February 17, 2015
HSM has released its latest Motor Trade Investment Bulletin and reports that yields in the motor trade investment market have exceeded all expectations in 2014, driven predominantly by a high volume of car sales, and resulting in a narrowing of the yield differential between manufacturer and national dealer covenants.
A healthy 2015 is predicted and HSM reports that strong regional dealer groups at yields of at least 6% offer the best opportunities for investors as prime yields fall to 4.5%.
2.4 million cars were registered in the UK during 2014, the fourth largest total of all time and the highest in a calendar year since 2004. This represents a market growth of 9.3%, which has had a knock on effect on for the used car market and after sales operations, greater security of income for investors and an increasing need for manufacturers and dealers to acquire larger sites.
Richard Harding of HSM comments: “The motor retail industry remains buoyant with a trend from occupiers towards larger sites as trading volumes rise across all parts of the business. An overly congested site is proven to have an adverse effect on the operational success of a dealership.
“Brands such as Audi, BMW, Mercedes and Volkswagen ideally now want sites of between 2.5 and 3.5 acres and, where prime positions in conurbations are at a premium, sometimes look to locate after sales operations away from the main dealership facility. However, the overall requirement remains for a traditional glass fronted showroom with main road frontage, despite the advance of the digital-savvy consumer.
“In line with the wider investment market, yields in the motor trade investment market advanced further than anticipated in our last report in April 2014. Investors continue to be attracted to the sector due to the availability of long leases, often incorporating some form of guaranteed rental uplift, the covenant strength of tenants and strong underlying site values.”
The recent sale of the new Honda facility in Orpington to CBRE Global Investors for approximately £5,650,000 set a record net initial yield of 4.35% and is evidence of how yields have strengthened, particularly for the best opportunities. Prime yields have fallen to 4.5% with a narrowing of the yield differential between manufacturer and national dealer covenants.
This transaction followed a previous landmark sale, the leaseback of three prime dealerships in East London, Milton Keynes and Colchester by Lancaster Plc. The East London property is under construction and will be a flagship facility for Porsche. The portfolio was purchased by F & C for a price of £24.15 million, representing a net initial yield of 4.88%. This is the first time a sub-5% yield has been achieved for a dealer group covenant and there was competitive bidding for both deals.
Richard Harding adds: “We envisage continuing high levels of interest in the sector. Strong regional dealer groups at yields of at least 6% particularly offer good opportunities for capital growth, with the potential upside of covenant improvement through corporate acquisition.”