The Covid-19 pandemic impacted all assets within the real estate sector and petrol filling stations were no exception. In January 2020 CBRE’s Real Estate Outlook focused on the uncertainty and international risks associated with Brexit whilst highlighting the positives of rising real wages and a fiscal boost. The focus very quickly changed with the impact of Covid-19 and the subsequent announcement of a nationwide lockdown commencing on 23rd March 2020.
There was good news in that petrol filling stations were able to remain open as the Government deemed them ‘essential retail’. The bad news was that travel restrictions meant a significant reduction in traffic volumes on the roads during the initial lockdown period. During this period operators reported average fuel volume declines of 70-80% with shop turnovers declining by 10-20%. However, operators did benefit from increased fuel margins of up to three times the average at its peak, which mitigated some of the profits lost from the significant decline in fuel volumes.
There was a clear difference operationally from petrol filling stations in urban areas compared to sites in transient and rural locations, due to the importance of walk on trade. In some cases, those fuel led sites which did not have the benefit from walk on trade were forced to temporarily close due to lack of custom, whilst sites with convenience store formats showed positive shop performance with reports of 30% increases in turnover.
Although there have been further lockdowns since September, restrictions were relaxed and there has been a greater number of vehicles on the roads when compared to the initial lockdown period. Subsequently, trading levels have been consistent, and operators have reported year end results of 80-90% of pre-Covid EBITDA levels, which was an extremely positive result compared to initial forecasts in March 2020.
Transactional activity in the vacant possession market was subdued during the initial lockdown period as many operators waited to see how the pandemic would play out.
Travel restrictions didn’t help matters in viewing potential acquisitions, but in some cases, operators who were previously looking to sell chose to stall their disposal strategy, after profitability increased due to the substantial uplifts in fuel margins and shop turnover. Overall, CBRE research determined petrol filling station transactions were down by 51% in 2020 when compared with 2019. In the first quarter of 2021 CBRE has seen a significant increase in transactions highlighted by the announcement of EG Group acquiring the Asda forecourt business for £750m. We expect the increased transactional activity to continue throughout 2021.
The petrol filling station investment market went from strength to strength in 2020 as many other markets halted due to the impact of Covid. In October 2020 the largest ever sale and leaseback in the UK market was announced via the UK pension fund Universities Superannuation Scheme’s (USS) acquisition of a 49% stake in BP’s UK petrol filling station portfolio of 199 sites. The forecourts continue to be operated by BP as a tenant under new 20-year leases across the portfolio and the landlord will be a new joint venture company formed by USS and the oil company. A further 30 petrol filling station investments transacted across 24 transactions, which marked the highest number of transactions ever. Not including the BP SLB portfolio sale, the total capital transacted in 2020 was approximately £80 million with an average term certain of 16.5 years across the UK market.
Investors have been attracted to the asset class due to the strong trading performance during 2020 and the market resilience shown, evidenced by 90% of petrol filling station tenants maintaining payment of their rent during this time. Traditionally vacant possession values were at 80-90% of the investment value, but now in some cases we are seeing those values supersede the investment value, providing investors with a strong underpin. The impact of Covid has only accelerated the ever-growing shift in investor perception of the sector as many now wisely focus on the convenience retail trading element of the site. CBRE’s prime yield for petrol filling station investments is now 4.5%.
Overall, the CBRE value index showed that in each market property values held strong throughout this period of uncertainty with a positive shift in the investment market for prime assets.
Looking forward, there will be some significant changes to the petrol filling station market. The ban on sales of new petrol and diesel vehicles in 2030 and the subsequent growth in the alternative fuelled vehicle sector will bring about new challenges that the petrol filling station market will need to adjust to in order to evolve and discover further revenue generating opportunities.
*Not including the BP SLB of 199 sites.