Major new Liquidity Project findings Published
8 October 2014
The results of a major research project "Which Properties are More Liquid?" have now been published. The report, which was funded by The Investment Property Forum (IPF), is co-authored by Dr Steven Devaney from the School of Real Estate & Planning and Dr David Scofield from the University of Aberdeen.
Which Properties are More Liquid?
While the concept of liquidity is well understood by investors in commercial property – the ability to buy, or sell, without disturbing the price – it has proved very difficult to measure. This latest research from the IPF provides valuable new evidence on liquidity by measuring the time it takes to buy and sell commercial properties. While some research has been carried out before, this is the first time that a comprehensive study of both purchases and sales has been undertaken in the UK. The study was commissioned by the IPF from a joint team from Aberdeen and Reading universities and is based on a large sample of nearly 600 commercial transactions, stretching over a nine year period from 2004 to 2013. The wealth of data has enabled the research team to look at variations in liquidity across different types of property and through different phases of the cycle, from boom to bust.
- There is considerable variation around median times, but the median time recorded for purchase, from introduction through to completion, was 104 days, i.e. three to four months.
- The median time for sale, from marketing through to completion, was longer at 135 days (four to five months), reflecting the time spent on the market before the eventual buyer was introduced.
- Market state has an important explanatory role, with slower transaction times recorded since the UK market crash in 2007-2008.
- Transactions involving institutional investors appear more likely to complete quickly, as do transactions involving UK buyers.
- In all three sectors, better quality properties (defined either by price psf or by yield) took less time to buy and sell than lower quality properties.
- Unsurprisingly, transaction times for portfolios were longer than for individual assets, particularly on sales where the median time extended to 173 days, compared with 124 days for single properties.
- Price agreement was reached more quickly for small lot sizes (below £10m) but, overall, the study found only a weak relationship between transaction times and price – the greatest differences arising in the introductory phase of a deal.
- In the retail sector, large multi-let retail parks and shopping centres took longer to transact than standard shops and standalone retail warehouses.
- Central London offices transacted more quickly than offices in the regions.
- Even allowing for the different phases of the cycle, transaction times seem to have shortened over the last decade, suggesting that that the main participants (i.e. agents, lawyers, investors) have collectively become more efficient. Previous research on sales found that the average time to sell was around six months (source: IPF 2004).
- Method of sale and use of leverage are also likely to have a bearing on transaction times, but more data on these factors is needed to explore their influence further.
Mark Callender, Head of Property Research, Schroder Property Investment Management Ltd and chair of the IPF Project Steering Group that oversaw production of this research, commented: “This research provides a valuable new way of measuring liquidity, besides simply looking at transaction volumes. While some of the findings won’t come as surprise – e.g. London offices are more liquid than regional offices – there are also one, or two results which may challenge conventional wisdom – e.g. UK institutions are relatively quick buyers. The results also suggest that an unintended consequence of the general shift towards larger lot size properties may be to reduce the liquidity of funds’ portfolios.”
Philip Nell, of Aviva Investors, one of the Research Programme’s sponsors, said: “This is an excellent piece of research, and it is great to see the high level of engagement in this by the industry as a whole. Liquidity risk is one of the key drivers for property returns, and understanding the varying levels of liquidity in certain assets and certain market cycles is a very important factor for pricing this risk. I sincerely hope this work can be updated in the future, and that a wider pool of sources, including senior lenders, can be secured.”