The sector still provides relative value at an accessible price, especially compared to residential real estate, and the pandemic has only increased its appeal.
The coronavirus pandemic created torment for commercial property investors with many sectors still facing uncertainty, but there were a few sectors that defied the broader market.
Service stations, in particular, thrived during the pandemic as public transport was abandoned and many took to the road for a quick escape. The pandemic showed just how resilient service stations are as an investment.
While this asset benefited from an increase in domestic travel, the rise in convenience retailing also saw demand soar while restrictions were in place.
But savvy investors had their eyes focused on service stations long before the COVID-19 hit.
At an entry level buy-in of about $4 million, this asset delivers a sound investment thesis because of historically long-term leases, consistency in performance and the added drawcard of future development potential thanks to their often-coveted, or high-profile, locations.
And the results speak for themselves, with service stations seeing significant yield compression in recent years as demand shifts to investments with quality tenants and upside potential.
Over the past few years, yields have tightened on service stations and now average sub 5.5 per cent. Gross sales are also rising with $493 million transacted in 2020, up 39 per cent from $354 million in 2017, indicating growing appetite. Yields are likely to further compress as demand for this type of asset intensifies.
While the move to electric cars is gaining momentum, key providers such as Viva Energy, Caltex and BP, along with the main supermarket chains, are expanding their networks. The integration of electronic vehicles into existing sites has worked to soften risks.
There are now more than 6000 service stations across Australia and some 789 motor vehicles per 1000 people, the sixth-highest level globally.
The heavy reliance on cars in Australia has resulted in strong underlying demand for fuel, despite improvements in public transport infrastructure and ride-share technologies.
While electric vehicles appear a long-term threat, the low uptake of these products has come as a result of their higher price point and absence of government subsidies. This means that the majority of Australians will be dependent on fuel reliant transport over the medium-term.
The possibility of hydrogen fuel being taken up is also on the cards but, historically, petrol stations have adapted quickly to change and have implemented new products in a timely manner.
Viva, one of Australia’s largest energy suppliers, released a study before the pandemic showing fuel consumption should remain solid over the medium-term despite a weakness in retail fuel volumes and the structural pressure on consumption that is likely to emerge at some point.
‘No longer a drag’
Fuel efficiency is no longer a drag on total volumes of fuel consumed and while there have been incremental improvements in fuel efficiency from the move to more effective, lower capacity turbo-charged engines as well as hybrid vehicles, this seems to have been offset by the move to larger vehicles which consume more fuel per kilometre.
While retail fuel volumes are coming under pressure across the sector, a move away from public transport, links to key convenience store operators including Coles and Woolworths and being in sought-after locations will provide some protection.
Newer service stations will enjoy a premium price over more established or older petrol stations as they offer larger canopies and often include cafes or are part of tenancy mix offering fast food and dining outlets.
Attractive lease terms and an increased focus on the convenience retailing offered by service station operators have increased the attractiveness of the asset class.
Additionally, service station assets continue to offer long-term optionality for landlords via residential or mixed-use development, particularly in key metropolitan locations.
While yields have compressed on the back of increased investor demand, the sector still provides relative value at an accessible price point for both retail and institutional investors.
This provides a strong opportunity for income-focused investors, particularly when compared to the residential market.
Extracted from AFR