessments are based on computerised averages and as valuers, we find these online average ‘values’ have the potential tendency to inflate or deflate the true prices in a particular area. Two adjacent properties can be quite different in accommodation and facilities offered and this is not always borne out in sales data, however the impression may be created with the averages that this type of comparative is correctly applied, which is not always the case.

When it comes to the difference between the median DSF of auctioned and market distressed sales being constant over the period of 2007 and 2012 and not decreasing, we are once again not experiencing this observation by Lightstone. We have seen that over the past few years there has been a steady decrease in distressed instructions, particularly insolvencies and liquidations, as many of the banks have developed internal structures to assist their clients in debt and financial management.

Q:        Do you believe the auction platform reflects a more realistic picture of the property market? Please explain the reasons for your answer

A:        Yes, the auction platform is an excellent barometer of market conditions as whenever there is an upswing in the economy and related property market, we see huge demand for luxury and development property, for example. When there is a downturn economically, which naturally creates adverse effects on the property market, we see a higher incidence of distressed properties on our auction floor.

Q:        What, in your opinion, is the benefit of an auction as a sales platform – for both residential and commercial property?

A:        For both property categories transparency is the fundamental advantage with auction. Seeing the demand for a property by the amount of bidders bidding on it and the level of demand in the prices that are being bid all gives the indication of the market worth of that property. That cannot be achieved in a signed offer where the bidder is competing against unknown competitors offering unknown amounts.

Also there is the immediacy element of an auction, which also benefits the highest bidder in knowing that his or her bid will be taken under serious consideration by the seller and confirmed within the stipulated timeframe. There is a peace of mind in knowing whether your bid will be considered or not. This allows buyers to continue their search for the ideal property and not lose out on other opportunities.

These ‘other opportunities’ are another advantage apparent only at auction. There are a few select premier auction houses that facilitate multiple residential and commercial auctions to showcase their entire portfolio. That means that the bidder sees all the opportunities available as opposed to having one agent guide them to his personal stock only, thereby limiting the bidder’s scope and opportunity.

We also believe that the marketing capabilities, methods and reach used by auction houses casts a wider net and often yields more favourable results.

Finally, there is a growing need in the market for arm’s length deals, where sellers are able to dispose of their property without lengthy and complicated marketing, viewing and negotiation processes with brokers. Auctions allow for a method of sale whereby the seller is presented by the auctioneer with a cash offer that is secure as opposed to a broker presenting an option that may have several suspensive conditions attached. It is important to note here that auctioneers are subject to the same rules of conduct and code of ethics as real estate brokers. It is only the method of sale that differs and creates a comparative in the mind of the consumer.

Q:        How do you see the future of the auction industry in the South African real estate context?

A:        Personally, after 30 years in the industry, I can say that I have seen a total shift in buyer confidence due to ongoing consumer education on behalf of reputable auctioneers, which has resulted in more sellers and buyers utilising the auction mechanism. Auction has become far more competitive over the years and the levels of service have altered and increased dramatically to accommodate that growth.  In the past, a successful auction house could operate on a complement of less than 10 staff members. In today’s competitive and service driven arena, you will find that leading auction houses operate with in excess of 30 or 40 staff members. This should indicate the growth factor evident in the industry. Furthermore, auctions are attracting crowds unseen in previous years with unprecedented attendances of over 200 members of the public being present at many of our auctions.

What is also a sign of an industry that is healthy and being accepted as an effective sales vehicle for quality property is that we are seeing double the amount of properties on our auction floor as well as properties that have infinitely higher values than previously seen at auctions. An example of this would be our sale this year of the Blaauwberg Hotel, which was sold for R57.57-million inclusive. This is arguably one of the highest prices achieved for commercial property so far in 2013.

In today’s climate, we are seeing up to 100 homes and commercial properties being auctioned on a monthly basis. This shift and growth is evident and is quantifiable even in the past five years. Lastly, the mechanism is steadily becoming the first choice of asset disposal for many large corporate institutions and likewise this trend is gaining ground in the private sector as well and correlates with the growing market demand for arm’s length negotiation.

Rob Whitely - Rawsons Auctions

Rob Whiteley, Managing Director of Rawson Auctions Johannesburg

Q:        What, in your opinion, is the difference in perception between residential property auctions and commercial property auctions, and is the perception correct?

A:        Mention the word ‘auction’ and everyone immediately transposes the word with ‘bargain’. While this is true at some auction events, the property industry has, for many years, disposed of immovable assets through this method – at prices often far in excess of the seller’s expectations.

Q:        What percentage of your auctions are distressed sales versus ‘normal’ sales in both the commercial and residential market?

A:        Let’s qualify one thing. All the properties (whichever asset class) are not always in distress when we put them on auction. The vast majority are there because the seller is motivated to sell within a short time window. They may be leaving on a jet plane, emigrating to greener grass or downsizing due to empty nest syndrome and have already bought elsewhere. The reasons for selling are diverse – but the motivation for selling at auction is universal – to achieve a market related price within a defined time period.

While bank repossessions are far more common in the residential asset class, commercial buildings (shopping centres, petrol stations, warehouses etc) also appear on liquidators’ lists. We tend to find that the ratio of distressed residential to distressed commercial auction sales is approximately 10:1 or even more.

All these properties, though, have to be sold as quickly as possible in order to minimise liability costs and maximise the sale price and the only method of sale that can reasonably achieve this is by way of public auction (as opposed to a Sheriff’s auction – which is far more onerous for the seller).

Q:        What would your response be to Lightstone’s findings?

A:        We have always found that good properties fetch good prices and, at an auction of around 30 bank-repossessed residential properties, which were all held on site at each property, we achieved an average of 80% of market value and a clearance (acceptance) rate of 83%.

A leading bank quotes the average figures of 57% of value if the property is sold by the Sheriff. Add to this all the acrimonious discord that accompanies this type of sale, the court appearances, the disharmony within the family etc, and you begin to understand why the distressed seller prefers the ‘friendly auction’ route before the Sheriff knocks on their door.

Q:        Why do you believe the auction platform reflects a more realistic picture of the property market?

A:        Property auctions are the only true indicator of current market value. They attract a motivated and qualified buyer and the price they bid is the price that the market is prepared to give for that property, on that day. If the value achieved at auction is lower than expected, it usually means one of two things: There were no real, motivated buyers, or the property simply as not a good one (there’s no demand for it).

Q:        What, in your opinion, is the benefit of an auction as a sales platform – for both residential and commercial property?

A:        We are finding a substantial increase in the demand for non-distressed residential auctions coming from sellers who are tired of Sunday show days and non-motivated buyers appearing at 6pm wanting to warm their feet. Sure, buyers normally have to view the property before they bid (although some don’t) but marketing a property auction is short and sweet – normally taking place over the two weeks or so leading up to the auction, so inconvenience is minimised.

Commercial non-distressed sellers have seen the auction method as a primary course of sale for many years – many opting only for this process to achieve a quick disposal. They like the fact that they can control the whole process, from sale conditions (deposit amount, guarantee date etc) up to the date and time of the event.

Q:        How do you see the future of the auction industry in the South African real estate context?

A:        Property auctions have come a long way in South Africa in a relatively short space of time and are now regulated by the Consumer Protection Act (CPA) and the Estate Agency Affairs Board (EAAB), giving both the seller and buyer alike a high level of security  and confidence when dealing with an auction house. Terms and conditions, like in the television commercials, also do apply, but they have to either be read out at the auction, or be available in hard copy so that everyone is aware of them before they bid.

Roy Lazarus - Park Village Auctions

Roy Lazarus, CEO of Park Village Auctions

Q:        What, in your opinion, is the difference in perception between residential property auctions and commercial property auctions and is the perception correct?

A:        I don’t believe there is a difference in the perception towards residential and commercial property. In South Africa, there is a perception that property auctions, residential or otherwise, stem from a distressed scenario, but this no longer applies. Increasingly, we are seeing more people and businesses voluntarily going the auction route to sell their properties.

Q:        What percentage of your auctions are distressed sales versus ‘normal’ sales in both the commercial and residential market?

A:        Approximately 50/50.

Q:        What would your response be to Lightstone’s findings?

A:        Generally speaking, we have found that the properties we sell at auction achieve similar or higher values to those achieved via traditional channels. Indeed, we have a vested interest in achieving the highest possible values, which is why we market our properties (and assets) so extensively and create as much hype as possible. It is worth noting that Lightstone’s findings support my initial statement that, increasingly, auctions are not being used purely as a sales mechanism for forced sales.

Q:        Do you believe the auction platform reflects a more realistic picture of the property market?

A:        In a nutshell, yes. In our case, we field properties across the spectrum. As such, we are in tune with market trends and limitations and can therefore market properties appropriately.

Q:        What, in your opinion, are the benefits of an auction as a sales platform – for both residential and commercial property?

A:        There are myriad benefits to selling property via auction. For example, properties are marketed to large, receptive audiences; auctions bring together qualified buyers prepared to buy; there are no suspensive conditions or loose ends and transactions are brought to finality quickly.

Q:        How do you see the future of the auction industry in the South African real estate context?

A:        At present, the real estate industry as a whole is somewhat over-regulated and we’re hoping that the processes will be streamlined. In terms of the auction industry, we have every confidence that South Africa will follow Australia’s lead, where auctions are the sales mechanism of choice.

Aucor 9 July 2012

Mark Kleynhans, Director of Aucor Property

Q:        What, in your opinion, is the difference in perception between residential property auctions and commercial property auctions and is the perception correct?

A:        There definitely is a difference in perception from a buyer’s point of view between the two categories. Historically distressed residential auctions carry the stigma of debt, a person losing their assets due to financial implications, such as repossession or death as in the case of deceased estates. Commercial property, however, is viewed very differently. Firstly, it is important to point out that the market of commercial buyers is a completely different demographic to buyers within the residential sector. The auctioning of commercial property is seen in a positive light as savvy buyers understand that true values are driven by the auction process and it is an effective, dynamic and non-suspensive environment that brings numerous benefits to both buyers and sellers alike. This view is a more accurate reality of the auction industry and process and in reality residential properties on auction benefit from these same advantages.

Q:        What percentage of your auctions are distressed sales versus ‘normal’ sales in both the commercial and residential market?

A:        Aucor Property specialises in commercial, industrial retail and residential properties across the spectrum, however, we have a very low percentage of distressed properties on our books. Currently the figure stands at approximately 2% of total sales. We proactively seek to work with listed property funds, large corporates and private individuals looking to buy and sell property in order to grow their investments or consolidate their current portfolios. For us it is about more than just taking a property to auction, it is about strategically understanding our clients, their needs, the market and demand.

Q:        What would your response be to Lightstone’s findings?

A:        Statistics and the figures quoted do present a slightly one-sided view of the market. In our opinion it is fundamental to balance the value of time and money in this process. Often sellers will hold out for as long as possible to try and achieve the best price for a distressed property by selling via private treaty. The situation is completely different once a property has been repossessed and the banks or liquidators need to get a quick sale and turnaround and that is when you see these properties coming to the auction floor. In reality, again, this is where the market really does dictate the price and value but, to reiterate, the benefit is that the bank/liquidator knows that the sale will be quick and non-suspensive and therefore it is a route they generally prefer to take.

Q:        Do you believe the auction platform reflects a more realistic picture of the property market?

A:        Absolutely – the auction floor is a real reflection of what price the market is willing to pay for a property and therefore what the perceived value of that specific property is.

Q:        What, in your opinion, is the benefit of an auction as a sales platform – for both residential and commercial property?

A:        The benefits are common to both sectors for both buyers and sellers. The auction process provides the seller with a quick channel to market. Properties that are listed are usually taken to auction within a four-week cycle as opposed to the traditional method of selling property, where a property can be on the market for up to 20 weeks with no or little interest. Furthermore, sellers benefit from a situation where there is a collection of buyers in one room at one time, making the process more effective in reaching a wider market. Lastly, the sale is non-suspensive and the buyer has to be organised before coming to an auction in terms of financing, bonds etc.  From a buyer’s perspective, properties can be purchased at a fair market value and the buyer knows that the seller is committed and is not just testing the market.

Q:        How do you see the future of the auction industry in the South African real estate context?

A:        We believe that the auction industry is going to continue to grow as a preferred tool for buying and selling of properties and we will do our part to educate the market on the benefits of using the auction platform to help grow the category. In global markets, auctions are the only way to buy and sell property (Australia is an example) and as new trends and techniques develop, so we will encompass those into our business and market to further develop the channel.

 

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