Why investors are gearing up for the automotive sector
From car showrooms to petrol stations, the automotive sector is fast gaining attention among investors seeking long-term growth.
New green technology and the potential for strong long-term growth are just two reasons why investors are flocking to the UK's automotive sector.
The sector, which includes car parks, service stations, petrol filling stations and showrooms, saw more than £800 million worth of transactions last year. A recent poll from JLL suggests 22 percent of investors plan to invest in the market over the next 12 months.
One of the biggest trends driving interest in the sector is the shift towards electric vehicles. New registrations of plug-in cars in the UK increased from 3,500 in 2013 to around 105,000 at the end of June 2017, according to Next Green Car.
These bring both challenges and opportunities for real estate, such as service stations. “A fast charge delivers approximately 80 percent capacity in just 30 minutes,” says Richard Servidei, Director – Alternative Investment at JLL. “While that’s happening the owner will probably get a snack and a coffee, and the service station could even evolve to providing beauty treatments, quiet zones and business centres like we see in airport lounges.”
Yet infrastructure has been slow to respond. Three quarters of shopping centres don’t have electric vehicle charging points and there were only 2,500 charging points installed in the UK in the last year.
Car parks are also lagging behind, with some car parks having limited charging points while others have none at all, Servidei says. He believes this will change, particularly if overseas operators decide to set up operations in the UK. “If operators don’t put their toe in the market now they will be left behind,” he warns.
Changing trends bring new opportunities
In contrast to the rise in electric vehicles, the UK has seen a decline in the number of petrol filling stations. This is expected to hasten as the shift to electric vehicles steps up a gear.
Motorway service stations, which already have the benefit of barriers to entry thanks to tough planning permission legislation, could become even more important as petrol filling stations dwindle and electric vehicles charging points outnumber them.
Indeed, there has been a major shift at UK motorway service stations. No longer a last resort for hungry families, service stations are tapping into the casual dining trend by offering travellers an attractive array of brands like Marks & Spencer, Waitrose and Patisserie Valerie.
Other areas of the automotive sector are also seeing changes. Car manufacturers have been opening up showrooms in shopping centres, such as the Tesla showroom at Brent Cross in West London. Servidei says others have been focusing on margins and analysing how to make their showrooms more efficient. Jaguar Land Rover, for example, has said it wants to combine its Jaguar and Land Rover dealers under one roof.
If car manufacturers decide to consolidate their showrooms or move them into shopping centres, it raises the question of what will happen to the land. Servidei says the land could be suitable for a number of alternative uses such as gyms, self-storage or supermarkets.
Car parks are attracting attention for similar reasons. “Car parks are an exciting investment opportunity because car manufacturers, insurers and the government are all focusing on electric vehicles. Whatever happens, cars won’t disappear so if an operator has a chunk of real estate in a prime location capable of housing modern vehicles it’s likely it will be worth more in the future than it is now,” says Servidei.
Demand versus supply
At the moment investor demand for the automotive sector exceeds supply, and Servidei expects this to continue.
“The interest in the automotive sector is a knock-on effect of investors looking to invest in alternatives. The market offers long-term income outperformance, which everyone wants to buy in to,” he says.
Many investors already own hotels and student accommodation and are looking for something different to invest in.
“Car parks and service stations typically have 25 to 30 year leases, while showrooms and petrol filling stations have 15 to 20 year leases. They all have rent reviews that are linked to indexation. The combination of a long lease with guaranteed growth means there’s heavy demand,” Servidei explains.
A major challenge for the sector is it’s still uncertain what the fallout from the UK’s EU Referendum will be. Reports suggest consumers are watching their wallets and there’s a risk this could eventually lead to a reduction in the number of new car sales.
“New car sales are still strong but I expect this will come off a bit and there’s a question around what will be the knock-on effect on the automotive sector. In addition, Brexit could result in labour and material costs increasing, and the oil price might not stay this low in the long term,” says Servidei.
For now, there is a constant flow of new funds and money into the market, as investors chase good tenants with index-linked returns.
“I think this demand will continue unless there is a big material shift in something like interest rates or a clampdown on bank lending,” concludes Servidei.