No matter how much hype the electric car industry generates, with almost 20 million cars on the road throughout the nation and well over 5000 service stations, we will still be pulling up to fuel pumps for a long time to come.
And that means buying and selling service stations remains high on the agenda for those after a long term, passive commercial property investment.
Buy well and the result is a virtually guaranteed set-and-forget style investment - low-risk, long-term and with a good rent return for many years to come.
However as with any commercial property investment, petrol stations present a unique set of requirements and critical factors to check before any moves are made towards having finance approved and especially signing a lease. So while service stations are among high-profile investment opportunities, they also demand a good deal of due diligence and forensic examination of the lease in particular. Among the chief considerations are:
- Environment and contamination issues: Especially significant for those buying a service station freehold – the business and the land – as an Environmental Site Assessment (ESA) is required to document any contamination or other issues with the land. Despite this being the case, as recently as three years ago it was unlikely either buyers or sellers would have had this carried out, let alone be aware of its existence according to commercial agents who specialise in the field.
This still presents problems today. Kieran Bourke, commercial agent and associate director of leading property agency Burgess Rawson, transacts an average of three service stations every few months. He says despite ESA’s now being imperative, it is still common to receive a blank look when he brings up the subject during discussions over service stations and their potential value.
“For banks to lend on service stations these days they need ESA reports,” Mr Bourke explains. “You can have interested parties putting offers in but if they haven’t had an ESA done then either the solicitors or the banks will stop the process until they do.”
ESA’s follow standards laid down by a state’s Environmental Protection Authority and are valid for 12 months. Valuable for both lessees and purchasers, they are used as a way of proving liability for contamination: a tenant is usually responsible for remediating land to the same condition it was in at the start of their lease, information which will be contained in an ESA report. Similarly, service station owners are liable to pay for any clean-up required should an ESA detect contamination. ESA’s are also among the reports required by the authorities should an application be made down the track for rezoning or redevelopment, two factors which can often drive the purchase of a service station site in the first place given the fast-changing nature of the urban landscape.
- Age of site & petrol tanks: Newer sites are usually fitted with modern tanks built of double-wall fibreglass. These are less likely to leak fuel into the ground than older steel tanks, and behind the simple reason banks lend more generously on newer sites. Older sites however are still readily traded, with Mr Bourke selling a northern beaches service station four years ago for just over $7 million which is currently closed for a few weeks while tanks are upgraded.
- Fuel provider: Typically, a service station purchaser will enter into a franchise agreement with one of the big players such as Shell, Caltex, United Petroleum and so on. Franchise agreements means that tanks, pumps and lines are the responsibility of the parent company and these majors offer a purchaser the greatest security.
- Is the lease in your favour? A net lease is preferable as it requires the tenant pay for outgoings, from water rates and land tax to insurance premiums. Also, as with other commercial properties, the lengthier the lease the better.
- Location: The obvious property purchase requirement, and in this case one that can pay big dividends. “Due to service stations being, more often than not, in strong commercial locations, many have future upside possibilities,” Mr Bourke says. “In 15-years’ time the zoning might change for instance, and then sometimes the highest and best use for the site wouldn’t be a service station - it could be apartments.”
- Costs: Service station prices vary widely. Mr Bourke recently transacted a petrol station in the tiny town of Tingha near Inverell in NSW’s Northern Tablelands for $470,000. Other sites, such as huge service centres located on the country’s major motorway the M1, can trade far north of $10 million and well beyond.
Other important considerations when looking at a service station investment include the financial position of the business; business plan; your previous experience in the area; market conditions; profit forecasts and legals ie registration papers, permits and the like. Consulting experts such as business brokers, advisors and (clearly) your accountant is highly advised.