The calibre of vehicles squeezing through the tiny BP petrol station on London’s Park Lane is second to none. On any given day, the garage of millionaires serves Bentleys, Porsches and BMWs. Skodas are fewer and further between.
The quality of BP’s Park Lane clientele may set the garage apart, but the petrol station does have a lot in common with its less well-bred cousins. Not only is it one of only a dozen petrol stations within London’s congestion charge zone – an area with around 140,000 residents – but it is part of a shrinking number throughout the country.
Twenty years ago, there were almost 17,000 stations in the UK. Today, there are just over 10,000 – a number that is forecast to drop to 7,500 by 2010. The reason for the decline lies with oil companies. Price wars and consolidation have led to an average of 100 stations going up for sale at any one time. “This year, I would expect 350 to come on the market,” says Rob Hilton, head of automotive and roadside for Colliers CRE.
While this may be bad news for those seeking a convenient local petrol station, it is a developer’s dream. The majority of sites are in city centres, making them prime for redevelopment, and this is why they are being sold at up to three times their value.
As a result, two issues now split the petrol station market: how those that remain survive, and what happens to the land of those that are closed.
It was oil giant Esso’s reaction to increasing competition of supermarket chains that is seen as an indirect reason for petrol stations closing. With the supermarket giants moving into the market and cutting prices, Esso hit back with its “price watch” campaign in 1996, promising to match the lowest price within three miles of any of its outlets.
This move was followed by the Wetherspoon syndrome: what the pub company did for cheap drinking in UK pubs, so the price watch campaign did for cheaper petrol at the forecourts. Those that could not survive with lower margins quickly went out of business. And even more stations closed owing to a number of oil company consolidations from the late 1990s to today.
As a result, those stations that were left had to up the ante. Selling petrol was no longer the main profit – other sources of revenue had to be found. And this is where the supermarket giants came in.
John Coulling, associate director at Lambert Smith Hampton’s national motor trade and roadside department, says oil companies are obviously not as interested as supermarkets in the retail side because they want to concentrate on their core product. But many of them are now entering into partnerships with the large supermarket chains.
Big names understand retail market
A classic example was the Tesco Express and Esso partnership in 1998. Coulling says the arrival of the supermarkets has “affected the market by raising the bar”, adding that they operate convenience shops on the forecourts more successfully than the petrol companies because they “understand the retail market”.
“The petrol stations that do exist are bigger, better developed, and with much larger shops up to 3,000 sq ft, giving the ability to have more profit points,” says Coulling.
There is profit to be made from bigger forecourt shops, but there is even more profit to be made from selling petrol stations, as is evident from the money developers are willing to pay for sites.
Alfred Bartlett, partner and head of Donaldsons’ national roadside department, says: “It is not unusual for a decent petrol station in a decent area to change hands for £500,000. Five years ago, on a like-for-like basis, the price would have been £300,000.”
On average, between 65-70% of petrol station sites are converted to residential. Most of these developments are flats, which maximise the value of the land. However, some agents believe that, as the residential market starts slowing down, some sites will accommodate mixed-use schemes with retail, and maybe offices below flats.
Bristol-based developer Westmark is one of those going down the mixed-use road. It has submitted an application to turn a former petrol station in the heart of Clifton village into 14 flats with 5,000 sq ft of retail space.
Despite the continuing sales, which Barlett believes are now at their peak, oil companies are now starting to look for sites again. Given the cost of developing land and developing petrol stations, it is only those with the deepest pockets that will be able to build new ones.
A new petrol station needs between 0.5-0.75 acres and be able to accommodate a 2,500 sq ft shop, which equates to a cost of around £1m. Barlett believes that most new builds will have a Tesco on site. “Around a quarter of all offers made by developers for petrol stations have a Tesco Express in mind,” he says.
At the same time, Barlett reckons oil companies will begin to buy out independent owners so much so, that from a market split of 40% oil company- and supermarket-owned to 60% independent, “we will see a market with 99% of the petrol stations owned by the oil companies”.
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● There are now just over 10,300 petrol stations in the UK. This has fallen from 16,700 10 years ago. In the year 2010, it is expected that the number will have fallen below 8,000 ● Average convenience stores on new-build petrol stations are between 2,000-3,000 sq ft ● The average purchase price for a petrol station five years ago was £300,000. Today it is £500,000 ● Safeway is proposing a package deal for around 30 of its BP garage outlets to be sold as going concerns, albeit not necessarily with a BP supply agreement. Amanda Barber, national head of automotive and roadside at GVA Grimley, says bids received so far range between £60m-£90m |
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Developers face several challenges when deciding to purchase a petrol station. Contamination is one of the major issues. “If a site has been used as a petrol station, it will set alarm bells off in purchasers’ minds, as they will be expecting the area will still be contaminated – and there’s not a station in the UK that isn’t contaminated by hydrocarbon,” says Anne Harrison, environmental and planning specialist at law firm Clarkslegal. Harrison, however, says that this is not necessarily a major problem unless the contamination has spread to affect land in neighbouring sites. Depending how bad it is, soil from the entire site might have to be removed and replaced. In the majority of cases, oil companies will make sure the land is remediated and certified by an environmental consultant before it is sold on for development, thus avoiding future liabilities. A second issue is the value of a site. Rob Hilton, head of automotive and roadside at Colliers CRE, says oil companies work with two values: a book value for its original purchase, development and upgrading; and a market value. He explains: “If what they have spent on book value, combined with cleaning, is £2m, but the site only has a market value of £1.3m, then the oil company will still sell it for £1.3m and take a hit on it. If this does happen, then it’s bad planning on the part of the oil company. “But, generally, book value is exceeded by end-use value – that is, residential use or retail use.” There are occasions when the oil company will sell a site that still needs remediation. The purchaser is then responsible for both undertaking an environment study before buying and for cleaning up the site, which can cost up to £100,000. In most cases, the cost of remediation is incorporated into the sale price. |
