Advice and Opinion Property Auctions

Online auctions gain popularity in SA’s commercial property sector

Different markets around the world have different perceptions of auctions.

In Australia, an auction is the primary means to market for real estate transactions, specifically residential and then commercial properties under $5 million AUD.

In the US, the auction method of marketing is growing in popularity, and it is becoming an accepted mechanism for buyers and sellers as a first choice of means for transacting in real estate; more specifically in agricultural land but commercial and residential real estate is also seeing major activity across the board.

According to John Jack, CEO of Galetti Corporate Real Estate, the best time to go to auction is for a ‘Trophy Asset’ when you know there is a definite demand. “It gives everyone a deadline and equal opportunity to bid which often ends up attracting premium prices for these properties” he says.

Another big source of supply for auction is foreclosures, deceased estates, and corporate disposals.

These properties give the illusion of bargains held for sale where in fact, they are able to give the seller a quick, transparent, and competitive price for the sale”.

With little concrete information available, Jack believes that around 5% of real estate sales in South Africa are transacted using online bidding platforms but given the growing popularity, one could extrapolate to up to 25% in the next five years. “Influenced by Covid-19, the current market has led many industries online and auction is one of them, breaking down previous perceptions of transacting digitally”.

How does the online auction process differ from traditional, in-person bidding?

As per the South African Professional Auctioneers Association (SAPAA), online auctions are defined as the competitive marketing and disposal of goods or assets conducted on an internet-based platform for a pre-determined period with each lot sequentially closing at a given time.

The most significant difference is that prospective buyers can bid from the comfort of their home or offices – anywhere in the world. This opens the process up to the overseas market and gives embattled landlords access to a wider pool of prospective buyers” notes Jack.

The stability of the online auction infrastructure plays a crucial role. The online system acts as an invisible auctioneer, able to regulate bidding increments and the entire bidding process as buyers continue to bid against each other.”

Like traditional in-person auctions, bid prices are updated in real-time and the highest bidder is announced at the end of each auction.

Comparing apples and oranges

When comparing online auctions to traditional commercial property sales, Jack believes that each of these avenues still has their place and that the route to market should be deliberated on a case-by-case basis.

Mass exposure, a ‘quick’ transaction, transparency, qualified buyers and competitive pricing are key factors for auction. Alternatively, if the seller wants to keep the asset ‘off-market’ then a private treaty is best,” he adds.

Alternatively, when there is a premium asset with a clear demand, a sealed bid model is often preferred because it offers the best of both worlds. With significant confidentialities in place, pre-qualified bidders are invited to submit offers for the property or portfolio of properties. This often ticks the boxes for listed entities who wish to transact confidentiality without raising the concern of the market before an official SENS announcement.”

While Jack believes that there will always be a place for traditional commercial property sales, the Galetti team recently launched their new online platform, Galetti Auction Division as an additional route to market for clients.

Online auction myth-busting

When some people think of online auctions, they think of foreclosure. The term ‘foreclosure’ is used to describe a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments. The asset is then used as collateral.  

However, there are many other reasons why an owner might choose to sell a property on auction.

Jack dispels seven commonly held online auction myths:

  1. Bidders are not qualified and are in the room to simply kick the tyres.Important to remember is that the potential bidder pays a registration fee to be part of the online auction, this means that they are serious about purchasing.”
  2. Buyers cannot view properties that are being auctioned online, in-person. In most cases, if you are legitimately interested in purchasing a particular property up for sale, you will be invited or be able to make an appointment to visit the property prior to the auction itself. This is particularly evident when purchasing commercial property as prices can range from R10 million plus.”
  3. Sellers must accept the winning bid. Working strategically with your auction broker and setting a strategic opening bid should help to ensure that the property sells for fair market value. Prior to the auction, your broker will work with you to determine a reserve price (the minimum price for which the property can be sold for) and this is typically not disclosed to buyers. Just in case, most brokers will advise that sellers set the winning bed as Subject To Confirmation, meaning that the seller still has the right to reject the winning bid.”
  4. Auctioneers compete against traditional commercial real estate brokers. Every property is different, and real estate brokers understand that not every property can or should be sold the same way. Auctions are also useful to property brokers in that if they have struggled to sell a property using traditional means, this can be an effective way to reposition it, ensure a fast sale and find a fresh pool of buyers.”