Intelligent Investment
Resilience, Regulation, and Repurposing of the Roadside & Automotive Sector
June 26, 2024 14 Minute Read
Roadside assets maintaining profitability
Typically seen as a secondary asset where pricing has been held down by reputational risk, the roadside & automotive (R&A) sector is now proving to be the success story of Operational Real Estate (OPRE). Despite the rise in electric vehicles (EVs) and, until recently, the UK Government ban on the sale of new internal combustion engine (ICE) vehicles from 2030 (now 2035), petrol filling stations (PFS) have been recording growth across revenues, profits, and overheads over the past five years.
While R&A assets such as PFS have not been immune to inflation, they have benefitted from fuel cost resilience. Most petrol retailers operate fuel supply agreements based on ‘platts plus’, which means the retailer is charged an all-inclusive cost by the supplier depending on the Rotterdam intraday ‘spot’ market price premium added to reflect the costs of delivery and a profit margin for the supplier. With cost pressures stabilising, well-located assets with good covenant strengths are performing well.
Appetite for R&A assets remained resilient during lockdown as convenience stores at petrol stations became part of the ‘critical infrastructure’. Furthermore, with petrol forecourts making higher margins from selling coffee, sandwiches, and baked goods in the shop (typically 25-35%), than fuel from the forecourt, profit margins have grown in recent years, principally as a result of improved shop sales. PFS located in busy residential locations with parking facilities benefit from an uplift in local retail spend as these locations see approximately 50% of PFS revenue comes from retail spend.
Figure 1: Petrol stations with retail
Acknowledging these trends, operators are looking at ways to adapt their existing space and benefit from new revenue sources. As customers spend more time at petrol stations charging their cars, more space will be dedicated to recreational space and convenience retail. As petrol vehicles are phased out to meet government EV demands, services offered at petrol stations will also expand. Future services will likely include convenient-access retailers such as pharmacies, takeaway food outlets, coffee shops, and coworking pods.
Regulation and reputational reward
Governments globally are introducing regulation that will prohibit the sale of diesel and petrol engine cars and promoting the transition to electric and hybrid vehicles. However, recently, the UK Government has postponed a ban on the sale of new petrol and diesel cars from 2030 to 2035, much to the dismay of many in the automotive sector. However, government policy still requires 80% of new car sales to be zero emissions by 2030. While the UK Government has reaffirmed its commitment to reach net zero by 2050, leading car manufacturers such as Ford, Jaguar, and Volvo have repeated their commitment to go fully electric by 2030. So, despite the UK Government’s U-turn, the demand upon EV infrastructure is set to be very strong by the end of the decade.
PFS operators have been looking at ways to adapt their existing sites and mitigate the effects of their portfolios’ greenhouse gas emissions (GHG) and their impact on climate change. While this partly reflects evolving environmental regulation, customer sensitivity and awareness of negative brand equity are also driving factors.
As the transport sector is one of the largest contributors to carbon emissions, being responsible for approximately 27% of the total, reputational pressure is mounting. As a result, PFS operators must be willing to invest and lead efforts to improve energy efficiency through increased access to EV charging points and offering energy efficient alternatives. Forecourt operators have been making ground across this space by importing alternative fuels in order to comply with net zero targets. However, operators must find a balance between moving towards a more sustainable offering without alienating their customers, the majority of whom still drive cars which require traditional fuel. Nevertheless, growing customer awareness of alternative fuel sources and impending regulation has enticed more PFS operators to offer alternatives to traditional fuels, the most common being EV charge points.
Source: UK Government
Source: PRA Market Review 2022
Source: Zapmap
Regulation pushing PFS to offer more alternative fuel sources
Purchases of EVs surged in 2023 with nearly 315,000 battery-electric cars registered in 2023, a growth of 18% on the number registered in 2022. Meanwhile, traditional fuel vehicle registrations decreased by 19.8% in the same period. However, despite the increasing number of EVs, momentum for EVs slowed in the first quarter of 2024; battery-electric vehicles (BEVs) accounted for 15.2% of all new cars sold in March 2024, down from 15.4% during the same period in 2023. High initial purchase price, insurance premiums, and lack of charging points (particularly in rural areas), are preventing some car owners from switching to EVs, particularly during a period of high interest rates and cost of living pressures. Nevertheless, BEV market share increased slightly in April, with EVs accounting for 16.9% of all new car registrations.
Figure 2: Number of battery electric vehicles in the UK, 2016 to date
Despite the growth in EVs, petrol stations are still a necessity for the majority of the UK as petrol vehicles will continue to dominate the market (58% of all UK vehicles are petrol and 36.9% are diesel). However, the share of petrol and diesel cars is forecast to fall to 30% and 17%, respectively, by 2030 (albeit these estimates may change due to the ICE ban being delayed until 2035) as over half of younger drivers likely to switch to electric in next decade. Indeed, EV charging sites are outnumbering petrol stations for the first time. Some drivers are reluctant to upgrade to an alternative fuel vehicle due to a lack of charging facilities, particularly in remote areas. If take-up of continues on its current trajectory, then the supply of EV charge points will need to surpass the UK Government target for 300,000 EV charge points to be installed in the UK by 2030, if this is to satisfy an increase in EV usage. As EVs gain popularity, greater investment in infrastructure is needed with assets at risk of redundancy, as well as reputational risk at stake, if investors and operators are unable to offer customers alternative fuel and charging options.
Repurposing existing R&A sites
Planning permission has already been granted for some disused PFS to be converted into EV charging ports, commercial spaces for local businesses, secure charging ports for electric bicycles, and community hubs. City centre PFS have been catching investors’ and developers’ interest; disused city centre sites, such as a petrol station in King’s Cross, has been transformed into alternative-use such a restaurant, and The Cineroleum initiative in Clerkenwell transformed a petrol station into a cinema.
Move from risk to community
Some investors have been hesitant to invest in the R&A sector due to reputational risk – social, environmental, or cultural. Private and private equity investors have been the most active. However, this is changing, with a wider pool of investors exploring opportunities across R&A. Environmental, Social and Governance (ESG) has been high on investors’ investment criteria, yet it is no longer enough for investors and operators to implement environmental policies; both risk reputational harm if they overlook potential environmental risks.
Disclosure regulations could increasingly impact how investors view R&A assets. The Sustainable Finance Disclosure Regulation (SFDR) requires listed European and UK companies marketing products to the EU to disclose the extent to which their investment products comply with the EU Green Taxonomy. Under this taxonomy, any transport infrastructure dedicated to the transportation or storage of fossil fuels is classified as unsustainable. Therefore, investors aiming to market their funds/ products as sustainable will not be able to acquire traditional petrol stations but will be able to acquire exclusive EV charging stations as long as they meet certain requirements. The R&A sector may be attractive to a new group of investors who wish to invest sustainably, due to the emergence of EVs.
Reputational opportunities lie where assets can drive the development of social and governance agendas. Investors in R&A can make their ESG impact stand out, particularly for assets that can make a positive impact on communities. R&A investors can drive the development of R&A assets from being a necessity and convenience, to community-led placemaking that serves its local population. Community interaction, lifestyle hubs, and social enterprise are some of the many opportunities the R&A sector is uniquely placed to capture and make investable.
Where investment opportunities lie
The market for PFS investments has the potential to be relatively wide, with buyers ranging from major institutional funds and REITS to private individuals and propcos. Property companies and forecourt operators have also been acquisitive in specific situations; with the latter able to identify the underlying trading performance better than anyone else. Therefore, they are able to take a robust view on covenant strength, given they are the clear replacement operators in the event of failure. From a strategic perspective, short-term leases are attractive, especially where it is an oil company on the lease; an asset that could be used as bargaining collateral in the event of the wider fuel supply negotiations.
There is increasing appetite amongst investors, in particular, from specialist car park investment funds, pension funds, and long income funds. Investors are targeting well-located, income producing car parks that are let on long leases, with guaranteed rental uplifts to operators and strong covenants.
Future for investment
In spite of the growth of EVs on British roads, investment related to EVs comes from a narrow investor pool, and investment activity to date has targeted public EV infrastructure and customers. However, as the R&A sector implements long-term sustainability plans, an increasing number of companies will adopt Evs for their taxis, couriers, and deliveries, particularly if EV charging and battery technology improve. Furthermore, with greater transparency around EV data, opportunities will arise in real assets investment related to Evs, which should incentivise further investment in the sector.
Strategic partnerships between local authorities, energy networks, transport authorities, and real estate operators are imperative if the EV sector is to grow, adapt, and respond to the increasing demands of the nascent sector. As deadlines towards net zero approach, early adopters of EV will see strong returns across assets that cater for Evs. Increasing reputational hazard lies in operators who do not adopt sustainable practices and may be offered at a discount if there are no opportunities to adapt to EV.
Reputational hazard to opportunity
Never before have times been more turbulent for the roadside & automotive sector, but never before have there been so many opportunities for the sector to lead innovation and change. The sector has the opportunity to move on from its reputation as a sector traditionally seen as a risk, to a sector that can adapt existing space to bring positive environmental and social impacts to local communities.
The R&A sector has the opportunity to lead change, so changing targets and regulations will not affect the industry if operators and manufacturers are to stay ahead of government sustainability targets and lead the move towards net zero. Acknowledging these trends, operators are looking at ways to adapt their existing space driven by growing consumer demand for sustainable products. If the sector continues to adapt, then manufacturers and industry experts will need to ensure they can fulfil the changing demand. Operators will benefit from new revenue sources and communities will benefit from a greener roadside model that can benefit local economies.
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