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Last year was a good one for UK dealers with record profitability and buoyant new and used cars sales. It looks good for 2015, too. Interest rates are at a record low. The economy is improving and unemployment is falling.
The increased activity in most sectors is driving up the cost of UK commercial property, including dealerships, although it is still well adrift of its peak in 2007 prior to the downturn.
Phil Blackford, head of Rapleys’ automotive and roadside team, picked up on the lack of suitable property on the market with demand exceeding supply.
Lack of stock available
“There is currently a lack of traditional dealerships on the market: with the economy improving most existing stock has been sold or let, with very few new properties coming to the market.”
And he’s not alone. Paul Taylor, senior director, automotive and roadside, GVA, said following the downturn dealers with surplus property found themselves stuck with it for long periods. He maintains that lack of demand and unrealistic price expectations were sometimes to blame
“Now the revitalised market for alternative uses is easing this problem. This will be welcome news to retailers with large numbers of older properties within their portfolio.
“Similarly, from the perspective of the existing use, many of the emerging brands are happy to take on good quality prominent facilities that have been outgrown by the larger more established franchises.,” he said.
View from Colliers
“Values of prime sites in major conurbations are now consistent with the pre downturn although secondary locations, smaller provincial sites have still some way to go,” said John Roberts, director of automotive and roadside, Colliers.
Roberts said there is strong demand for sites from discount retailers like Aldi but the sites has to be right. He also said carmakers were putting more pressure on dealers to relocate properties.
“Compared to four years ago, there is a bigger emphasis now on manufacturers trying to get
dealers to relocate to bigger premises,” he said.
Values of commercial property including dealers are rising say property specialists
Shortage ofstock is also on the mind of Bill Bexson, managing director Automotive Property Consultancy (APC). He argues that ongoing restructuring amongst the key carmakers has sparked significant investment in the sector.
“This has led to shortages of suitable sites for expansion and relocation around the country. The market for motor dealerships in 2014 was just over £288 million – up on nearly £220 million seen in 2013,” he said.
Greater demand for higher standards
Overall, as new car sales have grown and carmakers continue to expand their ranges, there is greater demand from carmakers for higher standards and larger premises.
Tom Poynton, partner with Frank Knight said a lot of the activity is taking place in urban areas.
“The market is incredibly buoyant at the moment, retail volumes and margins are up and this has inevitably started to translate into more activity in the property market.
“We have recently been retained by a manufacturer looking afresh at its network with strategic redevelopments and relocations to follow. Inevitably, manufacturers are prioritising key conurbations where they may have a property headache although the unfortunate reality is that these areas tend to be the most challenging to remedy, also attracting the sharpest increases in pricing on real estate, both for land and existing buildings.”
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Poynton is not alone in seeing a change in the balance of power in the carmaker dealer relationship as business improved. Blackford of Rapleys sees it, too.
“Dealers are under increasing pressure to upgrade their properties, often to comply with corporate image requirements and to display larger model ranges.
“We have continued to see growth from the acquisition of existing businesses, but over the last 12 months there has been an increase in the number of active requirements for new locations, especially in the south.
Three years of continuous growth
“Economic recovery has resulted in 34 months of continuous growth in the UK market, so dealers can remain optimistic that they can achieve a satisfactory return on such investment for the right brands in the right locations,” he said.
But, the problem is, and it is a big problem, the cost of land is rocketing and demand is rising from other sectors who also want to grow.
Taylor at GVA said: “There is an increasing realisation that land prices are heading back to the sort of level that we saw pre-recession. Also the opportunity to acquire unwanted and relatively cheap land designated for office or industrial uses is disappearing as these sectors recover with a vengeance.
“When industrial land values are being quoted at £1-1.5m for several South Eastern towns outside of the M25 you know that you are in trouble, particularly when you factor in the increasing property showroom size requirements of many of the more desirable brands, or you are looking to develop a new site for a volume brand with high land-take criteria.”
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Dealers disposing of property are finding ready buyers from the hard discount retail chains like Aldi and Lidl. This is something that Blackford of Rapleys has tracked but he points out that finding the right march is not straightforward.
“Dealerships will continue to be sold outside the sector. Traditionally sites become available because dealers have relocated to bigger, better locations and historic town centre locations provide much higher values for alternative uses.
Demand from discounters Aldi and Lidl
“The discount food operators remain acquisitive with Aldi looking for 65 new stores this year and Lidl 30. Demand for convenience continues, however operators generally require less than 4,000 sq ft, much smaller than most dealerships so developers will be looking at multiple occupiers and mixed use schemes to maximise value. We are also seeing demand from restaurants, drive thru (including coffee), budget gyms and residential development,” he said.
The convenience revolution in retailing is also being monitored closely by GVA but it, too, says many of the deals are not as straightforward as they might seem initially.
“There is little doubt that convenience retailers see their future focus being away from the large superstores and more towards convenience shopping. Similarly the likes of Lidl and Aldi are desperate for more sites.
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“But these are not the only requirements in the market, and are not always the most straightforward in terms of securing a planning consent. Everything depends upon site specifics, in particular location of course, but also whether the building can be reused in some form, planning policies, anticipated densities for redevelopment, and the immediate environment.
“We have had approaches from gym operators, religious syndicates for places of worship, retailers, house-builders, care home operators, student housing providers, and fast food restaurants, to name but a few,” he said.
Bexson of APC said: “As the market has improved so has demand for industrial and logistics property leading to significant increases in the price of industrial land.
Significant problems for dealers
“This has created significant problems for dealerships seeking new, well connected, high visibility sites all around the country as other uses compete vigorously for the same product.”
“Values of prime sites in major conurbations are now consistent with the pre downturn although secondary locations, smaller provincial sites have still some way to go,” said John Roberts, director John Roberts , director of automotive and roadside, Colliers.
Roberts said there is strong demand for sites from discount retailers like Aldi but the site has to be right.
“A lot of it is down to age, condition and size of the site. If a site is over 1.5 acres in a good location we would say it is most likely say in the industry whereas previously we would say it would probably come out,” he said.
He said carmakers were putting more pressure on dealers to relocate properties.
“Compared to four years ago, there is a bigger emphasis now on manufacturers trying to get dealers to relocate to bigger premises.
Kia is expanding its network. It has 181 dealers in the UK with a half dozen open points
He said sale and leaseback was coming back into fashion as land prices and build costs increase.
Commenting on how the market has performed in the past is one thing. Looking into the crystal ball and forecasting future performance is another. We asked the experts to give it their best shot.
Poynton at Frank Knight said: “We predict the key trend throughout 2015 and 2016 will be pronounced rental growth. The rental markets have been relatively static through the downturn, with most increases a result of fixed and inflationary measures. With increased activity in the property market, and capital values rising, rents will naturally respond,” he said.
Poynton also picked up on the growth of the alternative fuel vehicle (AFV) market.
Alternative fuel market infrastructure
“There will have to be infrastructure investment to accommodate more AFVs. Petrol stations and supermarkets may invest in charging points, or smaller sites may be purchased and developed to specifically cater to this growing market,” he said.
Taylor at GVA said thinks sale and leaseback might grow in popularity.
“As retailers and, where appropriate, manufacturers, face ever increasing costs for securing land and undertaking redevelopments, the prospect of capitalising upon a bullish investment market may become more alluring.
“Sale and leaseback may become more prevalent, although there is no guarantee that current demand will continue longer term. Whilst the cost of money remains low for many, and freehold ownership may be seen to offer more flexibility, the fact that so much capital is tied up in bricks and mortar, rather than the operators’ businesses, is not always logical.
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“It is important to take advice when considering sale & leaseback as investors are predominantly looking for lease terms of 20 years plus, hence retailers must ensure the property is suitable in the longer term and that rental increases can be accommodated over time,” he said.
Bexson of APC said: At the beginning of 2015 the market for motor dealerships is under stress from a number of factors. Growth plans and relocations are being hampered by a lack of suitable sites. Suchsites that there are see competition from other, more traditional, uses driving up prices.
He is also seeing a lot of activity from Jaguar Land Rover.
“It is projected that new models will drive sales of JLR in the UK to triple by 2018. As part of the planning for this rapid growth, JLR are integrating their sales from a network of 90 Jaguar dealers and 120 Land Rover dealers to a smaller network of JLR dealers This exercise is expected to generate significant demand for new sites to cater for the integrated brand,” he said.