With all the changes occurring and with potential liabilities in mind are service stations still a smart investment?
Investing smartly in commercial real estate involves looking at options you might never have considered. The rise of service stations as an investment is proof of this. Historically these properties have been avoided, particularly by entry-level investors. This may be due to concerns about the potential liability when managing the risk of environmental damages inherent in storing and selling petroleum.
Despite this, over the last five years, they've grown in popularity throughout Queensland which has driven some changes in the market for such buildings as well as the yields that they offer. With all the changes occurring and with potential liabilities in mind are service stations still a smart investment? Let's have a closer look at these properties to clarify the potential benefits they may offer.
What benefits do service stations offer as an investment?
Investment financing is at record lows and other investments such as residential property, equities and shares appear to be showing lower returns. As a result, investors have been looking elsewhere, revealing the humble service station as a genuine option. Such an investment may be right for you as there are several positives inherent in owning such a property - if you buy right. These might include:
- A stable rental income - many of these properties already have long-term leases. This is something to look at closely when buying as the right lease agreement with the right tenants could guarantee reliable income for the entire duration of your ownership.
- Fixed rental increases - If you choose wisely you're likely to find a service station with a lease agreement featuring fixed rental increases. These will help ensure your rental income can cover all (or a large portion) of your mortgage and the costs of ownership. Additionally, as the rent increases the value of your investment may climb with it.
- Maintenance stipulations in contracts - you may find there are several benefits of having a multinational petroleum corporation as a tenant. One such positive is stipulations in contracts that will require your tenants maintain and even refurbish your property up to a certain agreed-upon standard.
- Paid outgoings - a stipulation often found in the lease agreements of service stations is that the tenant is responsible for all (or most) outgoing costs. You may not have to pay rates, insurance and a range of other costs if you find the right tenants.
- Set and forget - as a result of the benefits described above service stations are often 'set and forget' or passive investments. Once you've purchased and tenanted your property you may be able to sit back and enjoy the fruits of your labour as they grow over time.
What's going to happen with prices and yields?
Investors may be taking advantage of the long-term benefits these investments provide, holding onto the properties instead of selling.
Investors throughout Queensland have begun considering service stations as a viable property investment causing demand to increase and placing pressure on supply, prices and yields. During 2014 this saw sales turnover on service stations reach an incredible figure of $250 million - the highest since at least 2006.
The following year sales decreased to under $200 million, and 2016 is likely to return similar results with a solid $131 million in total sales to August. This decrease indicates that investors may be taking advantage of the long-term benefits these investments provide, holding onto the properties instead of selling.
As demand begins to exceed supply, prices may increase and yields may compress. This is already evident in rental yields throughout Queensland which have shown steady decreases since 2010 when regional properties were returning over 9.5 per cent on average and South East Queensland properties were returning over 8.5 per cent. Fast forward to 2016 and yields are sitting closer to 6 per cent in SEQ and 7.5 per cent in regional areas.
This indicates that you may experience lower yields of around 6 per cent if you buy now, but your investment may grow in value quicker thanks to booming demand.
What should you focus on when making such an investment?
Buying property with an existing long-term lease agreement, preferably with a blue-chip tenant will help make this possible.
As yields continue to compress it becomes increasingly important to focus on securing a quality tenant when investing in a service station. You may struggle to find yields exceeding 6 per cent regardless of where you purchase, so maximising the benefits described above should be the focus.
Buying property with an existing long-term lease agreement, preferably with a blue-chip tenant will help make this possible. Doing so will ensure that instead of relying on capital gains, or a sky-high yield, your investment has a guaranteed long term cash flow, one that's both stable and low maintenance.
However, when purchasing such a property there's more to consider than your average residential or commercial investment. You'll may have to negotiate with a multinational company, thoroughly inspect the premises for any signs of contamination and much more.
Seek the help of a professional real estate agent experienced in getting the most out of niche commercial investments every time. Do so and you'll have piece of mind knowing that your investment won't be running on fumes.
