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Service station commercial investments typically offer the security of a strong lease covenant to a multi-national tenant and the longer term development potential for additional uses once the economic life of the site has run out. Most service station sites are located on major roads with excellent exposure and often are on corner sites with good car access and hence have strong underlying land value. Service stations are generally in the sub-$5 million price range making them more affordable to a range of smaller investors. |
Caltex Service StationRecent sales of service stations
There has been a high volume of service stations sold in the last 12 months and at very strong yields, which indicates the high demand from buyers in the market for this type of commercial investment. Below is a table showing some recent sales of service stations;
Risks associated with buying services stations
The rewards of buying a service station, such as a long lease to a national company and strong land value, must be weighted up against any potential risks. Below is a brief description of some potential risks associated with investing in service stations that you should be aware of;
Environmental issues: Service stations present a potential environmental risk due to the bulk storage and transfer of petroleum products, most commonly in an Underground Petroleum Storage System (UPSS) where leaks or spills are not visually detected. Modern service stations generally have been constructed with double walled USTs, spill containment devices and monitoring systems. However, many service stations have been operating on the same site for decades with minimal update or maintenance of fuel infrastructure leading to contamination of soils and groundwater. Any environmental issues may lead to a significant decrease in the value of the property. Refer to our article on ‘The environmental risks of Underground Petroleum Storage Systems (UPSS) when buying commercial property’, for further details on environmental issues to be aware of when buying a service station.
Potential volatility of income and capital value: Turnover is heavily reliant on easy access and good exposure for motorists while unforeseen changes to adjoining roads and traffic flows can substantially impact on passing traffic to the extent that the service station may no longer be viable. When purchasing a service station, an alternative use of the property should always be investigated and considered should the need arise to redevelop or maximize the service station site’s future potential.
Assessing market rental: A challenge for investors purchasing service stations can be the difficulty in assessing market rental. Rents can be complicated to analyse given that they are, in reality, a function of the total volume of fuel which is sold as well as any additional lines of business generating income.
Comments on the service station industry
We have provided below a summary of key points relating to the service station industry.
There are approximately 8,000 service stations across Australia. The total number of service stations has decreased by 5% since 2000 however, the total number is down 50% on the corresponding number 25 years ago. This decrease in numbers is a result of the industry restructuring to meet changing market conditions. This change in the market conditions has been majorly influenced by the entrance to the industry by the supermarket majors who offer fuel discounts with a purchase from one of their parent stores. Coles has co-branded with Shell and now owns the franchises for over 620 service stations nationally, and Woolworths who have co-branded with Caltex now operate over 370 service stations nationally.
Most service stations are now ‘self-service’ providing limited driveway services but increased store based amenity including a convenience store, supermarket, fast food outlet (or coffee shop), and in some cases, an adjoining automated car wash. While services stations’ main activity is retail sales of automotive fuel, none rely on fuel sales alone, which account for around 75% of total turnover. Whilst petrol sales are the primary generator of customer traffic, it is the convenience retail uses which contribute the majority of the profits.
Independent service stations have continued to be out priced in the automotive fuels market and hence the industry is now driven by the major oil companies (Shell, Mobil, BP, Caltex) and the supermarket chains (Coles, Woolworths). There are a number of smaller service station operators (7-Eleven, Newmanns Fuel, Freedom Fuels, United Petroleum, Peak, Liberty) that account for a tenth of the market with the top five retailers encompassing an estimated 89% of the market in 2009.
| If you are looking to buy a commercial investment property and are thinking of using a buyers agent to gain more advantages with your purchase, call Prosper Group now on 1300 664 373 or email us on enquiries@prospergroup.com.au |
The information in this article has been provided from various sources including M3 property, Australian Property Review, Jones Lang Lasalle, and Burgess Rawson.
