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Automotive Scandal Raising Concerns for Automotive Property Investors

11/11/2015

For many commercial property investors, there are risk exposures and valid concerns caused by the Volkswagen scandal. Recently, Volkswagen found itself embroiled in a major scandal pertaining to diesel emissions tests, something documented extensively for months.

At this time, $6.5 billion has been set aside to deal with the scandal. To come to full resolution, some believe it will cost the company almost $20 billion. The full impact remains unknown since Volkswagen still has no defined strategy. Never before has a scandal of this magnitude rocked the automotive industry. In fact, things are so bad that a number of experts feel that Volkswagen will eventually face bankruptcy.

Impacting Property Investors

Although the scandal has raised all kinds of issues for investors and automakers, it has also increased stress among property investors. The parent company, VW Group, is the most sought after and highly traded of all manufacturing companies. As part of that are private investors, institutional funds, and property companies.

VW Group entered leases that achieved incredible yields within the market by leveraging its covenant as a means of unlocking high value sites. This is something it still controls by granting dealer partners with leases. However, when 62 institutional investors were surveyed, 66% stated they would not be investing in the company for a minimum six months or until they had a better understanding of fines, costs, and legal proceedings regarding the scandal.

Therefore, investors will likely have no interest in disposing of VW-let investments, at least for now. As a result, investors expect to see a cooling off period. In addition, there will be some type of impact to dealer covenants trading with VW group franchises.

Short-term, Volkswagen will see a fall in the volume of sales, which in turn will influence dealer partners’ profitability. Although there is a chance that legal action will help with recovery, this is still unclear. It is also unclear as to how long it will take for resolution but more importantly, the length of time it will take VW Group to regain the trust of customers.

There is also the issue of other automakers being guilty by association, something witnessed with the decline of share prices. A number of other auto manufacturers have been quick to respond by issuing statements denying they had anything to do with the scandal but if it comes out that some did, Volkswagen created a much bigger and more damaging mess.

As the details of the Volkswagen scandal are slowly unfolding, there is no question that automotive property investors, especially in Europe, will have some impact. The bottom line is that pricing in the fourth quarter of this year along with investment activity will be the true test.

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