Advice and Opinion

High yields fuel investor demand for petrol stations

Petrol Station

Petrol station sites have continued to attract investor demand as they show increasingly promising yields during a challenging economic environment.

Investors are eyeing this market carefully, with strong competition for established service stations 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 standard returns they are generating through mixed revenue streams, withsome recent service stations reaching sale yields of 8%. A well-located service station with large petrol pump volumes and attractive added retail is in very high demand across South Africa.”

“Despite South Africa’s sluggish economic growth, the fuel sector seems to be relatively recession-proof, and with a growing middle class set to see even more cars on the road, prospects are expected to improve further,” he adds.

Fuel, has for some time, backed the resilience of the fuel sector even during difficult economic environments. James Noble, Absa’s business development manager comments: ‘’The fuel volumes at some sites are under pressure due to less disposable income and therefore motorist buying less fuel, but generally service station businesses are still profitable and a good investment opportunity.’’

The challenge comes in for investors when supply is low and to get approval to build a new site is no easy task with the industry being regulated. ‘’There are on average about 12 to 14 site license applications per month for new to industry sites lodged at the Department of Energy over the last 2 years. It still 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 licenses and benchmarks as set out by the regulator. As a result, an existing operational and licensed service stations is very attractive to an investor.”.

Its not only about the barriers to entry says Wilkins. “Setup costs for 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,” Wilkins said.

Adds Wilkins, “As an example, Caltex on Crompton, a site in Pinetown which Galetti has taken to market, is generating tremendous interest from investors due to its location, retail component and the fact that these sites do not come to market in the area very often. When they do, the demand is fierce, as we have been experiencing with this property.”

According to Wilkins those looking to invest in a service station can approach it in one of three ways: By owning the business operation only, owning the physical property – the land and improvements, or both.