Your questions posed to our experts - with Nigel Smith, Gilbran Group.

Q. What should a dealer with a relatively small showroom do to maximise its potential if expansion is not possible?

A dealer with a relatively small showroom, assuming it meets the manufacturer standards, is going to have to be intelligently selective about the vehicles that are displayed within the showroom and will need to utilise the external areas on the site in order to attract customers and represent the brand appropriately.

One way to compensate is to use audio visual equipment. This is a great way to show the product off in a dynamic and contextual way and usually the manufacturer’s advertising budget will ensure that whatever the product is, it is seen as desirable. The internet should be viewed as an extension of the showroom.

Ensuring that all vehicles are visible through this medium can compensate for the shortcomings of the terrestrial showroom.

One other means of overcoming the showroom restrictions is to create an “impress” showroom in the immediate local area in situations such as shopping centres, sports centres and well-attended one-off events such a county shows.

This allows you to create visibility which will hopefully allow the showroom to merely provide a backdrop to the business of converting prospects to sales.

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Q. Do you think 2010 will be a better year for the automotive property market?

It shouldn’t get worse in 2010 for prime automotive property. The outlook for secondary property looks less positive.

Income yields on automotive property remain at unprecedented highs relative to other asset classes.

Automotive property provides the core infrastructure for personal mobility and sustainable well-run businesses will continue to provide that service from key physical locations.

Dealerships tend to be in high profile locations which should help underpin their value for alternative uses.

Having said that there is a continuing lack of availability of debt, a lack of investor appetitite for the sector and downward pressure on rents caused by the weakness of the economy and structural issues that remain in the industry, particularly too much capacity resulting in low profitability. Until these are substantially resolved it is difficult to see values getting back to 2007 levels.

Barring further shocks these positive factors should be sufficient to counter the negatives and keep values at or slightly above current levels in 2010, although non-prime assets and those at perceived risk of becoming vacant will struggle.

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Q. How can dealers ensure they are getting optimum value from their leases at present?

Dealers with an upcoming lease exit, i.e. a break or term-end, should start negotiations with their landlord as early as possible if they intend to stay. In the current climate they may well be able to reduce their property overhead.
Dealers should consider the cost over the whole of the lease term to ensure the benefit of a lower overhead is not lost at the first rent review.

Dealers with longer-term lease contracts should review how they are using their property. It may be be possible to increase the utilisation of rented space by taking on an additional brand or offering additional services to drive more revenue out of a fixed overhead. Failing that it may be possible to fix an underutilised property by subletting some of it. This is likely to require the consent of your landlord.

It pays to keep a dialogue open with your landlord and look after the property. Any landlord is more likely to go further to accommodate a good tenant.

Finally look at and plan for future critical lease events such as rent reviews, and review all your
property overheads, paying particular attention to business rates as new rateable values are due to be published at the end of September. 

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Q. What should a dealer with a relatively small showroom do to maximise its potential if expansion is not possible?

A dealer with a relatively small showroom, assuming it meets the manufacturer standards, is going to have to be intelligently selective about the vehicles that are displayed within the showroom and will need to utilise the external areas on the site in order to attract customers and represent the brand appropriately.

One way to compensate is to use Audio Visual equipment. This is a great way to show the product off in a dynamic and contextual way and usually the manufacturer’s advertising budget will ensure that whatever the product is, it is seen as desirable.

The internet should be viewed as an extension of the showroom. Ensuring that all vehicles are visible through this medium can compensate for the shortcomings of the terrestrial showroom.

One other means of overcoming the showroom restrictions is to create an "impress" showroom in the immediate local area in situations such as shopping centres, sports centres and well-attended one-off events such a County Shows.

This allows you to create visibility which will hopefully allow the showroom to merely provide a backdrop to the business of converting prospects to sales.

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Q. How can a dealer make a success from operating from a relatively low-key location or ageing showroom?

There is no inherent problem with a "low key" location or an ageing showroom if the property overhead reflects the location and the ageing showroom is not an issue for the relevant manufacturer to the extent that a franchise termination notice is issued. If the rental overhead reflects the "low key" location, this may be an advantage in today's price sensitive market.

If the rental overhead does not reflect the" low key" location then perhaps a conversation needs to be held with the landlord to adjust the rent accordingly. A landlord will prefer to adjust the rental rather than have a tenant vacate the building or go into administration.

He is unlikely, however, to be sympathetic to such an approach unless trading performance is exemplary relative to composites and operational sacrifices are also being made. Similarly the relevant manufacturer is, given exemplary performance and proven sacrifice, also likely to be sympathetic to an ageing showroom in today's environment.

Utilization of the internet, collection and delivery for test drives and service and a high CSI can overcome most locational impediments. Furthermore showroom shortcoming will largely be forgiven especially if there is a reflection in the pricing of sales and service for the dealerships physical shortcomings.

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Q. What advice would you give to dealers looking to start a new build in the recession?

Dealers will need to have a business case that is absolute and sustainable going forward. This will include full manufacturer backing for the project based on their re-orientated (not old) network plan. If possible get the manufacturer to commit to the lease, and take a sublease from them, to avoid a mismatch between the franchise agreement term and the term of the lease or finance commitment. The property location must be strong.

Dealers will need to aggressively manage all of their cost inputs to ensure their property overhead is as low as possible, prices paid for land must reflect the current (not historic) economic climate. We would also advise that any Bank finance includes fixes for interest rates.

Dealers will also need to ensure the development is correctly risk managed; dealers should insure the solvency of their contractor (for example with a performance bond) and make sure they have watertight finance commitments in place (debt and equity) to finish the development before they start it.

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More from Nigel Smith

Gilbran was formed in 1996 as the UK’s first specialist investor and developer of automotive property with offices in London and Frankfurt.

Our approach enables us to work very closely with operators and to build
a much greater depth of knowledge of the market than a traditional property company which enables us to better understand the requirements of our ‘partners,’ the car manufacturers and dealers, and to react to their changing requirements.

The company is managed by a full-time team of professionals supported
by an advisory board of experienced individuals who provide key insight and relationships across the spectrum of our activities.

To ensure that the most experienced resources are employed on individual projects Gilbran also assembles project-specific teams on a deal by deal basis.

This offers the company, and through us our partners, a great depth of resources together with a very high degree of operational flexibility and efficiency.

Working closely with our partner’s operational team, Gilbran will design capital and management solutions for any real estate requirements, be that the development of a single dealership or the acquisition, leasing or management of an entire network.

As a principal organisation, we invest our own capital into the property solutions that we create, sharing risk and reaffirming our commitment to our partners and to the sector.

Furthermore, by outsourcing the capital and management attention required and re-employing these assets on core operations, Gilbran’s partners enhance their own performance and shareholder value.

In respect of new developments, Gilbran assume all development risk (not our partners) and manage the entire development process: from site identification, based on a detailed understanding of our partners’ specific requirements; through to providing the initial feasibility schemes; budget costings; obtaining planning permission; and managing the whole construction process throughout.

In terms of existing operational sites and buildings, we have extensive experience in structuring sale and leaseback – style transactions employing unique, innovative and flexible lease terms with predictable costs which benefit our partners greatly.

Gilbran has assimilated a substantial portfolio of automotive property in locations throughout the UK, with several developments currently in the feasibility and planning stages.

The properties represent a diverse range of facilities for automotive manufacturers including Citroen, Land Rover, Honda, Jaguar, BMW, Bentley, Mini, Renault, Porsche, Mazda, Nissan, Fiat and Mercedes.

Nigel Smith is the founder and managing director of the Gilbran Group.

He is responsible for pursuing new development and investment opportunities throughout the UK, working closely with manufacturers and dealer groups, to provide cost effective solutions, and to ensure, in respect of new developments, that projects are delivered on time and within budget.

‘We invest our own capital in the property solutions that we create’.