Significantly higher returns will be on offer for investors in service stations this year after average yields ballooned 150 basis points last year as a result of higher mortgage rates and lower valuations.
The expansion of average yields last year to 5.9 per cent from 4.4 per cent in 2021 came as more than $1 billion of servos changed hands over the calendar year – 52 per cent more than 2021 – new figures from Ray White Commercial show.
Vanessa Rader, head of research at Ray White Commercial, said experienced investors, developers and private syndicates were looking to take advantage of the corrections in yields, after many first-time buyers, who had driven yields lower (by bidding up prices), had left the market.
“This correction is likely to see the need for some owners to bring their assets to the market which will add to the portfolio transaction activity anticipated in 2023,” Ms Rader added.
Service stations, which usually include a convenience retail store alongside fuel bowsers, have long been popular with mum-and-dad investors given they are typically offered with long “set and forget” leases to national operators such as Coles Express, Woolworths Caltex, 7-Eleven and United.
They also typically sit on large sites in good metropolitan locations – often main roads or prominent corner sites – giving them future development potential and high underlying land value.
The rise of electric vehicles was expected to have an impact on investor demand for service stations. However, the slow take-up of these cars in Australia means they have had little effect to date, and some servos still transact on yields well below 5 per cent. (The lowest yield last year was 3.9 per cent, according to Ray White.)
EV sales are rising, but from a low base
Of the 1,081,429 new motor vehicles sold last year, only 3.1 per cent (33,410) were electric models, according to the Federal Chamber of Automotive Industries. Only about 0.3 per cent of all registered vehicles are electric.
Sales of EVs surged last year, albeit off a very low base, rising 549 per cent and indicating that, over time, they will become more mainstream.
Andrew Turner, founder and CEO of Banner Asset Management, which runs a $200 million-plus service station and convenience store fund, said Australia’s slow take-up of EVs meant fuel companies were still committing to 10- to 15-year leases, suggesting they remained comfortable with their business model.
“However, as demand for alternate fuels increases, these service stations will likely be transitioned to incorporate EV charging stations and offer other alternative fuel solutions,” he said.
“All assets owned by our fund also contain significant convenience store facilities. Growing market trends indicate that these stores will eventually turn into broad service hub facilities in the future, which could potentially include the addition of click-and-collect centres, laundry services, co-working sites, meeting rooms, or even childcare centres.”
Even if electric vehicles become mainstream, the most rapid charging still takes at least half an hour.
Because of that, Ms Rader suggested, “the need for comfortable and enticing food, retail and entertainment options within service stations will grow, continuing the evolution of what these assets look like”.
“However, as petrol vehicles are expected to continue to make up the large majority of vehicles over the next few decades, service stations are here to stay and will continue to be attractive investment options for investors.”
Extracted from AFR