Queensland Service Stations Market Update
- There has been considerable growth in the number of service stations in South East Queensland over the past three years.
- Average rents grew strongly in 2018.
- Yields have continued to tighten in metropolitan areas but softened slightly in regional Queensland locations.
- Risks to the sector remain longer-term, but operators are aware of the main challenges (including the threat of electric vehicles) and are taking steps to ensure the longevity of their business.
There are an estimated 9,260 service stations nationwide (Source: IBISWorld). By revenue, Coles is the largest operator in the market (accounting for 13.9% of industry revenue) followed by Caltex (12.6% of industry revenue). The industry has become increasingly competitive during the past decade, and this has limited growth in profit, which IBISWorld estimates to be 2.3% of industry revenue.
The service station industry is at the beginning of a significant structural shift, largely due to growth in the electric vehicle market. Growth in electric vehicle take-up presents a major risk for service station operators and owners.
Both Viva Energy REIT and Convenience Retail REIT have highlighted in their most recent investor presentations the importance of convenience retailing and amenities at service station sites over the long-term. Service stations are 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 (with up to 250 Caltex sites to be rolled out under the ‘Metro’ banner) also shows that these players are aware of their need to diversify their retail and services offering.
Growth of Electric Vehicles
Australia remains behind other comparable countries in terms of take-up of electric vehicles as well as Government regulation and policy on the matter. Most developed, and a number of developing, countries have set targets for consumer take-up and production of electric vehicles. In addition to this, car manufacturers are increasingly developing targets on electric vehicle production.
Numerous consumer studies point to the initial cost of electric cars and limitations in charging and charging infrastructure as the core reasons for poor take-up of electric vehicles by Australian consumers. However, these hurdles are not expected to remain over the medium- to longer-term, with the cost of electric cars expected to be comparable to petrol cars by the mid-2020s. In addition, the need for public charging infrastructure has recently been identified by Infrastructure Australia in its 2019 Infrastructure Priority List. The report listed the construction of a national electric fast-charging network as one of its 29 High Priority Initiatives.
The Federal Government has also announced new policies in relation to electric vehicle targets. In March 2019, the Federal Government announced that it would develop and release a national electric vehicle strategy by mid-2020 and that 25%+ of new car sales should be electric vehicles by 2030. Future growth in the electric vehicle industry is a definite risk to the fuel retailing industry over the medium- to long-term and has already inspired some operators and owners to expand their retail and services offering.
During 2018, the average net rental rate was $395,167 for new service station leases signed in Queensland. On a per vehicle bay basis, the average net rental rate was $48,316 during 2018, up from $42,405 per vehicle bay during 2017.
Rents per vehicle bay have grown at an average rate of 8.77% per annum since 2012, including growth of 13.72% from 2017 to 2018. The average lease term was 14.3 years for service station leases that commenced in 2018. This was up from 12.6 years in 2017.
The increase in the average lease term was somewhat unexpected, given the longer-term threat posed to the industry from growth in the electric vehicle market.
Service stations remain a sought-after investment for private investors, superannuation funds, property trusts, REITs and offshore investors. Institutional interest in the sector has grown over the past five years and this has also seen portfolio transactions become a prominent feature of the market.
Analysis by m3property shows that the average Equated Market Yield for metropolitan service station sales in Queensland was 6.23% during 2018. The average Equated Market Yield for regional service stations was 6.71% during the year. Between 2011 (when metropolitan yields were softest over the past decade) and 2018, metropolitan yields tightened by 270 basis points. Regional yields were softest in 2012 and have since tightened by 385 basis points, based on their 2018 average.
Some major industry activity that has occurred over the past year includes:
- July 2018: Woolworths and Caltex announced a 15-year deal that will see 125 Caltex stations join the Woolworth’s redemption network. The wholesale fuel supply agreement also means Woolworths will be able to provide up to 250 mini-supermarkets under the “Metro” banner at Caltex petrol stations.
- Late 2018: Woolworths announced its intention to sell its fuel business to British EG Group for $1.725 billion. The sale was approved by the Foreign Investment Review Board in February this year and included 540 service stations. EG operates more than 4,700 service stations in Europe and North America.
- February 2019: Viva Energy acquired the remaining 50% interest in Liberty Oil’s wholesale business and announced the establishment of a retail joint venture with Liberty Oil’s retail business, of which it will own 50%.
There are two major REITs which operate in the service station market, being Viva Energy REIT and Convenience Retail REIT.
SEQ New Supply
m3property research shows that close to 90 new service stations have been opened since the start of 2017, or are currently under construction, across South East Queensland (SEQ). Most of the new service stations that have been completed in SEQ are in the Brisbane, Moreton Bay and Gold Coast Local Government Areas (LGAs).
7-Eleven has rapidly expanded its store network over the past two years, with over 40% of new service station supply in SEQ being leased to 7-Eleven. Some of the other operators such as Caltex and BP have focussed more on full redevelopments of existing sites over the opening of new sites.
Looking at future supply, we estimate there to be 65 new service stations proposed for development in SEQ. The number of new service stations proposed for development has declined by 13.33% over the past year (from circa 75 as at April 2018). The Brisbane City LGA accounts for the highest number of service stations proposed for development, followed by Logan and the Gold Coast.
SEQ Supply & Population Growth
An important success factor for service stations is proximity and exposure to customers. New service stations that are developed in areas experiencing (or forecast to experience) strong population growth are typically part of retail or mixed-used developments.
The Moreton Bay Region is an example of an area that has experienced strong service station construction activity alongside population growth during recent years, particularly around North Lakes, Mango Hill, and Griffin. Since 2017, there have been 20 new service stations constructed (or that are currently under construction) in the Region.
However, new supply proposals for the Moreton Bay Region have now slowed and this is occurring alongside a slowing in the rate of population growth forecast to occur in the region.
Another example of an area experiencing strong population growth is the Pimpama / Coomera region. Alongside strong population growth, there have been six new service stations constructed since 2017, with a further four proposed.
Going forward, we expect that the Logan and Ipswich regions will see growth in the supply of new service stations. These regions are currently experiencing strong population growth and residential development (particularly in areas such as Ripley, Yarrabilba and Jimboomba), however, they have not yet seen a significant boom in new service station construction, as has occurred in the Moreton Bay Region over recent years.
The map overleaf shows new and proposed service stations across the Ipswich and Logan LGAs, against forecast population growth (shown by shading of Statistical Areas) and residential land supply (shown by small shaded areas with white borders).
The outlook for the service station industry is mixed. Whilst the short-term outlook is for continued investor demand and expansion (albeit slowing) by the major operators, the longer-term outlook carries more uncertainty and risk.
According to IBISWorld, fuel retailers have a medium to low risk during the 2020 financial year. Industry risk has declined slightly from 12 months ago. Despite the medium to low rating, there remain some risks to service station operators, with the largest relating to the high level of competition in the industry. This is both internally (from competing service stations) and externally (from public transport and growth in the adoption of electric and hybrid vehicles).
Growth in consumer take-up of environmentally conscious cars has strengthened over the past five years and the trend is likely to threaten the fuel retailing industry over the long-term. We are increasingly seeing new service stations and service station redevelopments place less emphasis on fuel retailing and more emphasis on their non-fuel retail and services offering, and we
expect this trend to continue. However, according to IBISWorld, the sale of petrol, diesel and gas fuels accounts for 87.5% of fuel retailer revenue, highlighting how deep the impact will be as electric vehicles become more commonplace. The volume of fuel sales is projected to grow at a subdued rate over the next five years.
Furthermore, improvements in public transport infrastructure are expected to increasingly encourage consumers to use public transport over driving, particularly within inner-city locations. Projects such as the Cross River Rail (early works), Brisbane Metro (fully funded), the Redcliffe Rail Corridor (completed) and future extensions of the Ipswich and Beaudesert rail lines are expected to reduce consumer reliance on private vehicles in Greater Brisbane over the medium- to long-term.
Similarly, the Gold Coast Light Rail (of which two stages have been completed) and the proposed Sunshine Coast Light Rail are improving public transport options in the Gold and Sunshine Coast markets.
Whilst this is the case, inner-city sites are more likely to be able to be repurposed to alternate uses if required, thus mitigating the risk in investing in inner-city service stations.
In the investment market, the major REITs are expected to remain active in the service station sector during 2019. We expect that the yield differential between prime and secondary service station investments will become more defined over the medium-term, as investors will look to acquire service stations that have a wider convenience and services offering and an alternative use. The adjustment of some existing service station sites to cater for growth in electric car ownership will be required over the medium- to long-term.
A potential risk for investors is the possibility of future road upgrades which negatively impact traffic flow past service station sites. In areas experiencing strong population growth, it is reasonable to expect that road upgrades will form part of the area’s medium- to long-term plans. This could present a risk for service station investments in some locations, particularly given the changes occurring in the market due to growth in electric vehicles, which is making site fundamentals (such as location) a key consideration for long-term investors.
However, it is important to note that for some service stations, future road upgrades could also be a positive if they result in increased traffic flow past the site.