The Australian retail fuel industry has undergone significant change over the last five years which has seen major oil companies restructure their property and convenience assets, in a bid to protect and grow their market share.
This change has seen oil companies align themselves closer with major retailers such as Woolworths, Coles and David Jones in order to improve their retail offering and protect long term revenues. Portfolio sale and leasebacks (BP, Caltex & 7-Eleven) have become prevalent as all groups look to redeploy capital into their business with a focus on convenience retailing and upgrade of sites.
Sustained interest in fuel-based companies in Australia
According to Savills Australia’s “Convenience Retail Market Update” research spotlight report, there remains significant and sustained interest in fuel-based companies within Australia, particularly over the last 2-3 years.
Major player Caltex recently announced its name change to Ampol and will rebrand approximately 1,050 service stations under that name over the next three years. The relatively new owner of the Woolworths network, UK-based EG Group, is also taking its first steps to rebrand under its Euro Garages, or EG name. Meanwhile Chevron has acquired Puma’s Australian network and is likely to use the Caltex brand given they have terminated the licensing agreement with Caltex Australia.
Investors are attracted to service stations because of the generally long term lease covenants to some of Australia’s most successful retailers, which includes the supermarket majors and their partnerships in the fuel market.
The Australian retail fuel market is currently dominated by BP, Caltex and the two supermarket chains - Coles and Woolworths. Key players in Australia’s retail fuel industry are continuing to expand their networks and the number of service stations continues to increase, albeit at a moderated level than in previous years.
Convenience retail – a resilient asset class
Transactional evidence has shown that convenience retail has been one of the most resilient asset classes.
Fuel and convenience retail businesses have continued to trade through domestic lockdown periods and have played an important role in the community as an essential service.
The ‘convenience retail’ factor has increased appeal of these investments as they now have a larger store offering with greater variety of meals. e.g. David Jones and BP are ramping up their gourmet convenience food joint venture, unveiling plans to more than double the number of sites by Christmas. David Jones said it would stock its range of snacks, pre-prepared meals and gourmet groceries in another 21 BP sites in Sydney and Melbourne by the end of 2020, taking the number of sites to 31.
An increased focus on the asset class from institutional groups (Charter Hall) has raised the profile of the asset class. The security of income these assets provide is the key investment criteria, although investors appear to be less concerned about the impact of Electric Vehicles (EV) now.
Recent evidence of strong reversionary land value (e.g. Caltex sites portfolio) and integration of EV into existing sites to complement the fuel offer, has softened the alternate use risk at lease expiry.
A deeper look at the numbers
Savills analysis of recent national sales indicates that those service stations located in metropolitan areas and underpinned by underlying redevelopment potential have reflected firm yields, while service stations located in regional or rural areas indicate softer yields, in particular where land values are low and there is limited redevelopment potential.
In the past 12 months Savills recorded $3.57 billion of service station transactions, including $3.1 billion in leaseback sales to Charter Hall ($1.7bn BP and $1.4bn Ampol) and $470 million of individual sales.
Transaction volumes of individual sites have decreased from March to August 2020, however, investment yields have remained steady with agents reporting heightened interest in single tenant investments (supermarkets, Liquor, QSR and Fuel) that have continued to trade through government imposed lock downs.
The average passing initial yield on individual sites for the 6 months ending February 2020 was 5.72% on total sales volume of $346 million. While sales volumes decreased in the 6 months post COVID-19 to $126 million the average passing initial yield has softened only 15 basis points to 5.87%.
Savills data from convenience retail sales over the past 12 months indicates an average value of $5,747,629 for those located in “metropolitan” locations. The average sale price of sites within the December 2019 Caltex development site portfolio was $5,435,684. Divestment of those property development sites provides compelling evidence to the firm yields being accepted for convenience retail investments situated in metropolitan locations on major arterial roads.
Within a little over six months, Charter Hall has acquired an interest in 428 sites securely leased to either BP or Caltex on triple net leases and over 2,800,000sq n of land with more than 70% in metro locations. The purchase of a non-controlling stake in 225 BP and 203 Ampol fuel outlets provides the group with secure income to tenants that have paid 100% of rent through COVID restrictions.
Charter Hall’s Managing Director and Group CEO David Harrison noted that the off-market transaction reflects their strong market position and continued conviction for Long WALE assets with strong underlying investment fundamentals.
More information
Request a copy of the full report ‘Convenience Retail Market Update 2020.’
.jpg)
.jpg)
.jpg)
.jpg)
