Buying commercial property from auction
If you are after a bargain in the commercial property market, an auction would be a good place to look. But thorough preparation is a must, warns Karl Cushing
Buying a property can be a stressful process, and never more so than when buying at auction. Time frames are tight, and there's always the risk that you're not entirely sure what you're getting. And then there's the fear that you'll accidentally buy something while raising your hand to scratch your ear. But while buying at auction may not be for the faint-hearted, it can be a great way to bag a bargain if you do your homework and know what you're doing.
Getting information
There's a whole host of companies offering hospitality property at commercial auctions around the country (see panel below). Most publish a list of their auction dates on their websites along with catalogues containing a list of properties and their "guide prices", which are usually made available online a few weeks before the auction. You can also pre-register for a catalogue to be sent to you.
Guide prices, as their name suggests, should serve merely as an indicator, as properties can go for much higher while the reserve price - the lowest price a buyer is willing to accept - should be either within the range, or close to, the guide price, and is usually not disclosed.
Properties sold at auction include repossessions and properties which are a bit quirky and difficult to value. Auctions are also a good place to find development opportunities, such as parcels of land for new-build opportunities or vacant premises that have been used for alternative purposes and are ripe for conversion.
And then there are the properties that need work. This is where it pays to be diligent when you view the property, as some properties may have all manner of problems, which explains why they have been put in an auction rather than sold via a conventional agent.
Why buy at auction?
It can be a bit of a hunt to find what you're after, though, as commercial auctions feature other types of property such as retail, and some auctioneers mix residential with commercial. But there are some major benefits.
Auctions offer a high degree of transparency, as once the hammer falls the winning bidder enters into a legally binding agreement with the vendor. Contracts are exchanged on the day, so there is no risk of the buyer being "gazundered". The buyer is then given just 20 working days to complete the purchase. While this can result in a mad dash to get finance and paperwork ready in the allotted 20 working days if you don't plan ahead, it also means you get your hands on the keys fast.
"It's very simple," says George Walker, a partner in the commercial auctions department of Allsop & Co, who says that "buying a commercial property at auction is like buying a jar of jam at a village fête".
James Cannon, head of auctions at Savills Commercial, points out that all the documentation for each property is provided upfront in the form of a legal pack, including details such as the title deeds, special conditions of sale and the searches. This pack should be available to view at the auction, but it pays to order a copy from the auctioneer in advance, and it also pays to get your legal expert to read it over and pinpoint any troubling areas, such as restrictive covenants. "It's all relatively straightforward," he says.
But not all properties are ripe to go under the hammer. "I wouldn't sell a decent hotel in the West End by that route, for example," says Cannon. "The properties tend to be at the smaller end of the market. Around 80% of the properties we sell in auction are bought by private investors. If you're a mom-and-pop operation, it's a good place to look."
Viewings
When you have seen a property or properties you are interested in, it's time to view. Typically, there will be set times when you can just turn up and view the property in a block viewing, based on a viewing schedule in the catalogue and on the auctioneer's website. As properties are usually ready to view only a few weeks before the auction, it really is advisable to see the property as early as possible to leave time to arrange surveys and finance.
Look around carefully, and try to assess the property's condition and consider any fixtures and fittings. If you plan to bid on a property, you should instruct a surveyor to view it before the auction - or at the very least take along a trusted builder or architect on a viewing to assess its state and guestimate the cost of any repairs. As Walker says, "You wouldn't buy a used car off the side of the road, so why do the same with a £500,000 property?"
Finance
If you are not paying cash, you will need to arrange finance. Arrange this in advance, getting an offer in principle before you attend the auction, and don't get tempted to bid above your budget on the day, otherwise you might not have enough cash to complete the sale. That said, a number of specialist firms offer short-term bridging loans to help you get through such sticky periods, although arrangement fees and interest rates can be expensive.
You will also need to have the cash ready to put down a deposit on the day if your bid is successful, typically 10% of the purchase price, in the form of a banker's draft or a cheque. You will also have to pay a fee to the auction house, typically a few hundred pounds. Be aware that if for any reason you aren't able to complete in time, you will be penalised and risk losing your deposit.
Auction day
On the day, you should arrive early, as this will give you a chance to check the "addendum" for any changes relating to the lot you intend to bid on and to check the legal pack if you haven't already. Along with a cleared banker's draft or cheque for your deposit and a cheque to pay the auction house, you will be required to bring ID so the auction house can comply with money-laundering regulations.
It makes sense to have a dummy run and attend an auction or two before you intend to bid - not least to get used to the blink-and-you'll-miss-your-lot pace. "It does get the heart going a bit," chuckles Walker. "The first-timer's mistake is they don't realise how quickly they get ownership of the property. You do see a few hands shaking as they write out their cheques."
While it is always advisable to attend the auction in person, if you can't make it on the day, you can arrange to bid by proxy or by telephone. Either way, if you are the highest bidder when the hammer falls on your lot (and your bid is higher than the reserve price), you will be on your way to ownership. A member of the auction staff will take your details, and after you have signed the necessary paperwork, including the memorandum of sale, and paid the deposit and auction house fee you will be given your part of the contract.
Or, as Walker more succinctly puts it: "If you keep your hand in the air long enough, you'll walk away with the contract."
Tips and advice
- Make a note of upcoming auction dates.
- Check that the property is vacant, as many are sold already tenanted as investment opportunities.
- View properties as early as possible.
- Read the legal pack and special conditions of sale relating to your lot very carefully. Preferably, run it by a legal expert.
- Attend an auction before you intend to bid to familiarise yourself with the process.
- On the day, arrive early to get a good place.
- Arrange a survey and instruct a solicitor before you attend the auction.
- Check in advance what forms of identification you will need to bring.
- Find out if you need to pre-register for the auction.
- Bring the correct form of payment - cash or credit cards are not accepted.
- Keep checking the auctioneer's website - some properties are withdrawn at the last minute or their details are amended.
- Don't bid unless you already have all of your finance in place, and don't go above your bid ceiling on the day.
Upcoming auctions
Colliers CRE
- London, 18 February
- South Yorkshire, 20 February
- North-west, 27 February
- www.ccreauctions.co.uk
Cushman Wakefield
- London, 27 February
- www.cushmanwakefieldauctions.com
Erinaceous
- London, 21 February
- http://auctions.erinaceous.com
Jones Lang LaSalle
- London, 26 February
- www.cmx.joneslanglasalle.com
Pugh & Company Commercial
- Manchester, 28 February
- www.pugh-company.co.uk
Savills Commercial
- London, 25 February
- www.savills.co.uk/auctions
The following auction houses sell the occasional hospitality property and might be worth a look:
- Eddisons Leeds, www.eddisons.com
- Strettons, http://auctions.strettons.co.uk
- Paul Fosh Auctions, www.paulfoshauctions.co.uk
- Edward Mellor, www.edwardmellor.co.uk
- Clive Emson, www.cliveemson.co.uk
Pros and cons of buying at auction
Pros
- You can grab a bargain.
- It's fast - you exchange contracts on the day and usually get the keys in just 20 working days.
- It's transparent - you can't be "gazundered".
Cons
- You could lose your deposit if your finance is not ready in time and you can't complete in the allotted time.
- Your property might need more work than you thought.
- You might get overexcited in the heat of the day and overbid.
Regional property focus: Devon and Cornwall
Devon and Cornwall have become a Mecca for operators looking for a lifestyle change in recent years. The majority of buyers are from outside the area, and high demand means businesses fetch a premium.
The two counties have also seen a lot of inward investment in recent years in places like St Austell, Plymouth, Exeter and Falmouth, backed by the relocation of some major employers, such as the Met Office, making it increasingly attractive to buyers.
On Devon's north coast, the tourism hot spots of Woolacombe and Croyde, with their excellent surfing beaches, and Ilfracombe, home of Damien Hirst's restaurant 11 The Quay, are always in demand, and prices start to rise as you head east across Exmoor to places like Lynton or Lynmouth.
On the south Devon coast Plymouth is a key focus, with waterfront developments like the Barbican attracting a lot of interest.
Paul Reilly, agency director at licensed property firm the Stonesmith Partnership, says: "There's been a lack of freehold pubs for some time and the leasehold market has dipped a bit because there are lots of properties on the market. Leaseholds go for £50,000 to £150,000, with freeholds fetching £400,000 and upwards."
Reilly sees most demand in east Devon, on the coast - "anything by water is always in big demand" - and areas close to the M5. Properties with rooms are particularly in demand. "Food and letting is today's market, especially since the smoking ban," he says.
Having sold a record £18m-worth of pubs in the first half of 2007, licensed property firm Bettesworth's has seen a cocktail of factors, including the impact of the smoking ban, interest rate rises and the wet summer, result in a hardening of the local market.
"There's a reasonable supply of properties coming on to the market, and anything on the coast or in a beautiful location or with good figures always attracts a good level of interest," says director Barney Bettesworth. "But although there is underlying demand, buyers are nervous. They're biding their time."
Graham Timmins, senior surveyor at Truro-based Miller Commerical, says prices in Cornwall have dipped by up to 30% in recent months. "We've seen masses of price corrections for both leaseholds and freeholds," he says, adding: "The froth has gone out of the market."
Typically, leasehold pubs in the county cost a minimum of £50,000 and freeholds start from £300,000.
Timmins says the hottest areas are around Truro and Falmouth, but the lack of available free houses means buyers are being forced to look further afield to areas such as Camborne and Redruth, which, though less desirable, have lots of chimney pots and are subject to a multimillion-pound regeneration project. St Austell, another major regeneration area, is another good bet.
Hot spots for restaurants include St Ives and Padstow, although demand is fierce and freehold pubs, in particular, rarely come on to the open market, Timmins says.
Generally speaking, demand in the area can be very seasonal, especially in the coastal areas, so if it's a year-round business you're after, then head for the urban centres such as Exeter and Plymouth.
