The Valuers' View - Service Station Property
The Valuers’ View
To assist lenders, investors and owners, the Valuers at m3property have contributed their opinions on the current performance of the property markets and where they expect those markets to head over the short to medium-term.
The survey examines nine property sectors, looking at the key measures of market yields, internal rates of return (IRRs), rents incentives and value. Occupancy rates and average daily room rates were added to the survey for the hotel sector. Indicators including zeros indicate stability was also selected by respondents.
The key themes that will drive the real estate markets in 2021 will be:
Economic recovery as restrictions ease and confidence returns
Low population growth, but likely to rise as the vaccine rollout continues and borders re-open
Record low interest rates
Continued focus on Environmental, Social and Governance (ESG) factors when investing and managing portfolios
Growth in inflation resulting in rent growth for landlords, where rent increases are linked to inflation
The gap between prime and secondary yields is likely to widen
Government spending to remain high, despite stimulus starting to reduce
‘Flight to quality’, flexible terms and convenience expected to continue to drive tenant demand
Rebound in investor demand due to cashed-up investors, low cost of debt and global interest in strengthening countries with stable property returns
Continued investor focus on defensive assets, particularly in sectors with government backing and for properties with long WALEs and minimal need for capital expenditure
Despite strengthening residential markets, the official cash rate is likely to remain on hold in the short to medium term due to continuing economic uncertainty, low wages growth and labour markets not being at full capacity. The appearance of an asset price bubble is more likely to be remedied with macro-prudential constraints on lending rather than rising interest rates, which could derail the economic recovery if used too early.
If the post-COVID-19 economic recovery does surprise on the upside resulting in asset price bubbles, full employment and rising wages, this would drive up inflation, bond yields and the cash rate. This scenario would represent a risk to the property markets as it could flow through to the cost of capital and yields. That said, the RBA is likely to continue to implement yield curve control to keep bond yields in line with the economic recovery and a strengthening economy would provide stronger cash flows and vacancy would reduce.
Service Station Property
While COVID-19 has restricted interstate and international travel, intrastate travel has increased, maintaining consumer demand for service station offerings.
Considered an essential service and, therefore, open throughout the lockdowns, this sector has maintained its cash flow and generally seen favourable profit due to the lower price of oil over much of the pandemic to date.
Service Station Results
Yields and IRRs
- Yields and IRRs for well leased prime service station assets have continued to tighten as service station operators benefit from improving fuel sales margins, and investors seek the security of strong lease covenants. This is expected to continue in 2021.
Rents and Incentives
- Service station rents are linked to fuel sale volumes, which have not significantly increased, although margins have improved with a low oil price.
- With buoyant demand and stable rents expected, service station property values are likely to increase over 2021 by similar margins as experienced over 2020.