Adam Chapman, head of Knight Frank’s Automotive team, comments:- The Volkswagen scandal over diesel emissions tests has been well-documented over recent days, and the financial implications for the company look severe. To date, VW has set aside $6.5bn, but there is speculation that it could cost up to $18bn to resolve the issue. Without a clear strategy on how they will resolve the issue, we simply do not know the full extent of the impact; a scandal of this scale has never before been witnessed in the motor industry. Some have even suggested it could lead to Chapter 11 bankruptcy. This is of course speculation, and considered unlikely by most, but the fact is that over 35% of VW’s market value has been eroded since the news broke.
A clearer picture may be seen on 6 October when SMMT (Society of Motor Manufacturers and Traders) releases new registration figures for this bellwether ‘plate change’ month. Based on August’s sales figures, the main VW brands (VW, Audi, Skoda and SEAT) accounted for 22% of the UK new car market. In reality, September sales are likely to be too early to see the true impact of the scandal. August saw a record 42nd consecutive month of growth for new car registrations, and there has been much debate in the industry how long the graph will continue to point northwards. There is a finite amount of vehicles the UK market can absorb, and a levelling out of registrations will be welcomed by those who will regard it as sales hitting their natural running rate, thereby reaching a more sustainable level. Importantly, the VW headlines only reached us towards the end of the month, and the lag-time between orders and registrations will also have a dampening effect on the data.
The scandal is a particular cause of unease for automotive property investors. VW Group is by a long way the most traded and sought after manufacturer covenant, with a large number of institutional funds, property companies and private investors exposed to the world’s largest automotive manufacturing group. The company entered into attractive institutionally-friendly leases which achieved the keenest yields in the market, by leveraging its significant covenant as a way to unlock high value sites, yet retain control by granting under-leases to dealer partners.
But a survey of 62 institutional investors, by the investment banking advisory firm Evercore, shows 66% would not invest in VW for six months, or until it clarified what costs, fines, and legal proceedings it faced. We have witnessed similar early sentiment from UK property investors, but in reality such investors are unlikely to shy away for long. It is perhaps reasonable to assume that investors would not willingly look to dispose of VW-let investments at present, and therefore in our view the likelihood is that we will see a cooling off of activity, rather than values, as the investment market settles.
There is also the impact to consider on dealer covenants, especially those trading with VW group franchises. The manufacturer will certainly witness a fall in sales volume – in the short term at least – which will impact on profitability for dealer partners. Whether this can be recovered through possible legal action, or by side agreement is yet to be seen, and how long it will last will be down to how quickly VW Group can regain customer trust. Equally, at the moment other manufacturers are seemingly guilty by association, with share prices having fallen across the board. Several have been quick to allay fears and issue statements categorically denying any foul play. If this is proven to be the case, then the hole in sales created by VW’s woes is likely to be absorbed by other brands – we certainly do not envisage total registrations will suffer materially. For one loser, there may in fact be several winners.
The VW emissions scandal is gradually unfolding, and Knight Frank’s specialist automotive team will be making periodic comments in its bi-monthly newsletter, Automotive Insight. There will doubtless be an impact on the UK automotive property investment market, but the true acid test will be investment market activity and pricing in Q4 2015 / Q1 2016.