RESEARCH AUTOMOTIVE CAPITAL MARKETS 2016/17 HIGHLIGHTS Surge in high profile M&A Solid property fundamentals Highly defensive stock with low activity; the most active 12 and strong rental growth will see vacancy rates, but investment months for more than a decade Automotive investment perform opportunities constrained by a with no sign of abating well in the post-Brexit environment dominance of owner-occupied property WHAT IS AUTOMOTIVE PROPERTY? “ Average dealership The sector is typically characterised by three asset lot sizes have types: car dealerships, petrol filling stations and increased significantly; services areas. Of these, car dealerships account for ten years ago the over 50% of the automotive investment market, and as such is the focus of this research. typical investment lot size was £2-£5m The term also covers other ‘roadside’ this key sector of the economy, with assets including, for example, convenience initiatives such as the Scrappage however the £7-£10m retailing, fast food, tyre and exhaust Scheme. Employing over 800,000 bracket is now well centres, truck stops and car parks. people in the UK, the critical importance populated.” of the motor industry to the economy Automotive cannot be overstated. investment landscape Average dealership lot sizes have Before the millennium, attracting increased significantly; ten years ago mainstream investment funds to the typical investment lot size was automotive property, including car £2-£5m however the £7-£10m bracket dealerships, was difficult. Back then the is now well populated. Assets (and nature of the stock was far removed portfolios) in excess of £10m are from the impressive purpose-built ‘brand becoming more common and look set to centres’ that typify the landscape today. continue as premium brands in particular Investors increasingly appreciate the stipulate the need for ever larger facilities positive investment credentials of these on the back of four years of rising new assets, including the prominent locations, car registrations. high quality of build (at significant cost) Notwithstanding the above, the and attractive large plot sizes. somewhat unexpected Referendum Over recent years, the car dealership result, and initial political fall-out has investment market has gone from naturally caused some uncertainty in the strength to strength; Q1 2016 saw prime market, which has led to a slowing of yields compress to c. NIY 4.5% as investment activity in H2 2016, noting that investors demonstrated strong appetite, transaction volumes were also surpressed lured by purpose-built facilities, long in the immediate lead up to the vote. leases, strong covenants, regular tenant What is clear is that in uncertain times investment and inflation-linked rent there is a ‘flight to quality’ and this has profiles. These are robust and defensive doubtless been evident in the Automotive investments; even through the toughest sector, with four of the six largest times, the sector was resilient, and investment deals in 2016 (Figure 1) investors saw clearly the high regard comprising prime stock let on long and support that Government affords leases to secure covenants. As a result FIGURE 1 Largest automotive investment deals of 2016 Asset Location Covenant Price Yield Agents Glaze Portfolio Bradford / York Various Confidential - CBRE/Knight Frank Land Rover, Honda, Mazda Birmingham Lancaster Plc. £17.00m 4.75% GVA/Knight Frank Ford Commercial Dagenham Ford Retail £6.62m 4.57% Knight Frank/Rapleys Nissan Bristol Nissan GB £6.03m 4.58% APC/Knight Frank Ford Bristol Ford Retail £5.85m 4.85% Savills/Knight Frank Ford Bromley Bristol Street Motors £5.50m 5.80% Michael Elliot / Springer Nicholas 2 Please refer to the important notice at the end of this report FIGURE 2 Strong automotive Prime yields (%) by sector (as at Q3 2016) rental growth Investors are looking to diversify 4.50 5.00 5.00 4.75 4.25 4.15 4.00 3.25 their portfolios with the inclusion of ‘alternative’ assets, and as such the prime automotive investments that do become available are typically in high demand. However, it is the more secondary assets that can provide great Car Car Petrol Service Open Regional Student Central Dealerships Dealerships Stations Areas A1 Retail Shopping Accommodation London opportunities for savvy investors. (Manufacturer) (Major (Oil (Operator) Warehouse Centre (London) Office Dealer) Company) (West End) Whilst prime yields may not compress much further, there is value to be had Source: Knight Frank Automotive/IPD in more secondary stock, perhaps with open market reviews, given our view that all have traded well inside NIY 5%. Shing Hong (“LSH”) – the world’s largest Indeed, prime yields have held strong Mercedes retailer – entering the UK. 5(Figure 2), but values for more secondary Knight Frank Automotive has FIGURE 3 stock have drifted. provided advice on a number of these Prime Automotive Rents (£ per sq ft) transactions, including LSH’s first UK acquisition, and US-based Group 1’s 4 35 M&A activity focus on the UK for its growth strategy. and potential 30 Certainly we envisage this trend covenant windfall continuing as profit margins for smaller 3 25 One measure of the health of the UK groups come under pressure and exacting automotive market is the level of business- Corporate Identity requirements give rise 20 to the need for regular capital investment 2to-business transactions. In this regard, FigureCar 4 shows a Carsignificant Petrol number ofService key in dealerships,Open Regional or even relocationsStudent andCentral 15 Dealerships Dealerships Stations Areas newA1 Retail builds, Shoppingwhich manyAccommodation of the smallerLondon transactions(Manufacturer) over(Major the last 12 (Oilmonths. (Operator)We Warehouse Centre (London) Office Dealer) Company) (West End) 10 calculate there has been over £500m of groups are unable to finance. This trend has been – and will continue to be – a corporate acquisition activity making it the major appeal to investors who have 5 most active 12 months for over a decade. benefitted from significant covenant 0 5Major UK based groups such as windfalls and overnight enhancement Lookers, Group 1, Vertu, Jardine, Sytner in capital values, as smaller regional London Midlands Scotland and Marshalls have all been acquisitive covenants are acquired by major South EastSouth West North WestNorth East along with foreign dealers, such as Lei corporate entities. Source: Knight Frank Automotive 4 3 2 Car Car Petrol Service Open Regional Student Central Dealerships Dealerships Stations Areas A1 Retail Shopping Accommodation London (Manufacturer) (Major (Oil (Operator) Warehouse Centre (London) Office Dealer) Company) (West End) The Spirit Portfolio – Knight Frank Automotive Investment Disposal (September 2016) 3 AUTOMOTIVE CAPITAL MARKETS 2016/17 RESEARCH FIGURE 4 BREXIT – IMPACT ON Largest corporate acquisitions in the last 12 months AUTOMOTIVE INVESTMENT The unexpected ‘leave’ vote in Purchaser Vendor Reported Price the UK Referendum on membership of the European Union has caused Marshall Motor Holdings Ridgeway Group £106.9m considerable consternation across Lookers Benfield Motor Group £87.5m the property market. Much of Lookers Drayton Group £55.4m the concern has centred on the rapid rate of redemptions in the Lookers Knights Group £27.2m commercial property retail funds managed by a number of the Vertu Motors Greenoaks £21.9m largest Institutional investors. Vertu Motors Gordon Lamb £18.7m Whilst the majority of these funds Group 1 Automotive Spire Automotive Undisclosed held significant cash reserves the scale and speed of withdrawals Jardine Motors Group Colliers Motor Group Undisclosed left funds with little choice but to Sytner Group Clare James Automotive Undisclosed ‘gate’ redemptions. Lei Shing Hong Mercedes Benz Retail Undisclosed In effect this meant that unit holders Source: Knight Frank Automotive were barred from selling their holdings until a later date. These funds are now in the process of in the short to medium term rental growth margins, with groups on average driving an orderly disposal of some of will be strong having been suppressed profitability of over 50%. By contrast, their property holdings to liquidate for an extended period, despite dealers’ car sales (new and used) margins are and return funds to investors as operational profits rising. typically below 10%. they reopen. Whilst some micro markets will be directly affected We anticipate average automotive rental Other major profit streams for (when we know what the actual growth of 4-5% per annum over the next dealerships include the sale of finance effect of the vote is – which may 3 years which compares favourably to and warranty packages stapled to car still be some way off) the underlying the 2.53% per annum growth anticipated sales, together with trade parts sales, fundamentals are largely as they across All Property. (Source: IPF fleet business and vehicle hire – these were pre referendum. Consensus Forecasts, May 2016). are collated below under ‘Other’ and UK based vehicle producers have collectively contribute a healthy profit committed to a post-Brexit UK and Where is the profit? margin (30%), notwithstanding these assembly activities should be being relatively small contributors to unaffected so long as tariff-free The motor retail industry may be seeing overall profit. automotive trading is agreed a levelling in new car registrations, but as expected. a slight lessening of pressure on new As such, the dealership operating model car targets may in fact allow retailers to is far more sophisticated and robust improve profit margins. than merely the ‘margin in the metal’, with profits less sensitive to pure car The car dealership sector is FIGURE 5 sales than one might imagine. The Profit contribution and margin fundamentally anchored in retailing. modern dealership is a diverse centre The customer experience is key to of business activity, with turnover across the success of the industry and public a broad range of profit centres. New perception is most accurately measured car sales in the showroom and on the forecourts; the dealers’ shop window for new and The road ahead used cars respectively.