April 11, 2014
Yields have strengthened across the motor trade sector to levels not seen since the height of the market in 2007, according to a new report from chartered surveyors, HSM.
The firm, which has advised on the sale and purchase of more than £275 million of motor trade investments over the last ten years, says that a prime dealership investment would now achieve a yield of 4.75%, a level which it expects to remain stable in the coming months.
HSM partner, Richard Harding, says that while manufacturer led investments have set the benchmark for prime yields, particularly for modern dealerships in strong locations, the leading dealer groups are catching up fast:
“Investments let to premium dealership brands have seen a major shift in yields, with a new Reading-based flagship facility for BMW and Mini, rumoured to have been transacted at an initial yield marginally below 5%. If this is the case, it will be the first time this level will have been breached for a dealer group covenant.”
The report suggests that with increased stability in the motor sector and recent rises in profitability, there is likely to be further retailer consolidation as the larger groups evaluate acquisition opportunities.
HSM expects institutional investors to retain their enthusiasm for the sector, but believes the prospects for further yield enhancement on sites let to manufacturers or leading dealerships are limited. Instead, the strongest potential is likely to lie in investments let to regional dealer groups. Richard Harding explains:
“The covenant strength of many smaller dealers will have improved during the recent trading upturn and as investors move up the risk curve, these opportunities will offer an attractive income return. Also, with many of the larger dealer groups now on the acquisition trail, the potential exists for a quick win through immediate covenant improvement.”
The report warns though, that with manufacturers and retailers now seeking larger sites to accommodate bigger showrooms and extensive external parking, the long term viability of facilities is becoming an important factor in evaluating potential acquisitions. The recent forward sale of a new Volkswagen dealership in Colchester, which will occupy a site of 3.9 acres, highlights the change in demand.
In addition, with the purchase of a new vehicle increasingly viewed as an ‘experience’ rather than just a transaction, dealerships are not just about size and location, but also the look and facilities on offer. As a result, sites which are constrained in size or provide smaller, more dated facilities, may have particular long term limitations and in these cases, investors will need to look closely at both underlying site value and potential alternative uses.