Recently we have seen an almost unprecedented amount of activity in sales involving Service Stations, with $100m’s worth of Petrol Station Sites going under the hammer. More recently it was Woolworths who sold 8 of its Petrol Station Sites http://tinyurl.com/9qyd64e, although prior to this, it was 7 Eleven who sold many of the sites acquired during their purchase of 295 Caltex Service Stations in 2010.
With all the volatility seen in Global Markets spilling over into most asset classes, investors have been desperate for long term, stable yield. The long leases on offer by these Service Stations, underpinned by the strong Retail Brands of 7 Eleven and Woolworths, seem to have hit the mark with these investors and pushed some of the yields down below 6%.
However, there are inherent environmental risks involved with purchasing Petrol Station sites that you need to be aware of and Banks are reluctant to take on these assets, as they could potentially create an environmental issue down the track.
In simple terms, if their is an environmental problem created from the Petrol Station, through a leaking underground petrol tank, or other means, it is you, the owner, that could be liable and become the target of any civil action . Of course, their can be huge costs involved with civil litigation, not to mention the costs involved with remediating a contaminated site, which is why Banks will go to great lengths, to ensure that i) the site isn’t contaminated when taking it on as a security & ii) that adequate monitoring is in place to ensure any future leaks or issues are detected early on.
As such the Bank will request an Environment Audit to be completed by one of their approved Auditors prior to approving a “high risk” asset as security.
The first stage of surveying will almost always entail an Environmental Audit, by way of a Phase 1 report. This report is an investigative report that examines the likely-hood of contamination on a site and the likely causes. Of course, with a service station, the likely-hood of contamination due to its use, is considered high, so the conclusion of the report will ALWAYS recommend a Phase 2 report, which involves a higher level of testing to be conducted (why they don’t simply instruct a Phase 2 report from the offset is anyone’s guess, but the fees involved with creating the reports may have something to do with it). The costs of these two reports alone can be as high as $50,000 and dependant on the findings of the reports, further sampling, research, drilling and reporting may be required. These tests, along with any of recommendations made by the audit, could add considerable costs to your purchase, literally in the $100,000’s!
So how did all the recent purchasers deal with their Banks? My gut feel is that the majority of recent sales have been completed by Professional Investors with substantial Cash Savings who didnt require assistance from a Bank or Lender.
Personally I do believe that some petrol station sites make great investments, due to their long lease profiles, as well as many benefiting from Mixed or Residential Zoning, which means many of the properties benefit from strategic/long term development potential.
But before you go out and add a petrol station to your property portfolio, do your research. Speak to your lender or Commercial Broker and ensure that you understand all the risks involved with making such a purchase. After reviewing the risks, if you do decide to proceed with a purchase, ensure that you discuss your purchase with a lender, so that you understand their expectations and what will be required to have their support and provide the funding that you require.
Con Katsiouras
Director – Folio Finance Pty Ltd
Ph: 03 8844 5555
E: con@foliofinance.com.au