Market Report: Dealership Property 2018

It is often said that dealers are in the property business. And it’s true. Take Pendragon. By the close of 2017 it had £261.2m of land and property assets compared to £199.3m a year earlier. It also had property assets for sale of £11m. And during the last two years it has pumped £15.6m into buying property freeholds

Vertu, too, had freehold and long leasehold property worth £182.m in 2017 compared to £137.7m a year earlier. It believes the perfect cocktail to run a business is a strong balance sheet backed by property assets. This reduces the group’s exposure to interest rate and rent increases and makes for a more resilient business.

So how is dealership property doing? To get a snapshot of the market we asked the specialists how values stand now compared to 12 months ago. And where will be they be in 12 months’ time?

According to Daniel Cook, partner in the Automotive & Roadside team at Rapleys the market may have topped out. “Looking at the UK market right now, there are signs that dealership values may have peaked. Fundamentally, there is an increasing quantity of dealership property on the market, largely driven by the volume franchises who are looking to streamline their portfolios.

“We anticipate further consolidation over the next 12 months, which will in turn further increase available stock on the market and likely impact values.”

But Cook urges caution: we are talking here about a slowdown not a freefall. Values have been rising for so long perhaps something had to give, eventually.

“While values may no longer be accelerating, the slowdown is likely to be limited. Demand for sites overall remains strong, including from alternative uses such as residential, which continues to exert real pressure on commercial operators across the board as landowners and investors seek to maximise values.

“One of the main drivers in market activity over the last two to three years has been JLR’s strategy of moving both brands under a single, large facility. This consolidation is only one example of innovation into how real estate portfolios are more efficiently managed, both from the franchise and manufacturer perspective.

“One of the emergent markets in the last five years has been stand-alone used car sites and supermarkets. The majority of main dealer groups now have these facilities and many are looking to expand this market further than the franchised sector as margins have been much stronger. We see this continuing for the foreseeable future.”

And, of course, consolidation will continue.  Cook believes that well-funded dealer groups with strong balance sheets will continue to acquire smaller groups.

“In addition, while new car sales have slowed, the used car market will continue to be strong and demand for sites from used car operators for new facilities will continue.”

Paul Taylor, senior director, automotive and roadside at GVA is also positive about the market and where values are going despite Brexit and falling new car sales.

“Occupational values of vehicle dealerships should by rights have fallen over the past year, in keeping with the downturn in trading conditions. Indeed, the seemingly insatiable appetite of the British press and politicians to keep kicking the industry has started to affect investor sentiment.

“From an occupational perspective, however, the wider commercial property market remains bullish, particularly in the South East, and as long as the asset concerned is well located and of a scale that could appeal for alternative uses, value should be underpinned to a large extent.”

In short the laws of supply and demand are operating with lots of buyers looking for the best properties in the right locations.

“In reality, transactional evidence relating to prime stock is in short supply. The majority of dealerships that are sold with vacant possession will be more secondary facilities.  The value of an occupational unit will still largely be influenced by the desirability of the incumbent brand and its suitability for such in the longer term.  Where OEMs have been open about their intention to slash dealer numbers, this will inevitably adversely affect values for the more secondary properties and locations,” he said.

“The outlook is dependent upon the robustness of the sector to the many challenges it faces, and the wider property market but, given Brexit is approaching, a logical conclusion would be that values will soften over the next year.”

Tom Poynton, a partner with Knight Frank Automotive is fairly upbeat about the future but generally believes the best properties will rise to the top and will always be in demand.

“A robust investment market and improvement in the quality of new car dealerships has driven up pricing on investment stock over

the last 12 months. We have witnessed yield compression down to around the 4.5% mark, comfortably 25 basis points ahead of the previous (pre-recession) market peak.

“Investor confidence in the sector remains high, with a diverse pool of buyers including institutional and private money, whilst new developments for the premium brands, especially JLR, have driven up average lot sizes.  The anticipated market consolidation towards fewer, but larger, showrooms, will see this trend continue over the coming year,” he said.

And of course the market has been kindled by interest from big players like the South African Supergroup and the US based Group 1 Automotive, among others.

“On the occupational side of the market, the UK has proved attractive to overseas dealer groups, with major players from areas such as the US, South Africa and China having entered the retail arena. Currency shifts have added value to acquisitions for these buyers, which has driven up pricing on both property and business goodwill, although there is some evidence of heat coming out of this area of the market and values remaining relatively flat throughout 2018.

“As ever, the market is relatively polarised, with the best property pricing reserved for modern, premium brand assets, whilst confidence in the sub-prime marketplace is more constrained. We anticipate an average rise in automotive real estate in line with inflation over the next 12 months, with prime stock predicted to witness real terms growth.”

And finally to Bill Bexson, managing director at Automotive Property Consultancy, who argues that the dealership property market is fairly robust.

“Prior to recession dealership investment values peaked in 2006.  This level for prime properties was regained in 2014 and has held pretty stable since. The ‘all’ dealership properties chart has not regained parity with pre-recession levels.

“The Motor Retail Property Investment sector remains predominantly robust. Indeed, recent investor market activity continues to demonstrate that there is significant interest in dealerships, particularly those in the right location, housing the right brand and with the right dealer tenant.”