One of the key factors within the forecourt property sector in 2010 has been the continued lack of available bank funding, according to Calum Campbell, partner Petroleum & Roadside Services at chartered surveyor Graham & Sibbald.
"The availability of funding within the sector first started to tighten in 2008 as a direct result of the ’credit crunch’," he explained. "And although the squeeze on funding was not initially as severe as that witnessed in other areas of the property market, there has been a noticeable contraction during 2010. Campbell said lower loan-to-value ratios had also been introduced by a number of the principal lenders, and accordingly potential purchasers wouldl have to inject more of their own cash reserves into any acquisition.
"This overall squeeze on the availability of funding has limited the pool of potential purchasers in the market with many purchasers’ expansion aspirations being suppressed by their bank’s lending criteria," said Campbell.
"The industry has traditionally been very capital intensive with operators not only having to fund the site purchase itself, but the working capital tied up in both wet and dry stock. In addition, operators need to fund the security required for their fuel, thus, with the high levels of capital required, any increase in the cost of finance inevitably has an adverse impact upon an operator’s returns and in turn their ability to commit to further acquisitions."
While there has been a slight increase in interest in the sector in 2010, Campbell said transaction numbers were still far lower than peak levels witnessed pre-credit crunch.
"It has also been particularly notable that the level of due diligence being carried out by purchasers has increased and transactions are taking far longer to conclude. This phenomenon is driven in part by the increasing diligence required by lenders and in part by purchasers adopting a more cautious approach to acquisitions, keen to ensure that any purchase is a sound acquisition.
"On the positive side, site values within the forecourt property sector have fared far better than site values in other property sectors where dramatic falls in value have been witnessed. Both purchasers and their lenders recognise that service stations still benefit from a cash flow which enables them to service debt.
"Vendors should also take heart from the fact that there are still a number of well funded purchasers who are active in the market, who recognise good opportunities and are prepared to pay for them. It is clear that a number of these purchasers believe that values have now returned from the peaks of 2007 and 2008 to more sustainable levels, and with the heat being removed from the market they are able to acquire quality assets."
Campbell said that from a vendor’s perspective, it was essential that they select a selling agent that would be able to tap into these well funded purchasers with the ability to conclude, rather than being attracted merely by the highest valuation which would not be achieved on the market.
"During 2010, we have also witnessed more activity in the leasehold market with many site owners happy to retain their forecourt asset and accept a rental income stream rather than a one-off capital receipt," said Campbell. "This option can work well for both parties, with dealers able to expand without having to rely upon expensive Bank debt and vendors able to benefit from a reasonable return for their investment, rather than investing their monies in the Bank, Government Bonds or other asset classes which will produce far lower returns. We would anticipate that activity within the lease market will continue until such times as the current restrictions on available funding ease."
"Looking forward, we anticipate that there will be some dramatic changes within the market over the next 12 months. The recent announcements by Total and Murco will undoubtedly open up opportunities for new entrants to the UK market, and it will be fascinating to see who appears on the horizon."