COMMENT Typically seen as a secondary asset for which pricing has been held down by reputational risk, the roadside and automotive sector is now proving itself to be the success story of operational real estate.
While R&A assets such as petrol filling stations have not been immune to inflation, they have benefited from fuel cost resilience. Most petrol retailers operate fuel supply agreements based on Platts Plus, which means the retailer is charged an all-inclusive cost by the supplier depending on the Rotterdam intraday ‘spot’ market price, with a premium on top to reflect the costs of delivery and a profit margin for the supplier. With cost pressures stabilising, well-located assets with good covenant strengths are performing well.
Appetite for R&A assets remained resilient during lockdown as convenience stores at petrol stations became part of the critical infrastructure. Furthermore, with petrol forecourts making higher margins from selling coffee, sandwiches and baked goods in the shop (typically 25-35%), than fuel from the forecourt, profit margins have grown in recent years, principally as a result of improved shop sales. Petrol filling stations located in busy residential locations with parking available benefit from an uplift in local retail spend as these locations see approximately 50% of petrol station revenue comes from retail spend.
Investment opportunities
Acknowledging these trends, operators are looking at ways to adapt their existing space and benefit from new revenue sources. As customers spend more time at petrol stations charging their cars, more space will be dedicated to recreational activities and convenience retail. Services offered at petrol stations are likely to expand, with future services to include convenient-access retailers such as pharmacies, takeaway food outlets, coffee shops and coworking pods.
The market for petrol filling station investments has the potential to be relatively wide, with buyers ranging from major institutional funds and REITS to private individuals and propcos. Property companies and forecourt operators themselves have also been acquisitive in specific situations, with the latter able to identify the underlying trading performance better than anyone else. Therefore, they are able to take a robust view on covenant strength given they are the obvious replacement operators in the event of failure. From a strategic perspective, short-term leases are attractive, especially where it is an oil company on the lease; an asset that could be used as bargaining collateral in the event of the wider fuel supply negotiations.
There is increasing appetite among investors, in particular specialist car park investment funds, pension funds and long income funds. Investors are targeting well-located, income producing car parks that are let on long leases, with guaranteed rental uplifts to operators and strong covenants.
Reputational hazards
Never before have times been more turbulent for the roadside and automotive sector, but never before have there been so many opportunities for the sector to lead innovation and change. The sector has the opportunity to move on from its reputation as a sector traditionally seen as a risk, to a sector that can adapt existing space to bring positive environmental and social impacts to local communities.
Changing regulations will not affect the industry if operators and manufacturers ensure stay ahead of government sustainability targets and lead the move towards net zero. Acknowledging these trends, operators are looking at ways to adapt their existing space driven by growing consumer demand for sustainable products. If the sector continues to adapt, then manufacturers and industry experts will need to ensure they can fulfil the changing demand. Operators will benefit from new revenue sources, and communities will benefit from a greener roadside model that can benefit local economies.
Alice Marwick is head of operational real estate research at CBRE UK
