Property investor Bessim Saad is confident the 7-Eleven run petrol station he purchased for $3.2 million earlier this year will survive the electric vehicle onslaught.
“I don’t think fossil fuels are going to die out anytime soon,” says the Melbourne-based investor. “It’s my first petrol station. I’m hoping to purchase another one soon. I’ve been investing in property for many years.”
Saad is not the only one banking on Australia’s gas guzzling vehicle fleet – one of the most polluting in the world thanks to our love of 4WDs and utes – to keep rental income ticking over from the country’s vast network of petrol stations.
Over the past decade, the country’s retail trust powerhouses have built large service station property holdings that provide willing mum-and-dad investors with inflation-busting earnings increases off the back of CPI linked leases to convenience and fuel retailers like Coles Express, 7-Eleven, Shell or Liberty.
Activity in the sector is starting to pick up again after several years of fuel retailing disruption. Fuel sales dipped as COVID restrictions kept people at home and slumped again this year, when the war in Ukraine sent energy prices soaring.
That disruption and rising interest rates took the edge off real estate transaction volumes this year, which declined about 50 per cent over the previous year, says JLL retail sales executive Jarrod Herscu.
Herscu, who sold the 7-Eleven petrol station at 44-54 Sydney Parade in Geelong to Saad, said it transacted on a sharp yield of 4.67 per cent.
“We are also seeing heightened investor demand for service station anchored assets that include fast food outlets such as KFC, Hungry Jacks and Guzman Y Gomez. The inclusion of fast food outlets drives additional traffic to the service stations, bolstering their performance and providing a diversified income base,” Herscu said.
The market uncertainty hasn’t stopped one of the country’s largest property funds, Charter Hall, inking deals worth more than $270 million this year through its Charter Hall Retail REIT with BP, Ampol, Gull and Z Energy to acquire or gain exposure to multiple service stations in Australia and New Zealand.
And petrol major Viva Energy, owner of the Shell service station chain in Australia, said in September it will buy Coles’ network of convenience stores on its sites, giving it a bigger retail footprint than its arch rival Ampol and ramping up its customer engagement ahead of an expected recovery in fuel sales and transition to electric vehicles.
If Viva’s deal is approved by regulators, it will pay the supermarket giant $300 million for 710 Coles Express outlets on its properties enabling Coles to exit a non-core business and handing the fuel retailer $1.14 billion in convenience store sales revenue.
Despite COVID and soaring energy prices, Waypoint REIT, Australia’s largest listed property trust that solely owns fuel and convenience retail properties, recorded a $139.5 million valuation uplift midway through 2022 as rents rose and capitalisation rates compressed further.
Saad’s apparent lack of concern about the coming electric jolt is unsurprising when considered in light of research by Bloomberg’s New Energy Finance unit.
Its lead transport analyst, Will Edmonds, says Australia is not a priority for the world’s automakers when they decide where to send their scarce supply of EVs. “This is because it lacks policies, like strict vehicle emission standards, which automakers face in markets like the US, EU and China,” Edmonds said.
While federal and state governments have laid out ambitious EV targets – which will require equally ambitious policies to execute – if no emission standard or equivalent policy is introduced, limited uptake in the near term will mean EVs may represent just 32 per cent of the Australian passenger vehicle fleet by 2040. “This would be far below other peer markets,” Edmonds said.
“Because it has taken such a long time to act on vehicle emissions, Australia is in a difficult policy position. Australia’s fleet is so far behind other regions, like the EU, it cannot immediately rush in the same standards.”
The lack of available EVs means demand is outpacing supply. Despite that, the proportion of EVs sold each month compared to their fossil fuel counterparts is rising, albeit slowly. Last September, Tesla’s Model Y was nipping at the rear bumper of the Ranger when 4359 of its EVs rolled off the showroom floor, making it the third-highest selling model. In November, battery electric, plug-in hybrid and hybrid vehicles made up 14 per cent of all new vehicles sales.
Landlords and retailers may be slow to react to the coming EV wave – Viva Energy has installed just half a dozen charging stations across its network – but their focus is shifting.
In Norway, the globe’s most advanced EV market, electric cars account for around 80 per cent of new sales
Waypoint’s boss Hadyn Stephens said the trust’s primary long-term focus is on owning sites that are well-placed to navigate the energy transition.
“In this respect we have sold about 70 sites in the last two years and returned the sale proceeds to investors, leaving us with a much stronger portfolio of about 400 properties with a combined valuation of approximately $3 billion.”
Stephens points out that it will take a long time for EV uptake of new cars to translate to meaningful fleet share and, consequently, there will be a long period of adjustment for landlords and convenience retailers to grapple with the electric shift.
In Norway, the globe’s most advanced EV market, electric cars account for around 80 per cent of new sales, but make up only 25 per cent of the country’s total vehicle fleet. That’s despite Norway being many years ahead of Australia in terms of its EV transition.
“The opportunity for installing EV charging stations principally sits with the tenant as the terms of our leases do not allow us to unilaterally install them on our sites. We can and will work with them [tenants] to future-proof sites across the network over time,” Stephens said.
Viva’s majority owner, Netherlands-based energy giant Vitol SA, said earlier this year it expected demand for traditional fuels to remain strong “well into the next decade”.
Slim margins from fuel sales – typically only a few cents from each litre of petrol – mean operators make better profits selling food, drinks, confectionery and tobacco.
For Saad, the link between a store’s convenience sales and its location as a fuel source is more important the type of energy it sells. “Each service complements the other. The confectionery complements the fuel or the charging, and the charging complements the confectionery,” he said.
“My tenant is 7-Eleven. They have been in that spot from 2006.” If they leave, he said, the 1267 square metre site will still have significant value because of its development potential and corner location.
Extracted from The Age