Service stations in Sydney’s inner suburbs have been popular with developers over the years, what with their big blocks in convenient locations, but one currently for sale in Randwick has extra appeal as a development site.

The Shell-branded service station and a Coles Express convenience store, operating at 43-47 Frenchmans Road, will go under the hammer next month, with a unique set of contractual obligations that make the site particularly well suited to future development. 

Viva Energy Australia, the current tenant, is required to remediate the site to its “highest and best use” at the end of the term –  a rare inclusion in a service station lease and one that is likely to position it directly in the sightlines of property developers, according to the agent Nic Simarro of JLL.

He said that he had never sold a service station with these conditions in place.

The clause is particularly attractive to developers as it requires Viva to carry out any works to the land necessary to ensure that the land can be used for the “highest and best use” – meaning a future operator won’t have to navigate additional environmental hurdles if they choose to change the site’s use.

“Highest and best use” takes into account any commercial opportunities “reasonably expected” to become available to a future landlord under the current zoning – which in the case of the property’s B1 Neighbourhood Centre zoning includes potential hotel, boarding house and residential flat development.

“Generally speaking a remediation clause in a contract says [the operator] will remediate to EPA guidelines. [This contact specifies the remediation] to highest and best use, which is much stronger,” Mr Simarro said.

But with a lease to 2021, and option to 2026 in place, it’s not guaranteed that the site will be sold to developers – with the demand for service stations still “really strong”, said Mr Simarro, who advised the price guide was $6.5 million-plus.

So far he had fielded 145 inquiries, split between “investors, developers and operators”.

Viva Energy Australia’s current lease term includes annual rental increases of between 3 per cent and 6 per cent, with responsibility for paying all outgoings and land tax. The property is currently generating a net Income of $211,104, excluding GST.

The site is being offloaded by Wenzhou Pty Ltd, which sold another service station in the Sydney suburb of Kingsgrove in 2016 for $5.06 million.

“They’ve held this [Randwick site] for a good 15 years,” Mr Simarro said. “They’ve been divesting their portfolio. [They] started with 26 and now they’re down to three.”

The 1245-square-metre site, on the corner of Clovelly Road and opposite Randwick’s main retail precinct, is 1.2 kilometres from the new light rail route, which is set to open within the next year.

“This is the perfect freehold investment for any investor or future owner occupier looking for a defensive asset offering medium-term cash flow secured by a blue-chip tenant with the potential to develop or to occupy from March 2021 or 2026,” co-listing agent Dylan McEvoy said.

The sale comes as several other prominent service stations in the inner city look set to make way for redevelopment.

Sydney-based developer Urban DC recently lodged an application with Waverley Council to build a 28-apartment complex on the site of a current BP service station and two surrounding properties, at 599 Old South Head Road, in Rose Bay. The outcome of the proposal is pending.

Last year Mr Simarro sold a service station at 867-877 South Dowling Street, in Waterloo, for $12.86 million after marketing the property on its mixed-use development upside. The property is leased to Viva Energy until 2027.

The auction for 43-47 Frenchmans Road, Randwick, will be held at 50 Margaret Street in Sydney on June 4, 2019.

Extracted from Commercial Real Estate