What The Car Crash In The UK Auto Sector Means For Property
Not a prang, not even a crash, but a multi-vehicle pile-up: The bad news in the UK auto sector just keeps on coming, one dire announcement ploughing into the back of another.
Auto manufacturing is a vital part of the UK property market outside of London. Total occupation runs into tens of millions of square feet, from the car marques themselves and on into the supply chains they support. But since 2016 auto sector take-up has been falling. In the West Midlands, for instance, it accounted for 1.5M SF of take-up in 2016, falling to just 500K SF in 2018, according to Cushman & Wakefield.
When the auto sector shrank in Detroit in the 1990s and early 2000s, an entire city was hollowed out. UK car manufacturing is not as geographically concentrated as in the U.S., but nonetheless, the changes it is going through will have a profound effect on regional economies and property markets.
Some think it is just a cyclical slowdown, one of those periodic moments of turbulence that has bedevilled the auto sector since Henry Ford first cranked mass production into life, a bump exacerbated by the uncertainty aound Brexit. They hope new battery technology will involve additional demand for factories.
But others see major structural changes that go far beyond the effect of Brexit, that could cut the land and floorspace needed by the auto sector, and lead to an influx of second-hand property hitting the industrial market.
Behind the falling industrial take-up numbers is a stark fact: Car output is plunging, down 9%, the lowest for five years. The global auto sector is struggling to cope with change, both in vehicle technology and in customer demands.
The trio of big Japanese car makers (Toyota, Nissan and Honda) are particularly troubled. Their super-refined supply chains and concentration on perfecting drivetrain systems conspires to make it painfully difficult to adapt to new technologies and market needs.
JLR has problems too. Over-reliance on deisel is a headache in the UK market. In China, a market which has been a major factor in the company's recent success, it suffers from the self-inflicted problem of poor locally produced product reliability which has become a drag on sales.
The Problem, Clearly Stated
Should the property industry, and the industrial and logistics sector in particular, be worried?
The industrial property sector has had a stellar couple of years, and 2018 was the best of the lot. The UK logistics market had a record-breaking 12 months with annual take-up reaching 35.9M SF, the highest level since 2008, according to Cushman & Wakefield.
Yet the data contained a warning: in the West Midlands, a region dominated by JLR and its supply chain, annual take-up halved compared to 2017, falling to 3.2M SF. Reduced demand from the auto sector was largely to blame.
“I see the current situation as less serious rather than more serious,” Cushman & Wakefield partner Simon Lloyd said of the Honda, Nissan and JLR problems. “It’s a temporary issue, it's structural change.”
If the worst comes to the worst, Honda’s 370-acre Swindon site is well-located on the M4, and Swindon is already a growing logistics hub, lloyd argued. The site will find new uses. The same goes for Toyota’s Burnaston plant, just a short HGV ride from the giant East Midlands Gateway logistics site.
Knight Frank Head of Industrial Charles Binks said there is a the perfect storm facing the global auto sector.
“We’re going through a blip and the auto sector will bounce back,” he said. “The auto supply chain always goes in fits and starts. We had a spate of activity in 2016, and then it goes quiet.”
Binks is less optimistic about the future of the Swindon market: It will have to face competition from Bristol and the tier one supply chain will return a lot, potentially millions of square feet, of floorspace to the market. Local problems aside, Binks sees investment in battery technology and automotive vehicles as a lifeline for the UK car industry.
Reasons To Be Cheerful
“Manufacturing may shift away from the UK but growth in research and innovation in motion technology may in part compensate for a decline in UK-based car assembly in Britain’s advanced economy,” BNP Paribas Head of Midlands Simon Robinson said.
Landlords tend to agree that disruption is short-term.
“Our customers are already working on, and planning for increased demand, in the coming years as a switch to electric vehicles happens — much of which will be based in the UK in and around the traditional auto locations like the new JLR battery facility at Hams Hall,” Logicor Asset Manager Mike Best said.
“We expect to see continued demand from the sector as the market evolves and our existing customers are already planning for this and investing in facilities to ensure they continue to be key assets in the auto supply chain.”
The picture is subtly different if you talk to auto industry experts, and none is more firmly located in the overlap between the auto sector and property than West Midlands Growth Co. Senior Business Manager for the Automotive Sector David Shepherd.
Shepherd is leading the Drive Midlands initiative designed to attract and keep auto sector suppliers in the region. And he is not talking about blips.
“The auto sector is clearly significant to the Midlands economy," Shepherd said. "JLR goes for 50% local content in their cars, and our research has identified 1,100 local supplier businesses. The auto sector touches an awful lot of our economy now, and going forward.”
Asked to rate the risk posed by the current auto-sector smash-up, Shepherd is disarmingly frank.
“It is incredibly difficult to say. My sense is one of concern. Yes, this is cyclical in part, but we are potentially facing something more serious than any economic cycle. Look at what the Society of Motor Manufacturers and Traders have been saying: They are concerned for the future,” he said.
Shepherd does not expect some kind of automobile Armageddon, but he does think the change is big, serious, long-term and may involve a lot less land and property.
Reasons To Be Cautious
“The UK auto industry is in two halves. We have manufacturing, then we have Industry 4.0 which is about the first class research and development ecosystem. We have MIRA, and some fabulous work on vehicle technology at the universities of Warwick and Coventry, and the smart mobility centre at Wellesborne,” he said.
“This R&D landscape transcends the manufacturing sector, the UK has a high reputation, and we are fielding three or four good enquiries from newcomers even now, in one case global.”
Yet Shepherd said turning that technology into a large-scale manufacturing industry will be difficult. Battery technology is still expensive, charging points scarce, and “until you can get batteries to the same cost base as the internal combustion engine you have a problem, because an industry based on subsidy isn’t sustainable,” he said.
Shepherd said it is “not a silly thought” to suggest the car industry of the future, when it finally arrives, will need less land and property.
“One of the things that has come out of the last few weeks is that there is overcapacity in the car industry," he said. "In the future the car business is going to be about working smarter and harder. We’ve already seen this, with tier one suppliers doing some of the assembly, and generally as we get smarter we need less land. For example, look at how just-in-time supply chains have cut warehousing needs.”
The conclusion is not doom and gloom, but the cold hard realisation that big changes are in progress and the outcome not entirely clear.
“The bottom line is that the potential in the UK auto sector is still there," Shepherd said. "We’re making 1.6 million new cars a year, the UK is an early adopter of technology, and you only need to go to any supermarket car park to see how many electric cars are on charge. So you can’t write the auto sector off, and it uses lots of land and people and will continue to do so. But we are at a point where people question the need for cars and the dynamics of mass transit may change.”
Will big car plants like Honda’s at Swindon be a part of this distant future? Maybe not. By 2030 the auto sector, and its property needs, could look very different than it does today.