Highway hubs hit top gear as investors pump $1.8 billion into servos
Australia’s petrol stations are still proving a popular asset class, driven by blue chip tenants and future development upside, JLL’s research has found
AUSTRALIA, 11 December 2019 – Investors have spent more than $1.8 billion since 2016 to acquire Australian service stations, defying threats posed by electric vehicles and declining car ownership.
The good old “servo” has proved a resilient asset class, with investor demand continuing to drive down yields, according to a new report by JLL Research. The average yield in 2019 to date for metropolitan service stations is 5.00% across the capital cities.
JLL’s Focus on: Service Stations 2019 has tracked 310 transactions since the start of 2016. In 2018, the peak year for investment volume, 80 assets changed hands for a total $543.6 million. Sales in 2019 have totalled $303 million so far across 61 transactions.
Australia will gain about 340 new stations (including replacement of old stock) between 2019 and 2022. Most will be in Queensland (30%), Victoria (21%) and NSW (20%), with over 60% already leased to major operators including BP, Caltex, United Petroleum and 7-Eleven.
Several factors contribute to the positive medium-term outlook for Australia’s 6000-plus stations:
- Convenience retail offerings and cafes boost station income and bring in non-driver customers
- New public transport infrastructure favours the inner city, meaning outer suburban and regional areas will continue to rely on petrol-powered vehicles
- Uptake of electric vehicles (EVs) is likely to be slow due to the high cost and a lack of Federal Government incentives
- Landlords in some areas have the potential to develop the station site for mixed commercial and residential use.
JLL’s Director of Retail Investments – Victoria, Stuart Taylor, said: “Sales activity has been comparatively lower in 2019; however, 60% of the volume sold in 2019 has transacted in the four months since July reflecting growing momentum amongst buyers. This reflects the recent loosening of lending requirements for private investors and a greater number of purchasing opportunities available.
“Sales in 2019 have generally achieved strong results – an average of $1,960 per sqm across the country, with significantly higher prices in NSW. In Sydney’s eastern suburbs, a station with Coles Express on a 1245 sqm site in Randwick achieved $6,627 sqm, an outstanding result earlier in the year,” Mr Taylor said.
JLL’s report also touches on the extent of institutionalisation of the sector. Currently, only around 8.0% of assets are owned by ASX listed REITs (real estate investment trusts).
“The recent announcement by Caltex Australia to float 250 of their freehold sites in a new service station REIT in 2020 comes at no surprise considering the substantial premium the two existing REITs have traded at in the past 12-months.
“While the float will see an increase in the number of service stations owned in the REIT format, we maintain our stance that private individuals, syndicates, private funds and self-managed super funds will continue to be the most active acquirers. Furthermore, acquisitions by the existing REITS have slowed in 2019.
“Private investors are likely to remain the dominant buyer cohort moving forward. They can outprice their listed competitors who are income-led and place less emphasis on highest and best use considerations for pricing. Private investors can rationalise lower yields for development upside and future capital growth, and typically operate over a longer investment horizon.”
JLL believe investors will become more selective, preferring metropolitan sites on major arterial roads. Remediation clauses will also be essential for those investors looking at mixed-use development in the long term. However, regional stations with strong covenants and long-term leases will also continue to do well.
Challenges for the sector include:
- A decline in car ownership, from 1.58 cars per household in 2008 to 1.48 cars in 2018
- The cost of buying and maintaining a car, up 66% in the 15 years to June 2019; CPI rose 42% in the same period
- High fuel prices and pressure on profit margins (ULP cost an average 143 cents/litre in 2018-19)
JLL’s Senior Research Analyst, Louise Burke said: “Millennials have preferred to rely on existing public transport or ride-sharing companies such as Uber and Lyft, which have grown from small start-ups into a cultural phenomenon.
“We see the rise in ride-sharing operators as having a net zero impact on long-term fuel demand, with an increase in the number of ride-share cars offsetting the fall in car ownership.”
Mr Taylor added “convenience retail, including coffee, had become an important element of the service station revenue model as fuel profit margins declined.
“For example, Caltex’s take-away food concept The Foodary was launched in 2017 and opened its 50th outlet just one year later,” he said.
“Major service station operators will continue to develop their in-store offering across groceries, packaged meals and non-food products, and to expand their partnerships with fast-food retailers, some of which have expressed interest in growing their store footprint beyond shopping centres. A key example of this is BP’s recent partnership with David Jones to introduce premium food products into these stations.”
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. Our vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so, we will build a better tomorrow for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $16.3 billion, operations in over 80 countries and a global workforce of more than 93,000 as of September 30, 2019. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.