For some commercial property investors, petrol stations deliver a steady flow of return – but picking the wrong one can see a portfolio stall.
That’s why investing in service stations requires careful homework, according to Kieran Bourke, associate director of Burgess Rawson in Sydney.
“While service stations can offer high-profile investment opportunities, most passive investors approach these buys with a higher degree of caution than they would for other retail/commercial properties, and rightly so,” Bourke says.
“With location and critical infrastructure key to the site’s operations and influencing potential investment yield, the wrong choice can seriously harm your portfolio if one is seeking a no-fuss, long-term passive investment,” he adds.
Bourke explains what to look for when thinking about buying or selling a service station investment.
How to buy a petrol station:
Buyers should look beyond the usual factors of tenant, location and the age of the building to also consider the environmental factors, Bourke advises.
“The basics are still key; like long-term leases to strong trading tenants who will stay the term of the lease, minimising potential future management costs of having to re-list and capital expenditure considerations,” he says.
But there are a number of other red flags that smart investors look for when considering a service station investment, he adds. Bourke recommends answering a number of questions.
“Who is the covenant behind the lease? Is it a company head lease, such as Caltex, or a franchisee? A company head lease is a stronger covenant and will attract a lower yield (higher sale price) than a franchisee,” he says.
“How much rent is the tenant paying? If the site is ‘over-rented’, the tenant may not be able to afford the lease long-term, leading to a drop in future rent or the tenant moving out before the expiry of the lease, leading to re-leasing costs.
Bourke says other considerations include:
• Is the site in a busy commercial location that can sustain operations? What is the access like?
• What competitors are nearby and are they competing for the same flow of traffic?
• How old are the fuel tanks and what are they made from? If the service station is older, it is likely the underground fuel tanks are made from steel, rather than the modern alternative, with fibreglass lining.
“Over time, steel tanks corrode and can leak fuel into the ground, causing contamination. This can become a huge cost for the landlord if underground tanks and lines need to be replaced and remediation of a contaminated site is required,” Bourke says.
Always request a copy of a valid Environmental Site Assessment (ESA) report, which details any contamination issues with the site and its equipment, he adds. Such reports are valid for up to 12 months.
How to sell a petrol station:
To optimise the sale price, Bourke says vendors looking to sell their service stations should seek attractive lease terms, such as:
• Long-term leases, with option periods;
• Minimum three per cent annual rent increases;
• A net lease, with the tenant paying all outgoings, including council rates, water rates, land tax (on single holding basis) and insurance premiums;
• Making the tenant responsible for repairs and maintenance of above and underground fuel systems and ongoing monitoring of the fuel systems;
• The use of a remediation clause to ensure the tenant is responsible for any contamination caused by the tenant since their occupation.
“Investors shouldn’t be deterred by the risks, as service stations can be a solid investment option. Just be sure to do your homework first,” Bourke says.
To find out more about the properties in our portfolio, and how we can help you with sales, leasing and property management services, please contact us.
Written by Adrian Ballantyne, Real Commercial
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