The number of forecourt sites in the UK has been consistently decreasing for years now, with numbers currently down to 10,577 (source: Catalist). This compares to around 11,448 sites in 2003, 13,000 sites in 2000 and more than 19,000 in 1991, and while industry insiders think there is still a little way to go until this trend stops, site disposal has certainly slowed down. Grahame Frank, managing director of Irving Quinn chartered surveyors explains that with the major oil company divestment coming to an end, site numbers are beginning to level off. He says: “Some years ago there were 25-30% too many petrol retailing outlets in the country, but since then the major oil companies have all been disposing of unprofitable sites – we have been involved in major disposal exercises on behalf of Shell UK and more recently Chevron Texaco. “I think we are probably now approaching the optimum number of sites although this will alter with local developments, particularly by food stores. The government’s plans for new road schemes might also lead to new forecourt developments but probably at the expense of others. “In the future it is unlikely that the same number of sites will be coming on to the market but they will continue to be sold as the oil companies and other major operators rationalise their holdings.” Although the trend of diminishing sites has hit the industry – particularly independents – hard, site numbers are now low enough, it seems, for it to be having a positive effect on many of the remaining sites. After all, with more vehicles than ever now on the road (some 30 million according to the Retail Motor Industry Federation), the demand for fuel retailers is greater than ever. Nigel Berney at the Nigel Lawrence Partnership (NLP) explains that many sites are now finding that they are reaping the rewards of reduced competition – and those that are adapting to the modern market in particular are thriving. He says: “Market interest in petrol stations continues to be strong. The rationalisation programmes of the oil companies in recent years have markedly reduced the number of sites. In some areas the remaining sites that have survived this process have seen increased fuel sales to healthy levels. “Where owners respond to the expansion of the convenience market by adding facilities, extremely profitable outlets can be developed. Oil companies themselves continue to seek partnerships with food retailers to exploit convenience sales potential.” Indeed, with fuel margins still tight, potential forecourt buyers will be looking for additional means of income from a forecourt site. John Coulling at Lambert Smith Hampton’s motor trade and roadside department says that properties that can potentially exploit the shop or other high-margin facilities are key in today’s market. He explains: “Generally speaking, we have seen fuel sales at the average filling station increase year on year due to the number of site closures in recent years. Against this background, we have also witnessed a decrease in fuel margins, particularly as the major oil company suppliers move towards ‘Platts related’ fuel supply agreements. We now have a situation where the fuel revenue at the average filling station supports the site overheads (obviously dependent on the movement of ‘Platts’) and the profits are derived from the shop and car wash areas. Hence the growing importance of these facilities.” And David Collins at Adlers chartered surveyors says the market is “surprisingly healthy despite the pressure on margins” although he adds that one feature of the current market is a degree of division. He says: “To some extent the market is polarised between high-quality, high-volume sites that attract interest from major operators and sites that might previously have been considered marginal, where values are at an affordable level for single-site operators.” Meanwhile, the Scottish market has seen some radical shifts over the past year or so. Chris Ellen, head of petroleum and roadside services at Graham & Sibbald explains: “The retail petroleum industry in Scotland has changed very significantly, with the disappearance of Chevron Texaco and Q8, leaving Shell, Esso, BP and Jet as the only major suppliers. Thames Petroleum and Gulf are becoming stronger as they have an increasing number of opportunities to pick up supply agreements.” He adds that the change in balance of fuel supplies has affected the ‘saleability’ of sites: “It is difficult to sell a site which has not got a supply agreement, or has one which is shortly to expire, as continuation of supply and at what margin is an essential feature of the value of a filling station. However, recently pole sign prices have been uncertain and there is an increasing ability to obtain a better margin out of certain sites and indeed the oil companies are now relaxing their control on dealer-owned sites’ pricing in a lot of cases.” He concludes: “Pole sign price level has become less of an issue and it is entirely possible that petrol prices will disappear from roadside pole signs within the near future.” ALTERNATIVE USE In recent years the trend for forecourts to be sold for alternate use – residential in particular – has been notable, and has helped sites achieve values they would not otherwise have reached. But as the housing market cools off and site numbers begin to stabilise, the industry is beginning to see an increase in sites remaining in the industry with buyers fully prepared to pay for them. Lambert Smith Hampton’s Coulling explains: “Our experience over recent years has been that some 90% of sites coming to the market have gone for non-fuel use. However, this year we have seen increased demand for sites for continued fuel use and this has been reflected in the offers received whereas in previous years discounted bids were the norm.” And Irving Quinn’s Grahame Frank says that the majority of the disposals the company dealt with on behalf of Shell UK and Chevron Texaco were for non-oil use. “Someone always wants to buy a site on a main road for one use or another,” he points out, adding that traditionally such sites were sold for motor-related uses, but in the past few years many have sold for residential development at very high prices. “However, with the advent of moratoriums for new residential development in many boroughs, this would appear to have come to an end for the time being at least.” Frank says that the sites that remain in the industry tend to be bought by smaller operators. “The sites which have sold for continued oil use have gone to smaller, private groups or families whose overheads and expectations of profits are not as high as the major oil companies. Recently these medium volume sites have been fetching good prices, but only if they are in busy residential areas and the equipment is in good condition.” Coulling has also found that it is independents that are buying sites for continued use. He says: “With the oil companies’ major disposal programmes coming to an end and sites for continued fuel use dropping to a trickle, it is not surprising that the forces of supply and demand have kicked in fully with strong interest from independent operators across the board. “By way of illustration, we recently sold a high-volume outlet in the north with annual shop sales of £1m-plus to a group dealer for close to £1.5m. “With such interest and the recent cooling off of the residential market, it may not be long before even those outlets at the bottom end of the market have a higher capital value for continued fuel use as against the usual alternative of residential development.” And Adlers’ Collins is also seeing more independents coming to the market as buyers for continued use sites, but points out that they still like sites to have the potential for alternate use to back up their investment: “A number of smaller operators have entered or are consolidating their position with the acquisition of sites,” he says. “Sites in densely populated areas with good potential for alternative uses are very saleable. These will provide returns from the forecourt and, with increasing importance, from the shop, which will benefit from walk-in trade. The alternative use potential is the safety net should the filling station use cease in the future.” Alistair Coates, senior surveyor at CB Richard Ellis says that sites are unlikely to remain in the industry where alternate use value is strong. “The independents – including individuals, smaller companies and the larger dealer groups – are the main purchasers of sites that remain in the industry. However, the values for alternative use, particularly residential, are such in many cases that petroleum retailers simply cannot compete. We have been generating very high prices for sites, particularly in the larger cities, that are suitable for very high-density development whereas sites in smaller towns in the regions and more rural areas have more chance of staying in the industry due to lower demand and values for alternative uses.” NLP’s Berney says that as well as independents, the symbol groups are currently notable buyers: “The market ranges from individuals seeking a trading outlet as a vehicle for acquiring a capital asset with potential for alternative use development to major convenience store operators who see the roadside market as an essential element in their portfolios. Fuel margins are generally under pressure but values of well-located sites with a balanced range of facilities are strong.” However, alternative use remains an important feature of the market, as Nigel Berney points out: “Higher value alternative use is still a very significant factor. Apartment development is now virtually universal in its application and the recent strong housing market has had significant impact on change of use. Retail and car wash alternatives are also very strong competitors.” Collins says that roughly 70% of the sites Adlers deals with are for alternative use, but adds that this is often the result of oil company policy. “Most of the oil company sites that we have sold have included restrictive covenants that cover non-fuel use,” he explains. Collins says that residential development is still the principal outlet for most of the sites coming out of the industry, followed by retail activity and car sales. In Scotland, Chris Ellen says that continued use remains a tricky market: “Alternative-use values remain strong for many urban sites and this has been the saviour of many. This is unlikely to change. “A sale for continued oil use will take about six months to achieve and sellers should be aware that they will have to provide existing staff details, details of the supply contract and trading accounts for any purchaser. New-to-industry purchasers always have to be made aware of the requirement to provide some form of bond to the supplying oil company for fuel and this always remains a difficult funding issue.” Sadly, one feature of the market that hasn’t changed much in recent years is the difficulty in selling small, non-urban sites. Says Berney: “Smaller rural sites continue to struggle unless they can add facilities to become the focus convenience outlet for a wider community.” David Collins of Adlers agrees:“Rural sites with little scope for alternative use are very hard to sell.” ENVIRONMENT With the nature of the forecourt site comes the potential for environmental hazard – and this is an important consideration when buying or selling a forecourt site. Nigel Berney of NLP thinks that many buyers no longer consider environmental factors the headache they once did. “Environmental issues no longer seem to ring emotive alarm bells. Purchasers generally seem to be aware of the risks and with a favourable environmental report take them in their stride.” However, Adlers’ David Collins says problematic sites – usually those with old fuel tanks – can still disrupt the sale of a site: “Environmental factors, including ageing fuel storage tanks, are a major issue not only to buyers but also to funding sources since the costs of remediation could render a site uneconomically viable,” he points out. And Graham & Sibbald’s Chris Ellen adds: “Environmental concerns are rare for continued oil sales but sales for alternative uses can take up to 18 months where the planning requirements are usually difficult. “Best prices are obtained where the offer is subject to planning and environmental issues, and it is usually worth waiting for the granting of planning consent in order to maximise the asset value of the property. However, he adds: “We have had one of the busiest years in the petroleum property industry and that is indicative of the interest there is in the sector.” Before you buy Buying a petrol forecourt store (PFS) can be an exciting business venture. However, a vigilant buyer should consider: • TRANSFER OF THE PETROLEUM LICENCE The Petroleum (Transfer of Licence) Act 1956 provides that when a PFS changes hands the transfer of licence form should be completed and sent to the local Petroleum Licensing Authority (PLA). The PLA is generally the county council or unitary authority. In Scotland and Wales it is always the unitary authority. In certain metropolitan areas it is the Fire Civil Defence Authority. The PLA will process the application and return the licence to the new operator within two weeks. The buyer should ensure that a copy of the licence is held in the site register at all times and is available for inspection by any council building control officer. • TRANSFER OF A BUSINESS AS A GOING CONCERN Both buyer and seller should take advice on whether the PFS sale is a transfer of a going concern (TOGC). Basically, TOGC provisions will apply if there is a sale of a distinct operational business with no significant break in trade and any assets transferred are intended for use in the business by the buyer. If the TOGC provisions apply, the transfer of assets of the business including stock in trade, machinery and goodwill is not treated as a taxable supply and VAT cannot be charged. A TOGC of a PFS is likely to involve the transfer of property. There are extra rules to determine whether VAT should be charged on the transfer of property, even if the rest of the transfer does qualify for TOGC treatment and an accountant’s advice should be sought. • CAPITAL GOODS SCHEMES Buyers should ensure that pre-contract enquiries include enquiries as to whether any of the assets being purchased are part of a capital goods scheme. If they are, a buyer may assume responsibility for any adjustments of input tax required under the relevant capital goods scheme for the remainder of the adjustment period and an accountant’s advice will be required. • TUPE The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) are likely to be relevant. There are a number of technical factors which determine whether TUPE applies and a buyer should always seek advice on its implications. If TUPE applies, terms and conditions of work and continuity of employment of all employees must be preserved. Failure to preserve the terms and conditions of employees employed for one year or longer may result in potential claims for unfair (constructive) dismissal. • CONTAMINATION Oil is the most common water pollutant in the UK and a buyer should refer to the various pollution prevention guidelines available from the Environment Agency ( Buyers should liaise with the PLA in respect of petrol storage and should carry out an environmental risk assessment and implement a site specific environmental management system of operational procedures to minimise the risk of pollution occurring. The Environmental Protection Act 1990 provides that the ‘polluter pays’ for clean up costs in respect of contamination. The Act provides that liability will rest with companies or individuals who caused, or knowingly permitted, the presence of a pollutant but if no such person can be found, the present owners or occupier of contaminated land may be called upon to pick up the bill for clean up costs. A buyer should always commission a full environmental survey of the site. • PHYSICAL INSPECTION A buyer should pay particular regard to two pieces of legislation, which came into force in 2004: -The Disability Discrimination Act 1995 (in force October 2004) provides that it is unlawful for anyone providing a service to the public to treat a disabled person less favourably on the basis of their disability. A buyer must ensure that disabled access will not be in any way impeded. -The Control of Asbestos at Work Regulations 2002 (in force May 2004) require suitable and sufficient assessments to be made as to the presence of asbestos and further require the maintenance of up-to-date records of such assessments. If asbestos is discovered its location must be recorded and its condition monitored and measures necessary to manage the asbestos risk effectively must be implemented. • LIQUOR LICENSING Many PFSs now have the benefit of a Justices’ off licence and arrangements should be made to transfer the Justices’ off-licence to the buyer or one of his/her employees. The Licensing Justices will rarely transfer a licence to a person without an appropriate licensing qualification, usually the National Certificate for Licensees. A buyer should request a copy of the licence, a copy of the plan deposited with the Court and details of the licensing history as part of pre-contract enquiries. If the PFS does not currently have the benefit of a Justices’ off licence a buyer may consider applying for a licence, provided consideration is given to satisfying the ‘primary use’ test in S9(4A) of the Licensing Act 1964. It may be useful to request relevant data from the seller to support a licensing application. Unfortunately, the primary use disqualification is retained by the Licensing Act 2003, due to come into force in 2005, and while courts are now usually familiar with PFS applications, it will be new to the councils who will take over licensing administration. It may be preferable to consider an application for either a provisional or full Justices’ off licence before the provisions of the new Act take effect. Investigation into all aspects of the business and the property should be made at the outset. The need for a full survey, environmental survey and comprehensive pre-contract enquiries cannot be over-emphasised. Source: Winckworth Sherwood.