The continued expansion of the service station industry in Queensland in recent years has delivered substantial rental growth along with longer lease terms to a hungry investment market, according to the latest industry report from independent valuer and advisor, m3property.
However the Queensland Service Stations Market Update: Winter 2019 report from m3property’s Director of Research in Brisbane, Casey Robinson, also found that while the short to medium term picture remains positive for investors, operators need to deal with increased competition and limited profit growth. In the longer term, the uncertainty associated with an increase in the use of public transport and electric vehicles, will be a key issue for all stakeholders.
“There is an internal issue around an increase in service station competition and an external issue concerning increasing government expenditure on public transport infrastructure and growth in electric vehicles. However, for investors particularly, there is plainly upside in the industry currently with rents growing at a very positive rate since 2012, along with an increase in the average lease term year on year.
“The fact that close to 90 new service stations were opened or under construction since the start of 2017 across South East Queensland, with a further 65 new service stations proposed for development, also points to a very positive investment climate and that has been underscored by the investor response to portfolio auction offerings,’’ Ms Robinson said.
The report found service stations remained a sought-after investment for private investors, superannuation funds, property trusts, REITs and offshore investors with institutional interest in the sector growing over the past five years while portfolio transactions had become a prominent feature of the market.
Net rentals in Queensland in 2018 averaged $395,167 for new service station leases while, on a per vehicle bay basis, the average net rental rate in 2018 was up nearly 14 per cent, to $48,316, on the $42,405 rate in 2017.
Ms Robinson said rents per vehicle bay had grown at an average rate of 8.77 per cent per annum since 2012, including extraordinary growth of 13.72 per cent from 2017 to 2018. The average lease term was 14.3 years for service station leases that commenced in 2018, up from 12.6 years in 2017.
The report found average Equated Market Yields during 2018 continued to tighten in Queensland’s metropolitan area to 6.23 per cent but softened slightly in regional locations to 6.71 per cent. Between 2013 and 2018 yields tightened by 240 basis points for metropolitan sales and 145 basis points for regional sales.
Associate Director at m3property, Craig Berridge, said while there was no doubt that the service station industry was at the beginning of a significant structural shift, operators were aware of the main challenges and were taking steps to ensure the longevity of their businesses. The increase in non-fuel related retail and services offerings at service stations, he said, was reflective of an industry in transition.
“Both Viva Energy REIT and Convenience Retail REIT have highlighted in recent investor presentations the importance of convenience retailing and amenities with service stations increasingly being positioned to offer services such as postal, click-and-collect, and laundry and dining options, to ensure their relevance over the long-term.
“The agreement entered into by Woolworths and Caltex in 2018, where up to 250 Caltex sites will be rolled out under the ‘Metro’ banner, also shows that these players are aware of their need to diversify their retail and services offering,’’ Mr Berridge said.
He said he expected the yield differential between prime and secondary investments would become more defined over the medium-term as investors looked to acquire service stations that had a wider convenience and services offering and an alternative use.
He said the adjustment of some existing service station sites to cater for growth in electric car ownership would be required over the medium to long term.
According to the report there are an estimated 9,260 service stations nationwide (IBISWorld) with Coles the largest operator (by revenue) in the market accounting for 13.9 per cent of industry revenue, followed by Caltex (12.6%). The increase in competition during the past decade has limited growth in profit, which IBISWorld estimates to be 2.3 per cent of industry revenue.