Forecourt Trader’s 2014 Fuel Market Review reports that an historic tipping point has been reached, with the first increase in the number of forecourts recorded since the ’60s, and a significant upturn in the number of dealer sites, and this change is being reflected by a surge of interest in forecourt properties.
With Esso selling off its sites, supermarket groups and major independent retailers looking to expand, and investors seeking to get involved, the market is looking very strong at present.
But if you own a forecourt and would like to take advantage of the buoyant market, how can you extract the maximum value? One of the biggest questions is whether to sell or lease the property. Adam Wadlow of fuel and automotive property adviser, Barber Wadlow, which specialises in the acquisition, disposal and letting of petrol station businesses, said: "Historically, the letting option has not been that attractive, but with low interest rates and the improved quality and quantity of tenants in the market, it can now be an attractive option. Operators are prepared to enter into 15- or 20-year leases (with no breaks), providing guaranteed rental growth linked to RPI. And, if you are able to secure a major tenant, such as an oil company or supermarket operator, this can potentially add up to 25% to the value of the property."
He added: "The market for petrol stations let to operators is increasing as major investors, such as pension funds, acquire assets in the sector. So, if you do choose to let the property in order to retain an income stream, say for pension purposes, then it will not preclude a sale of the freehold interest at some point in the future."
To demonstrate this point, Barber Wadlow is currently selling a petrol station in Hemel Hempstead that is let to the Co-op for a term of 13 years unexpired (see photo above).
Examples of letting transactions that Barber Wadlow has dealt with in the past 18 months include the letting of James Gravens’ two sites in Ely and Littleport to BP, lettings in Luton, Hereford and Ilkeston to Petrogas, as well as leases to the Co-op and Shell.
However, Adam Wadlow said: "A letting is not for everyone, with certain retailers preferring to unlock capital via a sale of the freehold. Moreover, certain sites are not lettable propositions an example being a site that requires major redevelopment, therefore an operator may need to own the freehold to justify the investment."
Whether a freehold sale or letting, Barber Wadlow offers the following tips to retailers considering their exit strategy:
Have a tax plan
Selling a petrol station can generate a large sum of money, so it is important to obtain tax advice. However, one should be careful not to let tax rule your decision-making it is only part of the process.
Investment prior to sale
Retailers will often look to invest in a property ahead of a sale, the rationale being that a well-presented petrol station will support an enhanced value. This is not, however, always correct. Prospective purchasers will be attracted to an opportunity where they can add value, therefore a heavily invested site may limit such opportunities and reduce the property’s overall appeal.
Fuel supply agreements
Do not enter into new fuel supply agreements immediately ahead of a possible sale or letting without considering the implications. A ’free of fuel supply’ site can widen the market and often enhance its appeal as prospective purchasers will have their own fuel supply relationships.
Other supply agreements
Wherever possible, keep the term of supply agreements as short as possible. Similar to fuel, prospective purchasers will often have their preferred suppliers, which they would look to incorporate. If you do need to enter into an agreement (say for an ATM or coffee machine), make sure you have the ability to break the agreement and that it is not subject to onerous penalty charges.
Ownership of equipment
Confirmation needs to be given that all equipment, such as points of sale, car and jet washes and pumps, are owned and not subject to hire purchase or finance agreements. If the latter, then details will need to be disclosed.
Wet stock records
Make sure you have up-to-date wet stock records. Electronic tank gauges and independent wet-stock monitoring are useful tools in demonstrating to purchasers the historic track record of a site’s fuel storage equipment. This data will help reduce the need for environmental reports, albeit an intrusive investigation may be required for sites with development potential.
Age/condition of underground fuel storage tanks
The value of a site can be discounted because of old tanks and the perceived need to replace or re-line in the short term. This does not, however, always mean that undertaking such capital expenditure ahead of a sale is the right strategy. For example, prospective purchasers may look to undertake a knockdown and re-build of your site, meaning a re-line of the tank farm would add no value.
Staff will usually transfer with the property (subject to TUPE regulations) therefore, during the due diligence process, a vendor will need to give details of all staff so that the purchaser/tenant knows who they are being asked to take on. If your site is operated by a commission operator, make sure the agreement can be terminated by giving appropriate notice.
Who Are The Buyers?
Barber Wadlow estimates that there have been about 1,350 petrol stations sold or let in the past 24 months with the major operators, including oil companies, supermarkets and private equity-backed independent retailers, now actively acquisitive. This can deliver interesting opportunities for retailers, enabling them to unlock some premium values. However, these purchasers are sophisticated companies and, as a consequence, retailers need to have their businesses in order should a ’once in a lifetime’ opportunity present itself. Recent activity has included:
Asda has opened its first standalone forecourt with c-store, ahead of a planned rollout of 150 sites by 2018;
BP continues to acquire sites, with a target of 150 sites over the next five years in order to double the size of its network with M&S outlets;
Waitrose has opened its first two c-store format stores on Shell forecourts ahead of a proposed roll out of 100 sites;
Midland Co-op and Mid-Counties Co-op continue to acquire forecourts;
Sainsbury’s has secured about 20 fuel/c-store sites and has proceeded to add further sites as it expands its c-store network;
Morrisons opened its first M-Local c-store on a forecourt in Doncaster;
Shell entered into a lease on a new-to-industry site its first (excluding motorway sites) since 1998;
Major independent retailers MRH, MFG, Euro Garages, Rontec and Petrogas continue to grow their networks.
Private equity - key to growth?
There has been increasing private equity interest in the sector. Three of the top five independents MRH, Rontec and MFG have such support to help grow their businesses. Barber Wadlow advised Patron Capital on its acquisition of MFG in December 2011.
But genuine private equity investment is still limited. Private equity investors require high levels of due diligence, therefore a retailer would need to prepare its business as if it was intending to sell the divestment tips still apply. Moreover, in return for a capital injection, investor demands in relation to management reporting can be very substantial, which will be a different dynamic for some independent retailers.