When the property market peaked, before the sub-prime crisis in 2008, auctions were becoming the most popular method of sale in South Africa. This was for a good reason; they were achieving better prices than any other method of sale. There were two reasons for this, the first being quite simply that the market was flying, the other is that the auctioneers manipulated the price with ghost bids. Whilst Auction Alliance was singled out as the culprit, they were not alone.
The auction business has a long way to go before commercial and industrial property players will trust them again. This is a pity as auctions have an important role to play in the industry with their main reason for being in existence, the achievement of a quick sale. Yes, there is no doubt, if the property is particularly prime and there is a large pool of willing and able buyers, then the auction method can achieve the best price. This is not the case in the current market, bank finance is difficult to obtain and the pool of willing and able buyers has diminished substantially. The buyers that are attending auctions now and have cash or a willing banker are looking for bargains. The Auctioneers are taking smaller rooms in the hotels and the spectators (brokers, valuers, bankers, wannabees, amateur investors, networkers and the like), who usually occupy 95% of the venue, are losing interest in attending them. On-site auctions are returning and on line auctions are emerging. I believe the latter are much more difficult to manipulate and hence are trusted more than the “mass, hotel venue” auctions.
In normal markets, property auctions cater for two types of property sales:
1. Ultra prime properties 2. Distressed properties
There is a trend for unrealistic sellers (often those that overpaid for the property on auction in the boom times!) to try every method of sale and after the property has been over exposed; they take it to auction, thinking that the auctioneers can achieve a miracle. The property is then “sold”; subject to confirmation and the auctioneers try and hammer out a deal after the auction, usually unsuccessfully. The auctioneers use the “vendor bid”; to give the impression that the property was sold and to protect the “value”; of the property. We all know this is a complete waste of time for the seller, the buyer and the auctioneer. Buyers of commercial and industrial property are getting disillusioned with this process, hence the decline in auction attendances. Auctioneers should revert back to only taking on properties where the seller is realistic and motivated and the reserve is achievable or they stand to lose credibility. I also believe that vendor paid advertising should become the norm again, so that sellers are committed to the process. I believe that the broker community in general should take notice of this.
The vendor bid process is misused in South Africa as a means to create a false impression that the price achieved on auction was reasonable. It is my belief that a vendor bid should be announced by the auctioneer so that the other buyers in the room are aware that it is not a bid from the floor. If a buyer is not sure who he is bidding against, he should stand up and ask the auctioneer to point out the competing bidder! I also feel that if the reserve is not met and the property is not sold, the hammer should not fall “subject to confirmation”. The auctioneers should simply say, “the reserve for this property has not been met, so if there are no more bids, we will move to the next property”. Likewise, if there are no bids, the auctioneer must either clearly announce a vendor bid or say that “there are no bidders for this property, we will move to the next one”
So, back to the question of “is there a future for commercial and industrial property auctions in South Africa?” My answer is yes, provided that the industry can be transformed by adopting a transparent and ethical auction process to the extent that buyer and seller confidence is restored.
Guy de la Porte is an Independent Industrial Property specialist in Cape Town, South Africa