Simon Johanson
NOVEMBER 6 2017
The Age
Most of us spend more each week on petrol than any other single household item.
Pulling up to the petrol bowser with the kids in the back of the Tucson and filling up the tank is still the single biggest weekly purchase many families make, according to detailed Australian Bureau of Statistics household spending data released recently.
Oil markets jumped on Monday on concerns over potential renewed US sanctions against Iran as well as conflict in Iraq.
The average household spent $49.64 a week on petrol in 2015/16, the ABS says.
But the typical family’s regular fuel fix isn’t only lining the pockets of multinational energy companies, it has created a rapidly-evolving asset class popular with both ends of Australia’s property investment spectrum.
Property yields for petrol stations have crunched by more than 1.3 percentage points since 2013, according to numbers supplied by Burgess Rawson, a real estate agency that sells large numbers of petrol stations through its monthly portfolio auctions.
The 10 service stations sold across the country by the agency in 2013 achieved an average yield of 7.71 per cent. Fast forward to this year and 23 have already transacted on an average yield of 6.37 per cent.
Money parked in a six-month bank term deposit earns about 2.6 per cent interest.
“They are popular with wealthy families and syndicates,” says Burgess’ Jamie Perlinger.
The Coles and Woolworths supermarket wars in the 2000s spilled over into a headlong rush to partner with the oil majors and brand their own petrol station. convenience stores.
Investors generally focus on the service station’s location, who the tenant is, what type of lease term underpins it, and the amount of depreciation they can claim.
Newly built servos are particularly popular. “That’s a huge plus,” he says.
We are on the cusp of one of the fastest, deepest, most consequential disruptions of transportation in history.
Stanford University economist Tony Seba
“If you’re buying a new site, you own all the tanks and lines. They’re highly depreciable items. From the concrete to canopies, you can depreciate everything.”
The tax benefits certainly attracted businessman Mike Wolper.
After selling his confectionary import company Mike & Jack to ASX-listed Funtastic, Mr Wolper put $4.5 million of the proceeds into a new Coles-leased service station in the heart of Bacchus Marsh, a regional town on Melbourne’s western fringe.
“I wanted to find something that I could leave my kids that was problem free,” he said. “My depreciation is in excess of $200,000. It’s massive.”
One of the biggest investor advantages is the site’s lease structure.
“Coles and Woolies pay all outgoings including land tax and land tax has become a killer. I know it’s not a very exciting investment, but it’s long term and it’s safe. I needed that,” he says.
Servos may provide a safe, secure source of income but they have long been tainted with a C word: contamination.
Industry participants say the sector over the past two decades has moved to clean up its act.
Pollution from leached fuel products, a significant downside for investors, is now rare, tackled with double-skin fibreglass tanks and sophisticated inventory monitoring.
Leases push responsibility for environmental maintenance, contamination and clean-up onto tenants. “They [tenants] maintain these things to a high standard because they don’t want to spend the money on decontaminating or fixing the site,” Mr Perlinger says.
Woolworths will sell its petrol station portfolio to BP in a $1.8 billion deal that will help the retail giant fund its ongoing fight to regain market share in the grocery sector.
Woolworths wants to sell its petrol station portfolio to BP in a $1.8 billion deal that will help the retail giant fund its ongoing fight to regain market share in the grocery sector. Photo: Glen Hunt
Just over a decade ago the sector caught the eye of Australia’s supermarket duopoly.
The Coles and Woolworths supermarket wars in the 2000s spilled over into a headlong rush by both big retailers to partner with the oil majors and brand their own petrol station convenience stores. Supermarkets have been driving customers to fuel stores with discount vouchers, so called “shopper dockets” offering up to 8¢ off a litre of fuel, ever since.
The supermarket petrol tie-up smashed many small mum-and-dad operations and ushered in an era of fierce competition among major industry players.
The shakeout resulted in a huge reduction in the number of service stations countrywide, down from around 20,000 sites in the 1970s to around 6400 today, research from agency Knight Frank shows.
Barriers to entry are high as service stations are operated under long-term alliance agreements that create a challenge for new competitors.
Just how complex the sector has become is being played out before Australia’s competition watchdog which is investigating Woolworths’ proposed $1.8 billion sale of its 527 service stations to BP.
The Australian Competition and Consumer Commission delayed its final decision this month, pushing it back to November 30 to allow it more time to analyse data and information on the tie-up.
The regulator flagged concerns in August that the deal could ultimately reduce competition and cost consumers.
The ACCC’s Rod Sims has signalled concerns about the merger.
“The transaction would reduce the number of major rivals in fuel retailing. The transaction could see retailers face less competitive pressure to keep their prices low and as a result, motorists may end up paying more at the pump,” ACCC chairman Rod Sims said at the time.
It’s not hard to see the regulator’s concerns.
BP’s share of the wholesale fuel market will jump from around 18 per cent to 30 per cent if it snaffles Woolworths’ sites. The number of BP-supplied sites will shoot up to more than 1930, similar to Caltex, which has about 1900 sites, and far larger than Shell with 980 and Coles Express with 692.
The growth of supermarket-owned petrol stations sparked a corresponding investor rush from large property groups, as well as the private investors, wanting to cash in on the stable income and long-term leasing structures underpinning the sector.
That culminated in late July this year when APN Property group launched its Convenience Retail REIT, a listed property trust consisting largely of Puma-leased petrol stations.
APN’s REIT debuted on the Australian exchange with an initial $3 listing price.
It has since traded down, at $2.80 a share on Friday, only once briefly reaching its initial peak listing price five days after launch.
The trust is 65 per cent leased to Puma Energy Australia and 18 per cent to Woolworths. Other tenants include 7-Eleven, Caltex, Viva Energy Australia and fast-food outlets.
It has first right of refusal over any site Puma buys, develops or sells giving it a clear growth strategy for expansion in Queensland and Western Australia, as well as New South Wales and Victoria.
APN’s fund was the second institutional play to tap the sector.
The other, Viva Energy REIT now just over one year old, was conceived when Viva – Australia’s largest private fuel company – spun its property assets out of its balance sheet.
Viva subleases the fuel stations to Coles Express in an alliance that lets Coles run the retail operation while Viva supplies the oil products under the Shell brand.
It too, has largely traded below its initial $2.56 listing price, closing at $2.16 on Friday.
To all intents, the industry’s outlook appears solid and stable.
However, its future, rather than taking off with the throaty roar of a petrol engine, is sneaking-up behind it with the quiet whoosh of an electric vehicle.
While Australia has one of the lowest take-ups of electric vehicles (EVs) in the developed world – they comprised just 0.07 per cent of sales in 2016 – there are tentative signs change is on the way.
Queensland’s Palaszczuk government announced this month it will begin rolling out charging stations between Brisbane and Cairns to wean drivers off petrol cars.
The state also offers stamp duty and registration discounts for electric vehicles.
Colin McKerracher, the head of advanced transport at Bloomberg New Energy Finance, says electric vehicles will become price competitive with petrol models on an unsubsidised basis by 2025, leading to real mass market adoption.
“In our view [EVs] will be about 3 to 4 per cent of global sales in 2020. That’s not that far away now. And then about 8 per cent of global sales in 2025. That’s where it really starts to pick up,” Mr McKerracher says.
A charging plugs connects an electric vehicle (EV) to a charging station at Q-Park Park Lane underground parking lot in London, U.K., on Wednesday, Aug. 9, 2017. The U.K. government plans to invest more than 800 million pounds ($1 billion) in new driverless and zero-emission vehicle technology as it seeks to boost its economy while leaving the European Union. Photographer: Simon Dawson/Bloomberg
A charging plugs connects an electric vehicle (EV) to a charging station at Q-Park Park Lane underground parking lot in London. Photo: Bloomberg
Bloomberg estimates one-third of the world’s fleet will be electric by 2040 cutting oil use by eight million barrels a day, roughly the output of Saudi Arabia.
Most car charging, about 80 per cent, will happen at home.
“Because of that there isn’t so much need to replicate the exact refuelling infrastructure that we had with the internal combustion engine.
“In the long term, they [petrol stations] will face a real existential threat from the rise of electric mobility. But I do think that takes a long time,” he says.
Another researcher, Stanford University economist Tony Seba, goes much further, much faster.
“We are on the cusp of one of the fastest, deepest, most consequential disruptions of transportation in history,” he says.
Mr Seba released a report in May titled Rethinking Transportation 2020-2030 which sent established auto and fossil fuel industries into a tailspin.
By 2030 people will have stopped driving altogether and switched en masse to self-drive electric vehicles because they are 10 times cheaper to run, have near zero fuel costs and last much, much longer, he says.
Petrol stations, auto workshops and dealerships will be harder to find. Once the price of low end electric vehicles comes down to $US20,000 ($26,000) (by 2022 he forecasts), it will cause a tsunami that will wash away huge swathes of the motor industry.
“What the cost curve says is that by 2025 all new vehicles will be electric, all new buses, all new cars, all new tractors, all new vans, anything that moves on wheels will be electric, globally,” Mr Seba says.
It’s a hypothesis that’s not keeping Chris Brockett, fund manager for Convenience Retail REIT, up at night.
“My two young kids cause me more loss of sleep than electric vehicles,” he says.
There’s no doubt electric will be part of the mix in the future but the barrier to uptake, particularly their range and price, is still big, Mr Brockett says.
“The battery technology still has a long way to go and the range is not particularly great. In Australia, the trend is declining for EV sales.”
Mr Brockett says petrol stations, often at the forefront of retailing, are resilient to change.
Oil major Caltex introduced a pilot fresh food concept earlier this year in the Sydney suburb of Concord called The Foodary. It aims to exploit the convenience of the store’s location by offering fresh food, ready meals, laundry and parcel pick up.
If the BP and Woolworths deal gets the green light, the pair have flagged plans to jointly develop a new Metro at BP convenience store offering. They will model it on BP’s convenience store partnerships with Marks & Spencer in Britain and Rewe in Germany and Woolworths’ successful Metro small-store format.
“I don’t think it’s unrealistic to see alcohol being sold in future or co-tenanting with a pharmacy. The sites will certainly be able to adapt to the change because fundamentally they are very well located,” Mr Brockett says.
For Mr Wolper, the central location of his Bacchus Marsh servo is some comfort against a future without internal combustion engines.
“If petrol no longer gets sold, I will be turning in my grave. But I’m 67 now and I don’t think in the next 15 years there’s going to be an issue with petrol not being sold.
“If they [Coles] decided not to renew their lease, that’s a development site in the heart of Bacchus Marsh.”
Jeff Rogut
CEO
The Australasian Association of Convenience Stores Ltd.
Mobile: 0467 873 789
Sent from my iPad
Subscribe to our free mailing list and always be the first to receive the latest news and updates.