The motor trade property market is gearing up for significant activity as a result of changes in EU legislation and alterations to the structure of the UK motor trade industry. Jim Rowland reports.
Last year the European Commission took steps to loosen the grip that manufacturers have on car dealers via “block exemption”. The block exemption regulation, which benefited motor manufacturers, was made by the EC to cover the distribution, sale and after-sales servicing of motor vehicles. The effect was that an authorised, or “franchised” dealer, was not permitted to sell any goods which did not belong to the distribution network run by the manufacturer to which they were franchised.
A major revision to the block exemption regulation came into effect in October 1995 and lasts for seven years. This allows dealers to sell more than one brand of car under the same roof, buy spare parts from suppliers who are independent of their franchised network, and advertise and sell cars outside their “dealer area of responsibility” (the geographical territory which has been granted to them by the manufacturer). The general idea of this dilution of the regulation is to benefit customers through increased competition.
This new regulation weakens the manufacturers’ hand. Previously, they were accustomed to a position of significant control over businesses in which they have limited or no direct financial interest which gave them their on-the-ground representation. Now dealers are able to multi-franchise sites, subject to providing separate facilities for each vehicle brand, and this may lead to more frequent re-franchising.
This threatens the market representation of the manufacturers, particularly the larger volume manufacturers such as Ford, General Motors, BMW/Rover, and Peugeot Citroen (see graph) who will want to ensure continuity of representation in key sales areas, such as the major population centres.
The Retail Motor Industry Federation, a trade association representing the country’s leading franchise groups, says there are currently about 7,000 franchised motor dealers in the UK. However, trading figures suggest that this number is likely to decline rapidly. There are too many franchised dealers in the country trying to achieve sales within uneconomic territories. Manufacturers are therefore ruthlessly cutting dealers from their networks and granting larger territories to dealer groups. For example, dealer group Pendragon has recently been appointed by Volvo to run the entire south London area.
Among the large dealership groups there is also significant acquisition activity, which is leading to the emerging dominance of a dozen or so, mostly quoted, distribution companies (see graph). They are aggressively positioning themselves to increase their market share and improve profitability. This often places them in delicate negotiating positions with manufacturers who are still able to control who represents them in each area.
Manufacturers are seeking to “move metal” and are more interested in volume sales than high profit levels for dealers. They influence the profit margin a dealer can charge on new cars, and regulate standards at dealerships.
To accommodate all the related activities, such as spare parts, servicing, and used car sales, dealers are looking for better designed showrooms. And as multi-franchised sites require separate facilities they are also increasing the size of sites required. This is likely to involve moving to new sites, often outside town centres, rather than refurbishment.
Once shopfit is taken into account, this level of investment is expensive, typically £1.5m to £2m, and dealership groups are now looking either to liquidate capital tied up in existing modern properties, or lease at the outset.
As the larger groups expand their activities, more leasehold opportunities will arise. In the past it has been difficult to secure long-term property funding for this sector, but as many of the groups are now major public companies in which investment funds already invest, there is a perceptible change in the funds’ sentiment towards this type of investment, with yields falling to 8%-9% rather than 10%-11% for the best opportunities.
Other investment attractions, such as new motor showrooms, are also fuelling property development and investment interest. Motor trade location requirement criteria are in some respects similar to out-of-town retailing: main road locations, easy access, good visibility and ample room for display and car parking. Additional costs arise with the extra requirements: central site locations to allow circular vehicular movement, and a higher level of glazing and specialist works. These raise the building price approximately 25% above conventional retail warehousing.
In a number of recent cases, the similarity to retail warehousing has led to rent review provisions on modern motor showrooms being geared to retail warehouse rents. With retail warehouse rental growth running at 3% pa, according to Investment Property Databank, and investment yields at a 2% discount to prime retail warehousing, yet still benefiting from retail warehouse rental growth, a burgeoning investment market in this type of property is anticipated.
Attention has been drawn to the motor trade because of the increasing difficulty in obtaining out-of-town retail planning permissions because of the redrafting of PPG 6 and PPG 13. Motor showrooms, being in a class of their own, are not governed by the same planning restrictions that affect retail and leisure development, but they require the same sort of sites. While the resultant values will not usually equal retail values, they will often better residential or business uses and, as such, motor trade development is now a viable alternative to retail and leisure.
The motor trade market itself is moving closer to the retail park format. Because of multi-franchising, motor villages have evolved; for example, Evans Halshaw at Solihull, Pendragon at Derby, and Dutton Forshaw at Aylesbury. Planned motor villages and even autoparks, such as at Lakeside, will become more familiar around the country.
Most of the motor trade development is as a result of the need for a dealer or manufacturer to relocate. There are always, however, changes creating new requirements, such as the establishment of the Daewoo network in retail parks, and the requirement to separate Audi and Volkswagen facilities. Almost any population centre of 100,000 people or more has the potential for a motor village.
All these relocations leave premises vacant and available for recycling. Because these sites tend to be close to town centres, they are often snapped up by retailers, particularly the discount foodstores, and sometimes by residential developers. Rarely are they used again for motor trade purposes.
Dealership groups are not alone in seeking new premises. Manufacturers want to ensure continued representation in key areas. As their control over dealers through franchise agreements has been blunted, they are seeking to replace this control through property ownership. In this way they can grant leases to dealers linked directly to the brand of car sold. Most of the manufacturers have been active in direct development. Ford owns a number of its premises in London, as do Nissan and Renault.
The motor trade property market has been the preserve of specialist valuers, but the expected levels of development and investment activity will open up opportunities in a wider ambit for the property industry.
Jim Rowland is a partner at King Sturge &Co
