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March 10, 2014 4:56 pm
Car showrooms have long been indicators of financial health. For any journalist worth their salt, a simple call to the sales staff of a luxury car showroom during bonus season would quickly reveal how those banks in Canary Wharf or Wall Street had performed over the past 12 months, and just how generously they had lined the pockets of their staff.
News of a spike or a fall in the number of sports cars being taken for a spin were quickly reported back to page editors and dissected for the expectant reader. Indeed, in a recent edition of the FT, it was proclaimed that the feelgood factor in the City of London had returned, that the biggest banks were hiring again, deal pipelines were filling up, and bonuses were on the rise. And just so there could be no doubt, the article was punctuated by the news that Britain had overtaken Germany to become Ferrari’s largest European market.
The result is that car showrooms are proving to be a sound investment themselves rather than just indicators of wealth elsewhere, and the message being driven home to investors by property fund managers is that car showrooms not only provide shiny sports cars but an attractive investment choice. The argument behind this, however, is more Volvo-esque in its reasoning than Ferrari-like: namely that car showrooms offer a good hedge against inflation. With central banks around the world fighting against disinflationary pressures and every effort being made to avoid price falls, the wise owls at the property investment companies suggest the only way is up for prices, and that now is the right time for investors to inflation-proof their commercial property investments in anticipation.
Many fund managers, including Pimco, the world’s largest bond house, argue the opposite and that inflation will remain low this year. Property managers have other ideas, however.
As a result, says Kiran Patel, chief investment officer at Cordea Savills, the international property fund manager, “we’re particularly attracted to inflation-linked alternatives such as car showrooms”, which in the UK are offering yields of between 5 per cent and 6 per cent while 10-year index-linked Gilts offer “a meagre negative 0.15 per cent”.
Patel adds: “Historically, the motor industry has performed in line with the retail price index and, as a result, manufacturers and car dealers are comfortable with agreeing inflation-linked leases. This also reassures investors on their tenants’ ability to service these agreements.”
His optimism – and that of other investment professionals – comes despite car showrooms being under attack from the web.
According to research by consultants Frost & Sullivan, global online car sales will increase eightfold between 2011 and 2025 to almost $4.5bn to account for almost one in every five new car purchases.
Audi, Nissan, Jaguar, Land-Rover, Mini and Mercedes-Benz have all opened digital stores, while Ford, Peugeot Citroën, Fiat and Renault have launched websites for customers to buy cars from them directly.
At the same time, bricks and mortar dealerships are becoming expensive. Margins for dealers on new car sales in Europe are typically less than 1 per cent of the price of the vehicle.
But Patel is unperturbed. The car industry has been ahead of the curve in successfully combining a “bricks and clicks” approach, he says. “As a result showrooms are here to stay. Their websites have become sufficiently sophisticated for customers to do a lot of their homework online but they still want to visit the showroom for a physical inspection and a test drive.”
He adds that research from Cordea Savills shows that since 1990 the best-performing sectors during periods of higher inflation are regional offices and alternatives including car showrooms but also budget hotels and gyms.
Patel may have a point and, although sustained price increases seem a long way off for the time being (cue the bad car jokes), a look under the bonnet at car showrooms might avert a head-on collision with inflation.
Chris Newlands is the editor of FTfm, the FT’s fund management section
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