Queensland Service Station White Paper
SEQ supply slowing, yields show further signs of tightening and the re-positioning of service stations
- Yields were broadly stable during the 2020 financial year, averaging 6.31% across Queensland and 6.11% within South East Queensland.
- We have seen no sign of yield softening as a result of COVID-19 to date, instead, we have seen some signs of sharpening
- New supply across South East Queensland has slowed, with developers now focusing on regional areas.
- Across Queensland, the average net rent increased during the 2020 financial year, with more new developments including a stronger focus on the incorporation of food and dining options within the service station. The average rent per vehicle bay declined during the year, with the average vehicle capacity increasing.
- The service station sector is expected to continue to evolve. Service stations are likely to be increasingly positioned as convenience hubs in strategic locations as growth in electric vehicle consumption continues. As electric vehicle usage increases, fuel storage and environmental risk will decrease.
- Investors may potentially become more averse to long-term risks for assets in secondary locations as the industry evolves.
- Fuel retailing revenue is estimated to have dropped substantially during the 2020 financial year, a result of COVID-19.
- The industry is estimated to have brought in a total revenue of $31.4 billion nationally during the financial year (Source: IBISWorld).
- It is estimated that there are 6,539 service stations across Australia, of which approximately 1,450 are located in Queensland.
- Retail sales of petrol are estimated to account for 72.5% of the fuel retailing industry revenue. Diesel, LPG and other gas fuels are estimated to account for 12.2% of industry revenue. Demand for, and sales of, diesel fuel is expanding more rapidly than the sale of petrol, as consumer preference for higher fuel-efficiency is resulting in more consumers switching to diesel vehicles.
- According to data from the Queensland Government, the number of retail sites owned or operated by fuel retailers that have E10 petrol available to customers increased by 126.5% from the March quarter 2016 to the December quarter 2019. As a proportion of accountable retail sites that sell regular unleaded petrol, circa 72% of accountable sites in Queensland sold E10 petrol during the December quarter 2019, up from circa 40% during the March quarter 2016.
- Service stations compete on price, location, marketing and promotions. Prime locations (such as on major arterial roads or large intersections) are critical in obtaining the large volume of fuel sales required to make a service station financially viable. Strong competition in the industry makes it difficult for new entrants in the market – which are also faced with large initial capital outlays, heavy regulatory constraints and difficulties gaining environmental approvals.
SEQ Supply has slowed
- New supply across South East Queensland has slowed over the past 12 months.
- We are starting to see a stronger focus on regional service station development, given the increasing saturation of the metro market and southern operators such as Metro, Westside and United seeking more market share in Queensland.
- An emerging trend is for some developments to have a larger fuel canopies (for example 16-18 bays). This is pushing down the rental rate on a per vehicle bay basis for some of these facilities.
- We estimate that over 115 new service stations have been developed across South East Queensland since January 2017. This includes service stations currently under construction and excludes re-developments.
- Most of the new supply has been delivered to the Brisbane, Moreton and Gold Coast LGAs.
- 7-Eleven has been the most active operator leasing new service stations across South East Queensland.
- Over 2019 and 2020 to date, there have been circa 37 service stations completed (or currently under construction and due for completion this year) across South East Queensland. A large proportion of these have been in the Brisbane LGA.
- We estimate there to be a pipeline of circa 80 service stations proposed for development across South East Queensland (i.e. plans submitted or plans approved). Approximately two thirds of proposed service stations are approved.
- Over the past year, we have witnessed numerous proposals for service station developments withdrawn during the application process, likely a result of the increasing saturation of the South East Queensland market as well difficulties attaining approval due to the costs associated and environmental and regulatory concerns.
Source: m3property Research
Service stations are evolving
- Whilst behind other developed countries, electric
vehicle uptake in Australia has continued to increase and will present a long-term threat to the service station industry.
- Infrastructure Australia has included the rollout of a national electric vehicle fast-charging network as a High Priority Initiative in its 2020 Infrastructure Priority List, citing that by 2040, electric vehicles are projected to account for between 70% and 100% of new vehicle sales and 30% of the total vehicle fleet in Australia.
- As service stations diversify and evolve, we expect to see more new sites developed with electric charging stations. Over time, this ultimately changes the hazard profile of service station sites, reducing contamination issues and enabling higher use development over the long-term.
- New service station developments typically incorporate an expanded food offering and other services such as click and collect groceries and on-line shopping.
- During the year ending June 2020, the average net rental rate was $40,695 per vehicle bay (/vb) for South East Queensland service station leases. The average initial lease term was 12.5 years.
- Across the entire Queensland market, the average net rental rate was $39,484/vb, with an average lease term of 13.1 years.
- Newly constructed serviced stations receive a premium over established serviced stations. For leases signed across metro and regional markets between 2018 and 2020, newly constructed service stations had a net rental rate of $45,308/vb compared with $30,618/vb for established facilities (constructed pre 2016).
- An interesting trend we noticed during the 2020 financial year was a sizable increase in the total average net rent (to be $370,754), however, because the average fuel canopy size increased for leases signed during the year, the average rate/vb declined. Net rental rates have also increased as more new developments are including café, food and dining precincts.
- The COVID-19 pandemic has increased the popularity of drive-through fast food, which increases turn-in traffic for multi-tenanted assets.
Source: m3property Research
Source: m3property Research
Investment Market and Yields
- The average equated market yield for Queensland service station sales (including metro, regional, single-tenanted and multi-tenanted) was 6.31% during the year ending June 2020.
- Yields for metro South East Queensland averaged 6.11% during the year. Metro yields have been stable over the past three financial years. To date, we have seen no sign of yield slippage for transactions during the COVID-19 period, and if anything, we have witnessed some yield sharpening.
- Single-tenanted properties typically transact at sharper yields (25-100 basis points) than multi-tenanted assets due to their decreased vacancy and management risks.
- We have witnessed an increase in multi-tenanted sales over the past 18 months as development of these assets has increased.
- Charter Hall has been an active buyer of service stations, recently purchasing a 49% stake in the Ampol Property Trust with GIC. Early this year, Charter Hall and Charter Hall Long WALE REIT acquired 5% each of the Viva Energy REIT’s portfolio.
- Yields are expected to sharpen over the next 6 to 12 months.
- We expect that the yield differential between prime and secondary service station investments will become more defined over the medium-term as investors look to acquire service stations that have a wider convenience and services offering and / or an alternative use.
- The major REITs are expected to remain active in the service station sector over the medium-term.
- There were reduced fuel sales during the acute phase of the COVID-19 period, however, fuel sales are now reportedly trending upwards according to industry operators.
- We are increasingly seeing new service stations and service station redevelopments place more emphasis on their non-fuel retail and services offering, and we expect this trend to continue. The volume of fuel sales is projected to grow at a subdued rate over the next five years and the adjustment of some existing service station sites to cater for growth in electric car ownership will be required.
- Operators are expected to continue to expand into areas such as convenience store operations, car washes and other services given the long-term threat to fuel retailers of energy efficient and electric vehicles.
- Location remains the key factor in the success of service stations and this is expected to continue as service stations are more frequently positioned as community hubs.
- We will be monitoring average lease terms to see if they start to taper back over the medium to longer-term term, as growth in electric vehicle consumption continues and operators evaluate the future viability of fuel retailing.
- Service stations are well placed to benefit from increased domestic travel when all State / Territory borders re-open, particularly while international borders remain closed. It is also possible that we will see more activity from investors who have not traditionally been active in the service station market due to the more subdued performance of some other property sectors at current.