Investing in Service Stations
Service stations have become hot property for provite investors, given thier long leases, cheap entry price and low maintenance. In this guide we dive into the fundumentals of investing in service stations.
Australian Fuel Sector
The oil and gas industry is usually divided into three major sectors: upstream, midstream and downstream:
- Upstream – searching for potential underground or underwater crude oil and natural gas fields, drilling exploratory wells, and subsequently drilling and operating the wells that recover and bring the crude oil and/or raw natural gas to the surface.
- Midstream – involves the transportation (by pipeline, rail, barge, oil tanker or truck), storage, and wholesale marketing of crude or refined petroleum products.
- Downstream – the refining of petroleum crude oil and the processing and purifying of raw natural gas, as well as the marketing and distribution (also known as retailing) of products derived from crude oil and natural gas.
Retail Fuel Sector
The Australian retail fuel retailing sector has undergone significant changes over recent decades. In that time we have witnessed retail petrol stations becoming increasingly dominated by larger, more centralized sites, and a changing of the guard of ownership from major oil companies to major Australian supermarket chains, such as Coles and Woolworths. This process has led to a rationalisation of the number of petrol stations and a transformation of petrol stations into broader retail outlets. In fact, the emergence of the supermarket chains have created a mindset where they generally do not see petrol as their main product but rather as a useful adjunct to their primary business objective of maximising sales of non-fuel items, including convenience shops, cafes, car washes, ATM services, auto accessories and equipment hire.
Part of the appeal of offering a broader convenience retail offering has been the higher margins available from non-fuel type revenue. This addition has provided substantial growth for the industry with industry profits increasing by nearly 150% in real terms from 2005 to 2014, according to the ACCC.
A key driver of this growth has been the advent of shopper docket discounting schemes. Although, in 2014 we witnessed the first year of negative growth in retail sector profits since 2008−09, which arguably reflected the tougher stance by the ACCC in relation to shopper dockets.
Service-Station Property Investment
The evolution of service stations as a property investment class, is in keeping with the broader demand for non-core property sectors in Australia this cycle. This has led to the tightening of yields as investors have become more familiar with these different forms of investment and their attributes.
Investing in service stations have become particularly attractive to smaller investors and Self-Managed Superannuation Funds (SMSF’s), given they typically have average asset values of $1-2 million. This has led to even more extreme pricing, as we have seen with other sectors such as childcare, as these investors typically price these assets on their relative yield to residential property or term deposits. However, with long leases on offer, which are often triple net and supported by a strong tenant, it is not surprising that this demand has eventuated, and as we saw during the Credit Crisis, small private investors also tend to be more supportive of asset prices in a downturn compared to large institutions.
The following chart show service station yields based on historical market evidence. As with other sectors we have witnessed significant cap rate compression in recent years which now looks to be moderating. Our analysis of this data indicates a 100bp spread between regional and metro assets and a 40bp spread between assets which are tenanted from major brands compared to lesser known brands.
Threat of Electric Cars
The transport sector is one of the fastest growing sources of emissions within Australia, increasing by 47.5% since 1990, however it also represents the most financially attractive emission reduction opportunity across the Australian economy.
The transport sector accounts for 17% of Australia’s emissions in 2013-14, with Passenger and Light Commercial vehicles contributing 62% of the sector’s total emissions. The sector’s emissions have been projected to rise by a further 6% to 2020, driven primarily by population and income growth for passenger travel and economic growth for freight transport.
Around the world we are witnessing the emergence of the electric car as a viable competitor to fuel powered cars which understandably raises questions about the future risk to the service station industry.
However, the lack of a national policy framework in Australia, has led to limited overall support and incentives in comparison to our global peers. In Australia, electric cars represent less than 0.1% of the market, compared to 0.7% for the US and 1.3% for the EU. In fact, in 2016 there were just 219 electric cars sold in Australia, which was a staggering drop of 90% from the previous year.
Despite what’s occurring abroad, the evidence points to petrol powered vehicles being dominant in the Australian car market at least for another 15 years.
Find out more
For more information on commercial property in general, read our article Investing in Commercial Property – The Ultimate Guide.