Petrol stations are providing a fill up for investors, but how long will it last?

Petrol stations are providing a fill up for investors, but how long will it last_ by Global Capital Commercial

Traditionally the domain of private investors, service station assets are coming under the radar of larger Australian commercial real estate investors and REITs looking to improve the return on their property portfolios.

The attraction of the asset class is obvious, service stations typically come with long leases, have reliable tenants in place and offer high-quality lease covenants, all of which makes them appealing for both private and institutional investors alike.

But changes to the underlying business model for service stations is what’s making them more appealing to institutional investors who have traditionally shied away from the asset class due to the razor-thin margins of retailing fuel.

Changing consumer buying habits fuel demand

As consumer buying habits change and fewer people are doing a weekly shop at the supermarket, the local convenience store model of the humble service station has seen sales and profits rise significantly.

In Queensland for example, sales per square metre have doubled over the past three years, climbing from $1,100 in 2014 to $2,210 in 2017. And it’s a similar story for service stations across the country which have seen double-digit growth since 2011.

Consolidation in the service station market is also helping drive profits for operators. As cars become more fuel efficient fewer petrol stations are required to supply them. According to the Australian Competition and Consumer Commission (ACCC), the number of petrol retailing sites has fallen across Australia, from a high of 20,000 in 1970 to a low of 6,350 in 2014.

But how long will the good times last?

All of this is great news if you’re the owner of a state-of-the-art service station site with an attached convenience store in a prime location. But aren’t we ignoring the elephant in the room?

Service stations sites face an existential threat from the rise of electric vehicles. Bloomberg estimates that one third of the cars on the road will be electric by 2040. That might seem like a long way off, but it is well within the timeframe for most commercial property investors.

With most electric vehicle charging carried out at home the value of traditional petrol station assets could be hit hard by the shift away from the internal combustion engine. And if people move on masse to self-driving cars and ride-sharing services like Uber, the longterm impact for service stations could be even worse.

Location is key

Does that mean investors should stay away from the asset class altogether? Not necessarily, service stations are essentially property and prime located property at that. Many investors are taking the long-term view that service station sites offer prime opportunities for redevelopment.

The best way to protect against a step change in consumer buying habits is to be choosy about which service stations to invest in. Sites positioned on arterial roads and those located in the centre of town are the most sought-after locations demanding the highest prices with locations located out of town or with limited scope for redevelopment already proving difficult to sell.

Retail property Investors would also be wise to choose locations which offer a diversified income stream. Most state-of-the-art sites come complete with a convenience store, coffee shop, car wash and petrol forecourt. These sites will be more resilient to change than older sites which only provide petrol retailing and a small convenience store.

If investors are prudent and take care to purchase sites with a diversified income stream and good development potential there is no reason to suspect that long-term income will be affected. In fact, the clouds that are currently hovering over the sector may put some private lenders and potential buyers off making it easier for bargains to be found.