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Pumping Up Investment

Despite being regarded by some as a sunset industry, petrol stations are still sought-after by commercial investors, writes Sally Lindsay.

By: Sally Lindsay

1 August 2021

The Government wants 64,000 electric vehicles on the road by 2023 as it pursues a zero carbon economy. It is even offering an $8,625 subsidy to people buying new electric cars in support of this goal. But fuel industry pundits say their sector is not yet dead and won’t be for at least another 20-plus years.

In the meantime, fossil fuel station owners and investors are adapting in a fast-changing environment. Many operators are reshaping their outlets through complementary retail and service offerings, while others are moving to no-frills, unmanned stations selling discounted fuel – the biggest recent change in the sector.

In the most recent large-scale sale of service stations from Paihia to Invercargill, wealthy couple Barry and Diane Rissetto sold the land and buildings of 23 Z Energy outlets. Ten years ago the couple had bought 52 of Z Energy’s service stations when the company was ordered by the Commerce Commission to sell down
some of its assets after being given the green light to buy Caltex.

Fossil fuel’s days are numbered, but until we all go electric, service stations are still an option for investors.

Jason Seymour, Colliers International capital markets director, says there were plenty of buyers interested in a passive investment, although some did inquire if they could buy the business as well, but the operations have stayed with the tenant Z Energy.

“The value is in the underlying land,” he says.

The view most investors have taken is they have rental cashflow for a longish period and options for redevelopment, mostly into residential, especially on city sites, in the future, says Seymour. A couple of the service stations had excess vacant land which was suitable for residential development straight away.

Seymour says although service stations for sale have been few and far between since the portfolio sale, there is still demand there from investors.

“There is also constant demand from unmanned pump operators for land or older service stations with short leases. Not everybody sees service stations as a dying industry in a wholesale type of fashion,” says Seymour.

Expensive Land

Bayleys South Auckland agent Tony Chaudhary, who has sold service stations from Silverdale to Tauranga, says they are pure commercial real estate.

“The land is expensive whatever part of New Zealand it is in, purely because it has to be on a main highway with high traffic flows and preferably a corner site.”

However, Chaudhary says service station buying popularity varies with the times, rules, how the economy is performing, real estate returns and the fuel industry.

“Like any asset class, buyers will pay more for a long-term lease from a top tenant, such as the big four service station operators, and a good location.”

He says service stations outside the cities can be bought for cheaper prices at higher returns.

“Whether a buyer is in the provinces or the city, the same site, tenant and income will sell in Auckland, for example, at a yield of 5.5% but at 6% in the provinces.”

Other investors will look at building a new service station but it is not cheap – about $5 million is the ballpark figure. The biggest high-ticket component, apart from the land, is the underground fuel tanks and associated infrastructure.

Chaudhary says banks have tightened up lending on service stations.

“Banks are being hard in general, but particularly on service stations because they see them as customised real estate that has limited or no alternative use in their opinion.”

In Chaudhary’s opinion this is wrong. Investors with, say, Mobil or BP as a tenant on a 10-year lease, are dealing with top-10 companies globally that have billions of dollars in security.

“This is a strong financial instrument in anyone’s book.”
He says service stations, like any other business will also adapt to survive. “Whether people are driving electric or fossil fuel cars they are still going to need service stations for either petrol or charging for their vehicles and the convenience shopping most offer.

Proliferation Of Stations

The only petrol station brands with national reach 10 years ago were the big four – Mobil, BP, Shell and Caltex (Shell was bought by Z, which has since bought Caltex). However, there are now 21 brands.

In its 2018 annual report, Z Energy discussed whether petrol retailing was a “sunset industry”.

“We can see the sunset coming. This is not a blinddisruption scenario. We have the time to prepare ... Returns can still be attractive in an industry in decline,” the report says.

Gasoline Alley director Tim Ellis wonders how much more capacity there is in New Zealand for new petrol stations.

“Over recent years there has been a proliferation of stations going into all sorts of areas and some of this is highly successful and will remain so, but I do wonder where the high water mark is and whether we have more or less reached it.”

The MTA (Motor Trade Association) says there is no doubt service stations will be affected when the rising tide of new electric vehicle sales becomes a rush.

MTA energy and environment senior manager Ian Baggott says investing in EV chargers for individual service station investors doesn’t stack up from a business case point of view right now. An investment in charging units as well as power supply upgrades could cost around $100,000-plus.

Instead, it is advocating for the Government to support the sector in line with its “just transition” support for affected businesses and communities, to help with financial support to build the network of en-route EV chargers at locations suitable and convenient for EV owners – existing service stations.

Baggott says in scrutinising various energy demand/use models, it seems about 2030-35 is the predicted timeframe where sufficient EVs will influence a key drop in fossil fuel use that makes EV charging facilities at traditional service stations a worthwhile option.

MTA figures show the average gross margins on petrol and diesel have improved on 2018 results but average total fuel volumes have fallen about 15% since then. These figures do not include the impact of the Covid-19 lockdown period but are perhaps reflective of improving fuel efficiencies and more EVs coming into the fleet along with more use of public transport.

Last year 3.2 million litres of fuel were sold per service station site compared to five million in 2015, the average margin on petrol was 10.2 cents a litre, compared to 10.3 cents a litre in 2015 and the average margin on diesel was 10.8 cents a litre, the same as 2015.

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