Roadside advertising is offering increasingly lucrative opportunities for both landowners and media sellers as digital technology takes the platform to a new level. Wildstone’s Jonathan Chandler looks at the potential.
The glowing wall of branding that shines down on London’s Piccadilly Circus is arguably the most famous advertising pitch in the world.
The Chiswick Towers digital displays on the M4 flyover in West London produce rental income in excess of £1m per annum
From its earliest papered hoardings through the heyday of neon and through to today’s pin-sharp digital displays, it has been trying to persuade generations of Londoners and tourists to buy everything from cigarettes to smartphones for more than a century.
But if Piccadilly Circus is the ultimate ‘out-of-home’ advertising pitch there are plenty of other potential roadside sites which can offer a potential source of income.
Out-of-home (OOH) roadside advertising comes in various forms such as billboard posters, scaffold wraps, motorway towers and bus shelters. It is a £1bn per annum industry and offers opportunities to property owners and agents who can spot the potential of sites.
For example, the Chiswick Towers digital displays on the M4 flyover in west London produce rental income in excess of £1m per annum. Developed in 2013 by Wildstone for a public sector client, the two towers occupy a footprint of barely 250 sq ft, which (assuming a sub-10% yield) equates to a capital value of £50,000 per sq ft.
The OOH market is a more accurate barometer of the economic cycle than many other asset classes, because promotional spend is an easy expense to cut in a bearish market but also an important route to growth when sentiment is more bullish.
Unlike other property classes, this short lag means the rental bounce on premium advertising has been early and high. Digital OOH, in particular, has seen double-digit annual growth since 2010 and landlords looking to offer media sites to the market today are caught up in a veritable gold rush.
In 2014, total OOH revenue was up 1.5% year-on-year to just over £1bn. The 2015 forecast is 3% category revenue growth compared with digital accounting for around 27% of revenue.
The advertising potential of a building can have a major impact on its overall valuation
This growing demand from premium brands for digital screen space is being met by Clear Channel and Primesight who have both embarked on a nationwide rollout of fifty 48-‘sheet’ (6m x 3m) displays.
JCDecaux and other regional and specialist media owners are also actively pursuing a digital development strategy. This is countering the slump in secondary advertising sales as brands baulk at peripheral traditional formats, leaving landlords facing rent reductions, lengthy voids and forfeiture. It is therefore important for existing or potential advertising landlords and their agents to understand the workings of this polarised market and the opportunities and pitfalls that exist.
Following a number of mergers and consolidations, the UK OOH sector is dominated by a small number of media owners that control the market. JCDecaux (30%), Clear Channel (25%), Exterion Media (20%) and Primesight (11%) are the main players at present.
They sell the majority of space in fortnightly slots through specialist brokers Talon, Kinetic and Posterscope, which in turn deal with brands via media agencies such as MediaCom and Carat.
This hierarchical supply chain and associated rebates and discounts was the subject of an Office of Fair Trading investigation in 2011, though no action was taken.
An increasing number of small media owners are seeking to grow market share with the positive economic outlook, which is generating competition for premium sites. This, along with the establishment of specialist landlord consultancies, such as Wildstone, has fuelled further rental growth.
Rents in excess of £1m per annum are now being achieved by landlords for premium digital OOH sites. These figures are a product of scarcity, which is derived from location and planning factors. High rental value sites will always:
- be in top tier cities
- have good visibility splays
- have high vehicle and/or footfall traffic
- have limited competition from nearby sites
- benefit from an express or deemed advertising consent
- be viewed by a wealthy demographic audience
Where one or more of these factors is absent the rental values will be reduced accordingly. Where none of these factors exists there will be little or no demand from media owners. Investment funds are increasingly attracted to OOH sites as an alternative asset class.
Historically, advertising sites have been secondary or tertiary (with yields to match) reflecting poor construction, short contractual agreements (if any) and weak covenants.
More recently, the emergence of digital advertising and the associated increase in capital investment (up to £1m for a large screen) has meant media owners and landlords are more diligent in securing express consents and are demanding longer, more secure tenancies (albeit still Landlord and Tenant Act 1954 excluded).
The advertising potential of a building can have a major impact on its overall valuation. The 1960s Mille office building fronting the M4 comprises 100,000 sq ft
of multi-let office space together with three digital advertising screens, was marketed in Q1 2014 with a guide price of £15m reflecting a potential net initial yield of 10%.
It is understood that preferred bidder, McKay Securities, put forward an offer in the region £19.5m, reflecting a yield closer to 7.5%.
One can only speculate about the purchaser’s assumptions on the rack rental value of the office space or potential for residential conversion. But what is apparent is the reversionary uplift on the JCDecaux double-sided digital advertising tower together with the 70% revenue share payable to the landlord by Outdoor Plus, the tenant of the digital screen on the in-bound facade. The potential for rental growth and yield contraction certainly appears to have been a significant factor.
Landowners can certainly be confident that if they provide advertising space on their buildings that they will be dealing with substantial ‘tenants’. The principal media owners are now all multi-million pound turnover covenants. The effect of this security and demand for space has been a hardening of yields for these rarely traded OOH assets.
Another area for potential is installing advertising banners on scaffolding during building development and refurbishment.
While temporary, these displays (which still require planning consent) benefit from low installation costs and therefore the returns remain high. In a valuable location, income for landlords could readily exceed £50,000 per month, comfortably covering the cost of the scaffold and contributing significantly to the associated works.
However, voids will be higher and that relying on this income, particularly in non-core locations, is not advisable without first seeking professional advice. This is a growth area, particularly with the development cycle returning to speculative projects providing a greater number of opportunities.
The sophistication and proliferation of out-of-home advertising sector is moving forward constantly. Landlords and occupiers would be wise to explore opportunities in their portfolios.