Investors should be fuelling up on service station properties
Article | 4min read
by JONES REAL ESTATE on December 01, 2022
With combustion engine car production on a downward trend and demand for electric vehicles surging, there is no doubting the Australian service station sector is in for a dramatic overhaul over the next 20 years.
Couple this with the ever-evolving needs of the consumer population, and the opportunities to innovate in this sector from a convenience-perspective are exponential.
To help deepen your knowledge on the asset class and why service stations make a sound commercial property investment – for both established and first-time investors – let’s reflect on this property type’s recent performance and the upside potential that makes it an attractive proposition.
Service station performance in the 2020s
It has been an eventful few years for the broader real estate sector, with everything from residential to retail, gyms and gaming lounges, through to commercial properties and cattle farms facing their fair share of challenges off the back of the pandemic.
However, service station properties have performed consistently well during this period, especially throughout lockdown – selling roughly 90 million litres of petrol and diesel daily… But why?
Well, much of this performance can be attributed to the shutdown of Victoria’s public transport network, which meant more people were jumping in the car in order to travel where they needed to go.
And while most freedoms in our lifestyles have been restored, the lingering effects of the pandemic has reduced the number of people returning to the public transport network – further bolstering the need for service stations.
Why should you consider a service station as your next investment
Commercial buildings and industrial sites often command hefty prices, sometimes in the tens of millions, however right now service stations offer relative affordability to enter the market with clear-cut returns outlined on your investment.
Compared to the residential sector where leases yield about one – two per cent, annual service station yields return between 4.5 – 5.5 per cent on average. Furthermore, the service station asset class enjoys longer initial leases ranging from 12 – 15 years, with 15 – 20 years of optional terms, and are usually occupied by tenants that are trusted by Australian and global consumers including United Petroleum, BP, Ampol (formerly Caltex) and Shell.
Service stations are often located in coveted areas, or along key arterials positioned within varied commercial land or mixed-use zoning, making them versatile land parcels enjoying vast development potential to either elevate the existing property, or completely refresh the property type on the site.
AECOM Director for Oil and Gas, Ashley Lang, agrees with this sentiment, commenting recently that: “Their [service stations] future value is not in fuel, although petrol stations will continue to offer that in some form for at least the next 20 – 30 years. The value is in their strategically significant locations.”
Research commissioned by the Australian Automobile Association predicts Australia’s traffic and congestion will get worse, with the flow of Melbourne’s roads deteriorating faster than any other capital city.
But with more commuters spending more time on Victoria’s road network, service stations will stay in high-demand and in a position to take advantage of the changing conditions on our roads.
Emerging opportunities across the sector
The growing community of electric vehicle (EV) owners in Victoria compared to the number of charging stations is disproportionately tipped towards owners – representing a significant opportunity to up-spec existing properties with EV integrations that will act as a short-term drawcard for these car owners.
Furthermore, by 2030 in Australia, government modelling forecasts that 30 per cent of vehicles sold domestically will be electric, underscoring the importance of the early adoption of alternative power source facilities across the country.
Leading brands like Ampol are already preparing for mass change, installing over 400 EV fast-chargers across 121 service stations throughout Australia and investigating hydrogen fuel facilities, however more works are planned as part of the organisation’s “strategic reset” which operates nearly 2,000 service stations in the country.
Talking to the changes, Ampol’s CEO Matthew Halliday said: “Clearly fuel is going to decline over time. We want to position the business to play a role in repurposing its assets so that it could distribute future forms of energy to our customers.”
As this gradual shift from petrol to electric takes place, the broader design approach to service stations will also need to be reinvigorated to cater for the increased time a customer spends on-site when topping up their vehicle.
While a limited selection of products might be ample for a five minute fuel pit-stop, charging an electric vehicle to 80 per cent through a fast-charger can take up to an hour to complete – assuming immediate availability of a charging station (thus perhaps much longer) which will ultimately reframe consumer expectations around the service station retail model.
The success of Ampol’s Foodary pilot in 2018, which utilised a high-visitation site to test new fresh food and ready meal offerings, as well as parcel pick-up and laundry services, is a case study that represents the growing opportunity to establish service stations as integrated convenience hubs, especially for communities in dense city and country areas.
This wide acceptance of the Foodary trial, coupled with a recalibrated approach to service station design that will incorporate lounges with meeting spaces and other conveniences like short-term childcare, are all value-add opportunities that will help to improve user experience and open up new revenue streams for both brands and asset owners.
Recent Jones Real Estate service station deals
A strong example of the investment performance of Victorian service station assets occurred recently across Melbourne’s outer south east, where our experienced sales team sold two United Petroleum service stations in Dandenong South and Cranbourne West.
Interestingly, this is the second time our team has sold these two service station properties within 24-months to private investors, initially for $4.9 million and $8 million, and again this for $6.18 million and $8.5 million, respectively – representing a combined capital gain of $1.8 million and $27.58 million in deals.
Both transactions for each property were secured with a blended annual yield of five per cent, which will generate a solid passive revenue stream over the lifespan of each lease and perhaps the decades of options to come.
If you are keen to learn more about the Victorian service station market, or would like to discuss a separate commercial property matter, please reach out to us at email@example.com