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Rising land values and rent costs hit retailers

This year Sytner opened a new BMW dealership that cost £19m. Other retailers have opened £10m-plus Mercedes showrooms; Glasgow Audi opened a £15m outlet in November 2004.

Even further down the scale, the cost of building a new outlet runs into millions of pounds.

A significant proportion of that cost is land values. Buying or renting land is becoming more expensive – in some cases prohibitively so.

London obviously stands out: land values in the capital are typically £2m per acre. That’s way ahead of the second-placed region, the south east, at around £1.2m per acre. It’s forcing dealers to reconsider trading within the M25: HR Owen is selling some of its sites, while Capital Chrysler recently collapsed.

Demand from alternative land uses is also putting pressure on automotive land values, with the West Midlands facing pressure in this respect. Values in this area are just under £1m per acre. Compare that to the south-west of England and Scotland, where land values are just over £300,000 per acre.

High build costs

Research compiled by property expert GVA Grimley shows that the cost of building the dealership also varies, from around £725 per square metre in Wales and Scotland, to £940 in London. Also notable are the south east (£861), East Anglia and the south west (both £805).

GVA Grimley points to the relationship between land value and new build costs, suggesting that while new build costs are noticeably higher in the south, the land value differential of such locations more than off-sets these higher build costs.

“One notable exception is the West Midlands, which has low relative new build costs but relative strong land value levels. This helps demonstrate why there is strong demand for representation in this location by dealers,” says GVA Grimley.

Dealers have mixed views when it comes to freehold versus leasehold. For smaller businesses, freehold gives greater security and a potential nest egg for the future. Many larger groups have a combination of both, with some groups selling freehold sites to raise capital for expansion.

Pendragon last month set up a joint venture property business with Royal Bank of Scotland, which raised £98m. It now leases back 34 of its 250 sites, while the cash raised is currently earmarked towards acquiring the Reg Vardy business.

Sytner chairman Laurence Vaughan firmly believes his group is a retailer, not a property agent. Most of his 92 dealerships are leasehold. “We are in business to make money from selling cars and servicing, not from buying property,” he says. “We don’t want capital tied up in bricks and mortar.”

He is, of course, fortunate to have the backing of American giant United Auto Group, which frees up funds for investment and can negotiate long-term lease agreements. “UAG’s view is that a dealership needs to be fit for the next 25 years – they take a longer-term view than most companies in the UK and they aren’t scared of making the capital investment,” adds Vaughan.

Others aren’t so lucky. Dixon Motors sold most of its property prior to the acquisition by Royal Bank of Scotland in 2002, signing 30-year rental deals.

The bank sold the business to John Haines in September, although it retains a sizeable stake. Insiders claim RBS’s preference was to close the retail business – Haines has already sold seven sites and is in talks to offload four more, cutting turnover by £100 – but it would have faced a huge bill from its landlords for 27 years’ outstanding rent. It retains the stake to give it some control over the group’s strategy.

Former franchised dealers DC Cook and Appleyard were both burnt from sale and leaseback in the past.

As Guy Harwood, chairman of West Sussex-based Harwoods, says: “Freehold means you control your own destiny. Ten or 20 years go by very quickly if you rent and then you are in the hands of your landlord – especially if land prices go up.

“There’s a simple principle,” he adds. “If the site is going to increase in value, don’t sell. But if it isn’t, then by all means lease.”

Over the past five years, property values across most parts of the country have escalated. GVA Grimley’s research shows that automotive property can be an important investment sector in its own right, with prime yields (return on capital invested against the risk of investment) shifting from 7.75% to 5.25%.

“The higher the risk of an investment, the higher the yield an investor would expect in taking this risk,” says Kevin Marriott, GVA Grimley marketing communications manager. “Conversely, a secure tenant or property location would mean the yield is lower as the income from the investment is more secure.”

So what about those groups who prefer to rent? GVA Grimley’s rent index highlights prime rates for selected towns dotted across the UK, and represents the best likely rent for a well located modern dealership. It includes displays and parking.

Cost per square foot is, not surprisingly, highest within the M25 – Watford returned £20. The UK’s next two biggest cities, Birmingham and Manchester, share second place on £15 per sq ft with Bristol.

Rent in Bristol has risen due to competition from financial institutions looking for city centre sites. That’s pushed dealers out to the giant Cribbs Causeway retail park, where they face competition from high street shops, which forces rents up.

#AM_ART_SPLIT# Prime rental values rise

Rent levels and variations are as much to do with supply constraints as they are with demand levels. In certain areas, including Leeds (£13) and Newcastle (£12), rents are low relative to other locations, but have risen significantly over the past few years due to dealership expansion.

GVA Grimley comments: “Prime rental values in the automotive sector have increased by almost 50% over the last five years, although most of this growth has occurred since 2003. In fact, the automotive rent index has considerably outperformed all other property sectors monitored by GVA Grimley from 2000 to 2005.”

In terms of investment activity, GVA Grimley’s analysis of transactions suggests that activity has risen from £20m in 2000 to more than £60m last year. And the figures represent only a proportion of the market, as not all deals are reported.

“This three-fold increase represents the minimum level it has grown. Our view is that the automotive property investment market this year will be well in excess of £100m,” says GVA Grimley.

The AM100 top 10

So how are the AM100 top 10 managing their property costs? Pendragon and the company it is currently courting, Reg Vardy, have the highest property costs as a percentage of turnover, at just over 9%. Compare that to Camden Motors, whose massive turnover (£1.3bn) through just 21 sites means it is posting just under 3%.

However, the total cost of property of each Camden site is actually higher than its peers, at £1.6m (matching Reg Vardy) – even higher than Sytner, which has been investing huge sums in new builds for BMW and Mercedes-Benz. Camden’s high turnover means that its absolute figure is small as a proportion of total turnover.

The lowest total property costs are for Jardine Motors, at £1m per outlet. Its £900m turnover from 73 sites sees it return just under 8% property costs by turnover.

Every six months, GVA Grimley and AM will assess trends in property. Future issues will also consider profits compared to cost of property and per new and used car sales.

It cost how much?

Sytner BMW The group’s High Wycombe showroom is one of the UK’s costliest at £19m. The four-acre site, which opened in May, employs 130 staff and will turn over £80m in its first year, selling 4,000 cars.

Glasgow Audi This £15m centre is the world’s largest Audi dealership. Owned by Lomond Audi, the three-storey building has a 160-seat restaurant and conference facilities, plus an off-road test track.

Sewards of Bournemouth A GM brand centre accommodating Vauxhall, Chevrolet and Saab, which shows that even volume and budget marque showrooms can be expensive to build. It cost £4.5m.

#AM_ART_SPLIT# Rent per sq ft across the UK

CARDIFF: Rent: £12 per sq ft

MANCHESTER: Rent: £15 per sq ft

BIRMINGHAM: Rent: £15 per sq ft

BRISTOL: Rent: £15 per sq ft

BRIGHTON: Rent: £14 per sq ft

EDINBURGH: Rent: £12.50 per sq ft

NEWCASTLE: Rent: £12.50 per sq ft

LEEDS: Rent: £13 per sq ft

NOTTINGHAM: Rent: £13 per sq ft

WATFORD: Rent: £20 per sq ft

#AM_ART_SPLIT# Automotive land values

London and the south east are the most valuable (costly) places to build a dealership. Demand from alternative land uses is putting additional pressure on automotive land values. Alongside London/south east, West Midlands is also facing rising land values.

GVA Grimley automotive rent index

Rental values in the automotive sector have seen strong growth over the past two to three years. Prime rental values have increased almost 50% over the past five years and have outperformed all other property sectors monitored by GVA Grimley.

Turnover and property costs per outlet

Average turnover per outlet is markedly different for some dealers, with Camden seeing highest turnover per outlet at £55m. Its property costs per outlet are also the lowest as a proportion of turnover, at just under 3%.

Prime dealership rents

Rental values range from £12 at Cardiff to £20 per square foot at Watford. Rent levels and variations are as much to do with supply constraints as they are demand levels. Rent in certain locations, such as Leeds and Newcastle, have increased recently due to dealership expansion.

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