Key statistics

It was a fundamentally robust year for the car dealership industry amidst the obvious macroeconomic headwinds. Car mobility remains essential for the general population and although trading volumes from vehicle customers were lower, demand remained strong. Dealers have reported months of orders backing up, despite the cost of living crisis which disproportionately impacted those in lower demographics less likely to own cars.

It would seem the principal challenge of the new car market remains a supply issue fuelled by the ongoing financial, energy and supply chain issues, likely to persist throughout 2023. The Society of Motor Manufacturers and Traders (SMMT) has, however, reported stabilising supply figures with car registrations in the green from August to November. Overall, 2022 registrations were 3.4% lower than 2021, but stabilisation towards the end of the year would suggest that the automotive sector is well poised for supply recovery.

Battery electric vehicles (BEVs) remain modish, with over half of motorists wishing their next car to be electric (Motor Trader), and SMMT figures continue to show growth, with BEVs accounting for a 15.1% market share in 2022. To achieve zero emission growth, the government and various stakeholders must aid drivers in transitioning to go electric primarily through investing in nationwide charging infrastructure.

The market is also entering a transitional phase in the dealer and OEM (original equipment manufacturer) vehicle sales process. An option for OEMs is to introduce an ‘agency model’ whereby the dealer no longer inherits the profit margin risk of purchasing the vehicle product from the OEM, rather the customer places the order directly with the OEM and the dealer is the conduit for delivery of the product to the consumer. This will have a significant impact on dealership property. The dealer will display fewer new cars, reducing showroom space, which could lead to opportunities such as multi-franchising under one roof. Ultimately this will consolidate the dealer’s property holdings, presenting an opportunity to reposition their property and potentially unlock alternative use value on surplus space.

We have seen a number of dealers’ balance sheets benefit from dealership sales for alternative uses such as care homes, data centres, convenience stores, self-storage and residential. Despite the potential consolidation which may come as a result of this model, the dealer will continue to maintain the relationship with the customer, benefiting from the traditionally profitable after-sales portion of revenue. The dealer remains the focal point of the sale and distribution process of the vehicle.

The used car market has shown signs of correction in 2022 following a booming year in 2021, with sales 5.5% below the pre-pandemic five-year average (SMMT). Despite 72% of people now being open to buying online, half of all used vehicles are sold by franchised dealers (Car Dealer Magazine), with consumers staying loyal to the physical salesman as well using their online sales counterparts. As a result, franchised dealer balance sheets have remained healthy, with a number of groups posting record profits.

2022 was a year of major consolidation, with automotive giant Constellation incorporating Marshall Motor Group and substantial Lookers shares into its holdings. Additionally, the OEMs have begun a process of rationalisation of their dealer networks, most notably super-group Stellantis announced widespread closures and a drawback of representation across its network unlocking a number of opportunities for brands and dealers looking to expand. Toyota, KIA, Nissan and MG have been particularly active in increasing representation following a year of impressive vehicle sales statistics.

The property story

Generally, average prime yields across all commercial property sectors stabilised towards the end of 2022. Outward yield shifts are predicted amongst some sectors throughout 2023, particularly for offices and shopping centres. Yield hardening is expected in more resilient sectors, most notably Retail Warehousing, a sector often aligned with the car dealership market. As cross-sector property investment volumes tailed off towards the end of 2022, major investors are expected to come out of hibernation. There remains a sizeable amount of dry powder that investors will be keen to deploy, as holding large cash balances indefinitely is not a viable strategy in an inflationary environment. Institutions will continue to look favourably on real estate as an asset class. Inflation has peaked, interest rates are likely to stabilise as central banks approach the end of hiking cycles, and a longer-term economic outlook slowly becomes less opaque.

Car dealerships offer strong investment credentials amidst uncertainty, presenting an arbitrage opportunity for the canny investor. For some investors, volatility and downward pricing trajectory has driven a momentum to dispose of car dealership assets to raise cash and liquidity. In our market, we have largely witnessed a shift in buyer profile towards occupiers, particularly tenants buying in assets they occupy, with other dealers buying assets they feel they could either trade from or sit on the income, often adjoining landowners. Alternative users, such as self-storage and discount food retailers, have also been active, enjoying good returns with the anticipation of future redevelopment and occupation. The charts below outline the 2022 buyer and vendor profiles by investment transaction numbers.

It has been a bumper year for investment sales of car dealership property. 2022 was the best year in investment sales volumes since 2014 (which was somewhat skewed by a single portfolio sale), with £371m transacted, well above the ten-year annual average of £258m, as highlighted in the chart below.

The general car dealership investment market has been ebbing and flowing in recent years with the uncertainty of Brexit and Covid-19 lockdowns, resulting in a see-sawing pricing movement. The chart below shows car dealership prime investment yields within the car dealership market from March 2020 to November 2022, with yield movements moving outwards.

The car dealership market is not being impacted as definitively as other sectors, as underlying occupational activity is resilient, with dealerships continuing to report strong returns and trading conditions, albeit profitability is being tempered by rising interest and energy cost and inflation.

In tandem with the wider economy, there was a different narrative between the first and second halves of 2022 for the car dealership investment market. The period from autumn 2021 to May 2022 saw a very active market, with average yield movements pushed down to levels last seen prior to Brexit. Subsequently, there has been a distinct change in direction, reflecting the impact of inflation. Stock has continued to come to the market, causing yields to recede as the market corrects, which led to the withdrawal of some opportunities, a lot of which will almost certainly return to the market in 2023 as exciting investment stock.

Overall, yields for long-term prime income have been affected more than shorter-term income yields, with 'All' average dealership yield across all transactions for the past ten years at 6.27% and the last five years at 5.98%.

In the context of the current market, the best guide to pricing is by reference to the 5, 10 and 15 years long-term trends as markets, as a rule, tend to revert to their long-term trend lines. For investors, security of income, income growth potential, and its ability to combat inflation to sustain real value will be paramount.

Less critical to buyers currently is short to medium alternative-use potential, unless the asset has attractions either to the occupier themselves or an alternative owner occupier, and developers are largely out of the market, albeit falling land and construction prices will tempt them back. It is also important to recognise the uncorrelated nature of the car dealership market; its performance is not a mirror image of the broader economic picture – it has particularly resilient revenue security credentials that should appeal to investors looking for a safe haven for their money in turbulent times. Some of these points of difference are: