High yields fuel investor demand for petrol stations
Stiff competition for good sites with high petrol-pump volumes and retail outlets
INVESTOR demand for petrol-station sites has remained steadfast, as they show increasingly promising yields in a challenging economic environment.
Savvy investors are eyeing this market carefully – there is stiff competition for established service-station sites across South Africa, says Simon Wilkins, Galetti Corporate Real Estate’s head of global corporate services.
“The petrol-station market continues to be a prime focus for investors, due to the attractive returns they are generating through mixed revenue streams, with some service stations reaching sale yields of 8 percent. A well-located service station with large petrol-pump volumes and attractive added retail is in very high demand across South Africa,’’ says Wilkins.
“Despite sluggish economic growth, the fuel sector seems relatively recession-proof, and with a growing middle class set to see even more cars on the road, prospects are expected to improve further,” says Wilkins.
James Noble, Absa’s business development manager: fuel, has for some time backed the resilience of the fuel sector, even when the economic environment is tough. Noble says: “The fuel volumes at some sites are under pressure, due to less disposable income and, therefore, motorists buying less fuel, but service-station businesses are generally still profitable and a good investment opportunity.’’
The challenge for investors is that supply is low and it’s not easy to obtain approval to build a new site, because the industry is highly regulated.
Noble says: ‘’There were, on average, about 12 to 14 site-licence applications a month for new industry sites lodged at the Department of Energy over the past two years. It is a cumbersome process to get approval and build new sites.
“Depending on how the property transaction is structured and the fuel volumes being pumped, the returns on service-station properties are good. The current trend is also for non-refinery brands to increase their service-station footprint, especially in rural areas. Although the economy is under pressure, we still see a demand for service-station businesses, but the opportunities are limited, with not a lot of businesses for sale.’’
Wilkins agrees. “Barriers to entry into the fuel sector are substantial, with some new-build service stations taking up to five years to complete from planning stage. There are various factors to consider for a new build, such as proximity to competitors, rezoning for purposes of a filling station, environmental impact approvals and licences and benchmarks as set out by the regulator. As a result, an existing operational and licensed service stations is very attractive to an investor.”
It’s not only about the barriers to entry, says Wilkins. “Set-up costs for a service-station property can be as high as R100 million for a double-sided highway site. This is another reason why existing sites are so appealing.
“The service station has morphed to become a one-stop-shop, with consumers being able to carry out myriad tasks, including shopping, banking and eating in a forecourt, all while they fill their tank or have a car wash. Food retailers and fast-food outlets also play an important role in attracting business to the site, which investors take careful note of when considering a purchase.”
According to Wilkins, those looking to invest in a service station can approach it in one of three ways: owning the business operation only; owning the physical property – the land and improvements; or both.