Ampol’s recent announcement it has entered into a funding agreement with the Australian Renewable Energy Agency to develop a national, fast-charging network to power up electric vehicles shows times are changing for petrol stations.

Under the arrangement, Ampol will construct fast-charging bays at more than 100 sites across the country.

It’s a clear move by the fuel business to embrace the future. It’s also smart, if a 2019 report by professional services firm Boston Consulting Group, Is there a future for service stations?, is anything to go by.

The report argues new mobility models such as ride-sharing, alternative fuels and changing consumer preferences will re-shape service stations as we know them, requiring a fundamental transformation of their business model.

As the Ampol deal shows, service stations are already changing their approach, and this will only accelerate.

Dependable cash flows drive yield compression

BluePoint Property director Geordie Whitcombe has developed, bought and sold 13 service-station-based convenience centres, including centres leased to 7-Eleven, Ampol and Freedom Fuels, along with drive-through restaurants leased to Oporto, Zambrero and other national brands. He says there’s a lot to like about service stations as an investment.

“Service stations sign leases of between 12 and 15 years for an initial term, so they offer dependable cash flows and they’re backed by strong, national companies. At the moment, these properties transact on very sharp yields.

“Investors prefer well-located, land-rich sites with potential future reuse. For instance, some service stations have been transformed into multi-story apartment buildings and commercial office spaces. With the rise of online shopping, some may even include fulfilment centres down the track.”

▲ Ampol's announcement that it will add fast-charge outlets for electric vehicles to its service stations' offerings is a sure sign times are changing in the sectorAmpol’s announcement that it will add fast-charge outlets for electric vehicles to its service stations’ offerings is a sure sign times are changing in the sector.

Whitcombe says as landlords, the way non-fossil fuels like electricity will be incorporated into service stations is front of mind.

“These businesses are dynamic and they are still expanding. So that gives us a lot of confidence.

“National operators are now retailers that sell fuel rather than fuel suppliers that sell the odd chocolate bar. They’ll continue to adapt and provide new refuelling options, better convenience shopping and potentially dining options.”

Service stations’ specs make them attractive investments. Typically situated on minimum land parcels of 2000sq m on high-profile corners, zoning is often flexible.

There are a number of different uses for the land. In our portfolio, we own sites in land zoned as industrial, local centre and general residential. So, they can be redeveloped for a wide range of commercial and residential uses,” Whitcombe says.

“Operators are not going to disappear as the fuel and retail mix changes. Service stations are already a lot more inviting. It’s similar to walking into a Woolworths or a Coles supermarket with a smaller range of higher-margin products.

“As an investor, it’s good to know you’re sitting on fundamentally good real estate, so down the track, you have options to redevelop the land when leases expire.”

Service stations ramp up offering

Jamie Perlinger, director of commercial real estate firm Burgess Rawson, agrees service stations are focused on broadening their retail offering. He has transacted numerous service stations over time, especially 7-Elevens.

“United, Viva and now Ampol have made a really big effort to upgrade their convenience offering. We’re now even seeing Aldi open outlets at metro and smaller sites.”

The investors Perlinger typically deals with include high-net-worth individuals, families, syndicates and self-managed super funds. But there are a number of different investment models through which service stations are transacted.

▲ Centres leased to 7-Eleven are among those BluePoint Property director Geordie Whitcombe has developed, bought and sold. Centres leased to 7-Eleven are among those BluePoint Property director Geordie Whitcombe has developed, bought and sold.

Investment houses sometimes pick up a portfolio of assets. For instance, Charter Hall has an interest in a portfolio of Caltex and BP servos. By contrast, Ampol own the majority of their sites. Some service stations are also owner-occupied.

Victoria Padey, the fund manager for Australian Unity’s Diversified Property Fund, says service stations are an attractive defensive investment in the current environment.

Australian Unity’s Fund owns a twin service station centre at Wyong on a prime stretch of the M1 Pacific Motorway on the NSW Central Coast between Sydney and Newcastle.

The properties include two 24-hour service stations, retail outlets, restaurants and dining facilities.

Investment House Wingate is ramping up its new direct property platform business with the acquisition
of the prominent Westgate Freeway Service Centre, located just 3km west of Melbourne’s CBD at 62
Cook Street Port Melbourne, for a purchase price of $32.12 million.Investment house and non-bank lender Wingate recently purchased a service station in Port Melbourne for $32.12 million, representing a 4.8 per cent yield.

This property has been a resilient performer for investors for more than two decades. In May this year, the value of the property increased by $16.96 million or 15.01 per cent on its prior valuation,” Padey says.

“This uplift is due to a firming of the property’s capitalisation rate to 5 per cent from 5.75 per cent. It recognises the site’s redevelopment opportunities with potential additional income from existing and new sub-lease tenants.”

Service station investment holds up over time

Australian Unity has owned its Wyong service centres since 1999. Back then, their book value was $36 million. Today, these properties are worth $130 million, more than four times their initial value, as at June 30, 2021.

“During the past decade we’ve seen significant traffic growth between Sydney and Newcastle. The NSW government’s data shows annual average daily traffic for this section of the M1 has increased 12 per cent over the past decade,” Padey says.

“And while the pandemic has interrupted this growth, before the current lockdowns, M1 traffic levels had resumed to pre-Covid levels and traffic has increased by 11 per cent compared with 2020.

“It’s worth noting diesel sales held steady during calendar 2020 with road freight services largely uninterrupted.”

▲ Ownership of service stations is diverse, from big players such as Charter Hall with its interest in a portfolio of Caltex and BP servos, owner-operators.Ownership of service stations is diverse, from big players such as Charter Hall with its interest in a portfolio of Caltex and BP servos to private owner-operators.

Service stations will also benefit as people choose to use their own vehicles to avoid public transport during Covid and adjust to working, holidaying and staying closer to home.

“We believe service station assets like the Wyong twin service centres are well positioned to benefit from patronage increases over the short- to medium-term as commuting resumes over time and residents increase their intrastate holiday and business travel,” she says.

As such, Australian Unity’s plan for these service stations is to develop them and add enhancements that make a difference for the community and, over time, for investors as well.

The fund manager is currently scoping out the site’s potential for an expanded service offering, which may include the introduction of meeting room facilities to attract business travellers looking to do business on the road.

Service stations are now far from a facility to simply fuel up. They have become multi-purpose facilities whose uses will only grow over time, offering drivers more environmentally-friendly refuelling options, plus much more. They are likely to remain an attractive investment.

Extracted in full from: [+] Developer Interest Propels Service Station Asset Class (