Investors are flocking to the UK’s automotive sector as new green technology and the potential for strong long-term growth raise the profile, and profits, of this alternative asset class.
From car parks to service stations, petrol filling stations and showrooms, more than £800 million worth of transactions took place last year and a recent poll from JLL suggests 22 percent of investors plan to invest in the market over the next 12 months.
A shift towards electric vehicles is one of the reasons for the sectors’ rise to prominence. 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.
“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 Richard Servidei, from JLL’s Alternative Investment team.
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.
However, 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 hosting 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.
Another major challenge for the sector is the uncertainty around the fallout from the UK’s EU Referendum, or ‘Brexit’. 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.
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