Motor industry real estate – the consultant’s view

Pav Panesar, Automotive Associate at Knight Frank, provides a run-down of the motor industry’s position after a turbulent 2022, as we look ahead to 2023.

Looking back

2022 was a difficult year for the UK and global economies – we witnessed notable cross-sector deterioration in commercial property markets. Much of this was based upon sentiment, as opposed to hard evidence, given that transaction levels had slowed considerably, with market hesitation stemming from wider macroeconomic uncertainty. The deterioration in the value of sterling and mixed reaction to the September ‘mini-budget’ added significant nervousness throughout the markets, leading to a ‘disconnect’ between buyer and vendor pricing aspirations.

In some instances, we witnessed large valuation discounts on some industrial stock, where prices paid in the previous 12-24 months appeared to be very aggressive, with more modest ‘price corrections’ in the motor retail market.

Turning to 2023

We expect to see a continuation of larger institutional funds constraining their exposure to the commercial property sector in general, which will in turn provide opportunities for motor trade tenants to acquire freeholds and extinguish rental liabilities. Many dealers will also be focusing on reducing their operating costs, which have come under close scrutiny due to the surge in energy and transportation costs. Coupled with the upcoming 2023 business rates revaluation, this will ultimately further increase dealer pressure on bottom lines.

The Agency Model

The  transition to the ‘agency model’ has also been disruptive to dealers, where OEMs have traditionally been ‘out of the loop’ on final prices and contractual agreements, allowing the customer relationship to be managed exclusively by the dealer.

Under the agency model, manufacturers absorb the asset risks for all cars they produce. They also have access to the information that that was previously exclusive to the dealer. An expected benefit for the OEM under the agency model is full control over pricing and incentives, which could result in less new-car discounting and potentially lower dealer margins. Although the reforms were initially met with criticism, we have received anecdotal feedback demonstrating benefits such as better access to stock and a more transparent buying experience.

So, what does this mean for Real Estate?

Further network consolidation? Possibly. More separation of sales and service facilities? Quite probably. We also anticipate that those targeting the value and mid-market demographics to trade under one roof in more cases. Ensuring brand compliance with corporate identities will also be a factor, where we expect to see dealers condensing their building footprints and modernising areas with open planned flexible spaces, providing high quality accommodation, aiding the customer journey, with the added benefit of more efficient running costs. We consider this to be further supported by the well-documented demise of Cazoo, which you could argue emphasises the importance of relationships and traditional bricks and mortar.

Clearly, there is a growing market for the online buyer, particularly in densely populated urban cities, but to many, shopping has become more about experiences – the face to face interactions which provide familiarity and the sense of becoming part of a wider brand. This is truer than most for those purchasing cars, as for many, this likely represents the second most expensive life purchase, and often one to savour. Real Estate will remain a key component, therefore.

Knight Frank’s Automotive team operate across the UK and internationally, advising occupiers, developers, landlords and lenders on car dealerships, petrol filling stations, truck stops, motorway service areas, car parks and roadside retail assets.

For more information on the contents of this article, please contact Pav Panesar, Associate at Knight Frank on [email protected] or 07970 829908.