Specialist Property Sector Report 2017: Automotive

Factors bringing market momentum during 2017 

We are seeing an increasing number of foreign dealer group and investors actively targeting the UK dealership sector due to the long-term stability of the market, coupled with recent shifts in the value of sterling.

This ‘additional’ demand will help to sustain current occupational and investment values.

The larger dealers, petrol retailers and car parking operators are activity seeking to expand.

Opportunities for ‘new to industry’ occupational stock are rare and as such growth is typically driven by the acquisition of smaller operators. We expect continued consolidation across the automotive sector in 2017.

The record new car sales witnessed in 2016 are unlikely to be repeated in 2017, albeit the year is still likely to put in a stellar performance.

Increasingly attractive finance packages will bolster demand for new cars, whilst the exceptional performances over the last few years is creating better quality used car stock, which will in turn provide an opportunity for dealers to generate increased profits.

Factors that may serve as a brake to momentum during 2017 

The severe lack of investment product continues to provide a brake to momentum as demand far exceeds supply.

This is a trend that is likely to continue given the freehold dominant nature of the sector – indeed, a reason in itself why investments are so highly sought-after.

The EU referendum has created uncertainty in the market. This is likely to remain in the short to medium term, whilst stressing that any potential future levies on crossborder movement of vehicles and components is by no means assured. 

The Government’s stance on diesel cars and the introduction new tax bands could impact on new cars sales, particularly on small cars.

Conversely, these measures are likely to result in the seemingly unstoppable rise in ‘alternatively-fuelled’ vehicles.

The opportunity/value for investors 

Currently the strongest investment demand is for secure long-let income providing guaranteed rental growth. However, we do not anticipate further compression in prime yields. We consider better ‘value’ can be secured through the right ‘mid-tier’ stock, and that the yield difference between this and prime will narrow in 2017.

In recent years, investors and occupiers alike have targeted premium brands.

We see this trend continuing, albeit those seeking to move up the risk curve in the hope of greater returns, may start to target more secondary brands – especially those with new models coming through.

We are seeing strong demand at the smaller lot size end of the market, both in the dealership and petrol filling station sector. We consider there is scope for investors to acquire larger portfolios of granular product and generate significant ‘break-up’ value.

Attractions to investors from other specialist asset classes

The dealership sector in particular offers the potential for investors to acquire landmark ‘trophy assets’.

These properties are extremely attractive to foreign investors who may not be familiar with the UK.

The bespoke nature of the facilities, and the importance of the facility to both dealer and manufacturer, provides a unique scenario whereby the investor is in essence receiving a doublecovenant, i.e. the incumbent dealer group, combined with the franchise backing of a manufacturer.

Smaller lot sizes typify the automotive sector (save for motorway service areas, car parks and portfolios). These offer the opportunity for funds to invest relatively small sums and thus diversify fully across the alternative sectors.

What factors do new automotive property investors need to be aware of?

Investors should be aware of the lack of transparency in the sector in respect of rental and capital values. Specialist advisers are required as no two assets are ever the same, and can often identify overlooked value.

This is a market where smaller lot sizes are the norm – there are relatively few individual lots in excess of £10 million (save for Service Areas) and large portfolios remain rare.

Investors must develop an appreciation of corporate identity criteria. Manufacturers will ensure that their dealerships adhere to a consistent appearance but this is typically at the cost to the dealer.

From the investor’s perspective the asset is being continually upgraded, and even enlarged, by the tenant.

Predictions for the automotive property sector

With demand from foreign private equity and HNWIs arguably at an all time high, we consider there may be a ‘decade-defining’ transaction in the automotive sector this year.

Traditionally automotive investment product has been dominated by franchised car dealerships.

In 2017 we expect the ‘other’ automotive sectors, namely motorway service areas, petrol stations, tyre and exhaust centres and car parks to contribute significantly.

Collectively for the first time in history, these assets could exceed activity volumes in car dealership assets.

Alternative-fuelled vehicles will again take centre stage in terms of new sales percentage growth and we expect this to account for 5-6% of the market by the end of 2017, equating to a 50% increase on 2016 year-end figures.

For more information about investing in this specialist property sector please visit Knight Frank's dedicated automotive property sector page.