Bidders’ reactions on valuation signals – anempirical study of commercial propertyauctions in the UK

Auctions have always been an important transaction tool for objects that requires an individual pricing, such as properties, antiquities, art, cars, jewellery and so on. However, few commercial property markets are employing this market making function with the consequence of more illiquid market segments. Previous research has focused on whether or not providing information signals about the object is beneficial to the seller or not from a theoretical point of view. Therefore, this report aims at empirically assess how provided valuation information affects the sale-outcome of commercial real estates. This study examines the quality of the sellers’ and auctioneer’s announced valuation signal to the bidders by utilizing conventional econometric hedonic models, where the dependent variables are factors determining the success of the auction and based on a dataset including guide-prices and an investment grade for each object. The result is that the sale probability increases and price settles closer to the ex-ante valuation for objects with a low signalled risk (low guide price yield) and a high grade (A). There is a strong correlation between guide price yields and initial transaction yields, i.e. bidders’ risk/reward assessment follows that of which is signalled from the sell side. Furthermore, the transaction yields are more inelastic than the guide price yields, i.e. this happens at less than a 1:1 proportional rate increase. This indicates that guide prices not optimally reflect the bidders’ valuation. Furthermore, the bidders do take external factors into account when assessing whether or not to make a bid. In general bidders tend to prefer low yielding buildings with a high investment grade