Service station investment is down – Image: Pexels
  • Service station investment has dropped to $66.8M in 2023
  • Experienced investors focusing on lease longevity and fixed increases
  • Investors have moved back to prime east coast markets

Service stations have been a popular choice for investors over the past few years, however, 2023 has seen sales volumes dramatically fall away.

According to Ray White in 2022 there was $1.07 billion in service station investment as the ‘set and forget’ asset proved incredibly popular.

However, on the back of higher interest rates, the first five months of 2023 have seen just $66.8 million invested in the sector.

Ray White Commercial, Head of Research, Vanessa Rader said that despite the fall, volumes were still 47% higher than the previous peak investment year in 2019, which recorded $730.4 million, highlighting the significant growth in the attractiveness of service stations as an asset class.

“While the market continued to purchase in late 2022, we saw a number of investors leave the marketplace, notably the smaller first time buyers looking to capitalise on the ‘set and forget’ phenomenon of these assets,” said Rader.

“This left more experienced investors who, despite the increased financing costs, looked to the longevity of the lease covenant and fixed increases as a hedge to these growing costs.”

According to Rader, the pool of buyers was also limited by the higher LVR requirements compared with other asset types during a time where deposit rates have risen.

Service station investment

Source: Ray White Commercial

Activity has moved to prime east coast markets

She also said that locations that investors are focused on has also changed in the past 12 months.

“In our peak year of investment, 2022, we saw volumes dominated by NSW and Queensland assets, with an increased level of demand for WA and SA assets, while Victoria fell short of its historical volumes.”

“The quest to secure an affordable, quality, high returning commercial investment saw continued sales activity in regional markets and regions such as NT and Tasmania also improve.”

Rader said that while regional assets continue to trade, activity has transitioned back to prime east coast markets dominated by NSW, Victoria and Queensland.

“We expect buyers to move back to market fundamentals and be more focused on future redevelopment potential of assets for the remainder of the year, this includes closer attention to location.”

Vanessa Rader, Ray White Commercial, Head of Research

“As a result, those assets considered secondary in location, quality or lease covenant may have greater pressure on price, resulting in increases in potential investment yields.”

Yields rising

According to Rader, analysis of yields already showed growth trend in yields commenced last year as interest rates started their upward momentum.

Yield lows were achieved during 2021 with metropolitan assets averaging sub-4%, while regional markets saw significant tightening to just 5.88 per cent.

“As we transitioned through 2022 and into 2023, with the cash rate moving from 0.10% to 3.85%, investment yields have pushed up to 4.71% in metropolitan areas and 6.25% in regional markets, albeit ranges do extend beyond 7% for some assets.”

Higher rates scaring investors

Rader said the uncertainty surrounding future interest rate increases has put a dampener on investors’ appetite to move quickly on investment opportunities.

“For many buyers, capitalisation rates need to show further increase to spur on investment decisions, however, we expect to see limited assets come to market as owners continue to hold and reap the rewards of their stable income stream.”

“Distressed assets may start to emerge, however, volumes will remain subdued in 2023 until sentiment shifts occur and confidence is restored regarding financing.

“This will then drive investment activity into one of the smaller, private investor’s favourite, alternative investment classes – the service station.”

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