Poor auction result dents commercial market

DISAPPOINTING clearance rates at Sydney's largest commercial property auction last week have painted a bleak picture for small and medium-sized businesses.

By InvestSMART · 28 Jun 2010

By InvestSMART ·
28 Jun 2010

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DISAPPOINTING clearance rates at Sydney's largest commercial property auction last week have painted a bleak picture for small and medium-sized businesses.

Just four of the 28 properties, located around Sydney and regional NSW, sold under the hammer on Tuesday.

A property analyst, John Wakefield, described the clearance rate as "shocking" and an indication of the poor state of the commercial property market. "That is an extremely low clearance rate ... It is indicative of the poor sentiment at the mid and lower end of the business market."

The remaining 24 properties for sale either attracted no bids, were passed in, withdrawn from the market or had their auction postponed.

The properties that sold included an adults-only toy and book store on Oxford Street at Darlinghurst, a Harvey Norman store in Lithgow, a warehouse in Chippendale and an industrial workshop in Marrickville. The auctioneer, David Scholes, agreed the clearance rate had been "pretty miserable". But other property industry players, who asked not to be named, said it was the worst auction result in years.

The sale, at the City Auction Centre on Harrington Street, was hosted by Mr Scholes's company Auctionworks, which handles about 60 per cent of commercial property auctions in NSW.

The 14 per cent clearance rate was similar to those experienced at the height of the global financial crisis about two years ago, he said.

The low clearance reflected the big gap between the prices owners expected for their properties and what investors were willing to pay. "We are just on the cusp of owners being aware that they are going to have to adjust their prices a little. It's just a sentiment shift in buyers' attitudes," he said.

Properties that failed to sell included a Commonwealth Bank branch on the northern beaches, industrial units in western Sydney and cafes and retail outlets.

Many of the properties that were passed in failed to attract investors because the buildings did not have tenants.

The slump in sales was also attributed to the reluctance of banks to lend against commercial property. The policy is also harming the banks. The freeze on lending has meant banks have found it difficult to sell properties they have repossessed.

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Frequently Asked Questions about this Article…

What happened at the recent Sydney commercial property auction and what was the clearance rate?

The auction at the City Auction Centre in Sydney offered 28 commercial properties and only four sold under the hammer, giving a roughly 14% clearance rate. The remaining 24 properties attracted no bids, were passed in, withdrawn or postponed.

What does a low clearance rate at a commercial property auction mean for investors?

A low clearance rate signals weak buyer sentiment in the commercial property market, especially at the mid and lower end. It reflects a gap between what owners want and what investors are willing to pay, which can mean fewer immediate buying opportunities and more caution among everyday investors.

Which types of commercial properties sold at the auction and which ones failed to sell?

Properties that sold included an adults-only toy and book store on Oxford Street (Darlinghurst), a Harvey Norman store in Lithgow, a warehouse in Chippendale and an industrial workshop in Marrickville. Properties that failed to sell included a Commonwealth Bank branch on the northern beaches, industrial units in western Sydney, cafes and other retail outlets.

Why did many commercial properties fail to attract bids at the auction?

Many properties failed to attract investors because they did not have tenants, and there was a clear gap between owners' price expectations and what buyers were prepared to pay. The general reluctance of banks to lend against commercial property also reduced the pool of financed buyers.

How is bank lending reluctance affecting the commercial property market?

Banks' freeze or reluctance to lend against commercial property is shrinking the number of potential buyers who rely on finance. The article also notes this policy is harming banks themselves, because a lack of lending makes it harder for banks to sell repossessed properties.

Is the 14% clearance rate unusual compared with past market conditions?

Yes. Property analysts and the auctioneer described the 14% clearance rate as 'shocking' and 'pretty miserable.' The auctioneer said the rate was similar to clearance rates experienced at the height of the global financial crisis about two years earlier, and some industry players called it the worst result in years.

Who ran the auction and why does that matter to investors looking at commercial property sales in NSW?

The sale was hosted by Auctionworks and auctioneer David Scholes. Auctionworks handles about 60% of commercial property auctions in New South Wales, so results from their sales are a significant indicator of market sentiment in the NSW commercial sector.

What should everyday investors take away from this poor commercial auction result?

Everyday investors should be aware that commercial property sentiment is weak at the mid and lower end, prices owners expect may be above what buyers will pay, and financing is tighter due to bank reluctance to lend. These factors can affect deal availability, negotiation leverage and the importance of tenant occupancy when evaluating commercial investments.