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Petrol station closures fuel development

PETROL service stations offer a good return for the landlord, provided the tenant is one of the big oil companies.

But if leased by an independent, now may be a good time to look for alternative users for the site because the decline of the independents is far from over.

According to Goodwin Mitchell O’Hehir & Associates broker Tony Batista, service station businesses are not being traded anymore since the major oil companies took over the franchises beginning in late 1997 when most of the franchise agreements lapsed.

He said 1998 was very much a watershed for the industry because it marked the beginning of the end for many operators – some who had paid enormous amounts of goodwill only 12 months prior to the franchise’s lapsing and subsequently lost large amounts of dollars.

Mr Batista said the oil companies either held onto a station for the long haul by securing long-term 20-30 year leases or they closed the doors.

In the past two years alone, Mr Batista estimates that the oil companies have closed at least 50 per cent of their stations leaving in their wake derelict skeletons waiting for redevelopment.

The inner suburban stations have been the first to go, while new stations in high-profile positions on major roads or next to shopping centres have survived.

While the consolidation of the industry marks the death knoll of the independents, opportunities abound for developers wishing to build other commercial or residential buildings.

Oil companies traditionally have never been large landowners. Even over the past two decades the oil companies have never owned more than 5 per cent of their service stations. Today, after a continued property sell-off, the oil companies own only about 1 per cent of the service stations.

Mr Batista said leases paid by the oil companies generally varied between $50,000 to $150,000 a year. The rate of return on a property generally ranged between 7 per cent and 9 per cent – lower than a typical return for a commercial or industrial property but with lower risks because the oil companies often signed-on for 20 to 30 years.

Mr Batista said the rate of return decreased as the value of the lease increased.

A property with a $100,000 per annum lease would fetch about $1.4 million while a $50,000 per annum lease would sell for about $555,000.

Service Station Development Corporation head Col Stratton said since 1978, when the corporation was first formed to push for the rights of the independents, the ownership of stations had gone from a one-third company operated and two-thirds owner operated to a situation where today the oil companies control in excess of 90 per cent of the market.

For independent outlets, some which had been in the family for several generations, the only option was to close the doors because the margins were getting so tight.

“You can’t give them away. At a cent a litre or even two cents (margin) who’s going to take it,” Mr Stratton said.

“They go out of business slowly but surely. They can’t upgrade them because they haven’t got enough money to upgrade it.”

Motor Traders Association of WA director Peter Fitzpatrick said the sites with the higher value were those with the higher volume and in a prominent position.

“I think you will continue to see a rationalisation of the industry with the oil companies playing a dominant role in that and you will see, I think, over time some of the less profitable sites disappear,” Mr Fitzpatrick.

“I think there is no doubt that the service stations of today are quite different. There has been a shift in emphasis where they are now competing with the corner deli.

“They have become a substantial part of the whole retailing system.

“I think service stations are now in many cases replacing the corner deli as the place for people to go to for low-level groceries like take-away food and bread and milk.”

Mr Fitzpatrick said redevelopment of the site was always an option, but he still sees a role for suburban service stations.

“I don’t think we are going to see a total disappearance of the small suburban petrol outlet, but certainly the numbers I think will dwindle in favour of the larger commercial sites over time,” he said.

“For those just pumping petrol and doing nothing much else the rationalisation of the industry is going to make it very difficult for them in the longer term.

“That’s not to say they play a valuable role now but in the longer term I think it’s going to be very difficult.”

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