Focus on. November COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved

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1 Focus on November 2017 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved

2 Our authors Andrew Quillfeldt Director Head of Retail Research Australia tel: andrew.quillfeldt@ap.jll.com Annabelle Atkins Senior Analyst, Research tel: annabelle.atkins@ap.jll.com Paul Chapko Senior Analyst, Research tel: paul.chapko@ap.jll.com 2 JLL November 2017

3 Introduction The service station investment sector has seen significant yield compression and heightened transaction volumes over the past five years. Long initial leases, strong lease covenants and fixed annual rental increases are just a few reasons why investors are attracted to the service station sector. In 2016, sale volumes peaked with over $400 million worth of service station transactions recorded across Australia s eastern seaboard. The demand for this asset class has been driven by the private investor market, with the asset class offering the ability to secure investments with blue-chip lease covenants at an attainable price point. However, self-managed super-funds, offshore investors and newly formed Real Estate Investment Trusts are becoming increasingly active. Australia s expanding capital cities and well-connected road networks will support the long-term demand for service stations. Electric and plug in hybrid s represented less than 1% of the 1.2 million passenger vehicles sold in 2016, with total passenger vehicle numbers increasing 22% from 2007 to On a national level billion litres of fuel was purchased in Australia over the financial year, equating to approximately $22.98 billion worth of fuel. The increase in new car sales reveals an ongoing reliance on fuel consumption by Australians and positions service station assets as an appealing long term investment vehicle. The service station sector is regarded as a defensive asset class given the non-discretionary nature of fuel sales and the stable demand profile of fuel consumption billion litres of automotive gasoline sold in Australia in financial year 1, totaling approximately $22.98 billion 2. 1 Includes premium unleaded, proprietary brand, regular unleaded, ethanol-blended fuel 2 The average price per litre for Australia (126 cents/litre) was used over the 2016/17 financial year data taken from the Australian Automobile Association and The Department of Environment and Energy Focus on Service Stations 3

4 Economy FIGURE 1: Fuel usage by state FIGURE 2: Fuel consumption per capita, by state TAS 1.8% WA 12.4% NT 0.6% Litre/Capita 1000 SA 7.2% NSW&ACT 30.2% QLD 22.9% VIC 24.9% NSW & ACT VIC QLD SA WA TAS NT Source: Department of Environment and Energy, JLL Research Source: JLL Research, ABS, Department of Environment and Energy New South Wales (NSW) and Australian Capital Territory (ACT) drivers accounted for just under a third (30.2%) of Australia s national fuel usage over the financial year, equating to 5.51 billion litres of automotive gasoline. However, on a per capita basis (Figure 2) Western Australia (882 litres per person) and Queensland (855 litres per person) consumers were the highest users. The high per capita usage is likely to be explained by the increased travel time between locations given these states are geographically Australia s largest, fewer transportation options and a greater proportion of residents residing in non-metropolitan locations. 4 JLL November 2017

5 34% Increase in the cost of operating a motor vehicle over the past 15 years million registered passenger vehicles in Australia (Jan-17), equating to 0.58 vehicles per person. The cost of operating a motor vehicle in Australia has increased 34% over the past 15 years (to June 2017). Household consumption expenditure on operating a motor vehicle totalled $47.79 billion over the 12 months to June This includes the cost of purchasing motoring goods such as fuel as well as repair and maintenance expenditure. Interestingly, this figure represents only 4.9% of Australian household final consumption expenditure and has been trending downwards over the past decade. This is a reflection of strong growth in costs for other components of household consumption, particularly rent and other dwelling services, healthcare and education. FIGURE 3: Average cost of fuel per litre in Australia The number of registered passenger vehicles in Australia increased 22.8% from 2007 to 2017 (as of January 2017). NSW and Victoria (VIC) currently account for over half of all registered passenger vehicles in Australia (56.6%). FIGURE 6: Number of passenger vehicles per household No. of people (million) Passenger vehicles per household cents/litre Estimated resident population No. of vehicles per household No. of passenger vehicles 100 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15 May 16 May 17 Source: JLL Research, ABS Source: Australia Australian Automobile Association, JLL Research The average cost of fuel per litre as of May 2017 across Australia was 129 cents/litre 4. Sydney (127 cents/litre), Melbourne (128 cents/litre) and Brisbane (129 cents/litre) are broadly in-line with the Australian average. The most expensive metropolitan areas are Darwin (130/cents litre) and Hobart (140 cents/litre). On average there are 1.6 passenger vehicles per Australian household assuming the current household formation rate of 2.8 people per household (Jan-2017). The average number of passenger vehicles per Australian household has steadily increased since The reliance of consumers on petroleum and limited passenger vehicle substitutes has led to a consistent level of demand for fuel, despite movements in fuel prices. Demand inelasticity is one of the fundamental characteristics of the world s fuel industry. 3 Household Final Consumption Expenditure, Australian Bureau of Statistics 4 Australian Automobile Association Focus on Service Stations 5

6 Industry trends Australian Cities have a relativity low population density 65.4% of residents live within a capital city, as at Australia is becoming increasingly urbanised. The proportion of Australia s population living within a capital city has risen from 62.9% in 1991 to 65.4% in Melbourne is Australia s most densely populated city with an estimated 439 people per km 2 closely followed by Adelaide (403 people/km 2 ) and Sydney (396 people/km 2 ). A low population density results in an increased reliance on vehicle ownership. However, the Australian governments continued investment in public transport infrastructure will alleviate some residents need for a personal vehicle, particularly those workers who work in the CBD. Decreasing housing affordability across inner-urban areas continues to drive urban sprawl, particularly in Metropolitan Sydney and Metropolitan Melbourne. Well-connected road networks have allowed residents to reside in communities situated kilometers outside the CBD. The sprawling nature of capital cities has increased the fuel requirement per capita, particularly for communities based on the fringe of metropolitan cities. FIGURE 7: Population density, Person per km 2 Density per sqm km 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Hong Kong* Singapore* Tokyo London New York Paris Madrid Chicago Vancouver Toronto Melbourne Adelaide Sydney Washington Perth Los Angeles Brisabane Source: OECD, *Hong Kong government, *Singapore government, JLL Research 6 Demographia 6 JLL November 2017

7 Electric and plug-in hybrid vehicles represented less than 1% of the 1.2 million new passenger vehicle sold across Australia in Over 1.0 million fuel powered new passenger vehicles have been sold per year between 2009 and Electric and plug-in hybrid vehicles remain a small proportion of Australia s new vehicle market. In 2014 and 2015 electric and plug-in hybrid new passenger vehicle sales accounted for 0.10% and 0.11% of total new vehicle sales, respectively. In 2016 this proportion fell to 0.07%. Fuel powered vehicles remain the most common passenger vehicle across Australia. The price differential between fuel powered and electric vehicles and limited public charging infrastructure for electric vehicles has held back the penetration of electric car usage in Australia. The Australian government does not provide financial incentives or tax advantages to support the use of electric vehicles. A strong correlation has been recorded by many overseas countries between the number of electric vehicle sales and the government providing tax advantages and/or incentives to consumers. Public infrastructure spend to establish an adequate number of charging stations has also supported a faster take-up of electric cars in overseas markets. The key role incentives play on the electric vehicle market have also been witnessed in Denmark where electric vehicle sales volumes where strongly correlated to a change in regulation. The Government s decision to phase out incentives in 2015 saw a dramatic decline in electric vehicle sales and has consequently resulted in the a re-launch of the scheme in April Both France and Britain announced in the first half of 2017 targets to encourage sustainable fuel technologies and ultimately cease the use of fuel powered passenger vehicles by The use of the land occupied by service stations in Australia is tailored towards servicing fuel powered vehicles. Repurposing the existing infrastructure on these sites to cater for a greater electric car usage may be required in the future. Regardless of a potential transition in the use of service stations, the need for a road side convenience will remain in Australia. Norwegians are arguably the world s leading buyers of electric cars. Tax exemptions from the annual road tax, purchase tax and electric car owners not being subject to non-recurring vehicle fees has eliminated the price differential compared to fuel powered vehicles. The Parliament of Norway achieved its target of 50,000 electric cars registered almost three years ahead of schedule on the 20 April CarAdvice, Australian Bureau of Statistics (Note: Electric car sales do not include Tesla sales). Roads and Maritime Services, a department associated with Transport for NSW recorded the number of Tesla registered vehicles in the state increased from 119 in March 2015 to 363 in March 2016 and 618 in March Focus on Service Stations 7

8 Industry trends The convenience retailing component to service stations total revenue has become increasingly important. The number of service station sites across Australia today represent only a third of the 20,000 sites in The composition of a typical service station has dramatically changed over the past decade. In addition to a fuel pump, multiple service stations now include pad sites usually occupied by fast-food operators. More recently, operators have extended their in-store goods offering to resemble a small convenience store, quasi-supermarket or coffee shop. Both strategies have been used by landowners to boost revenue generated from the site. Caltex Australia, through forming strategic partnerships with food and beverage operators in early 2017 rolled out a new store concept, The Foodary. Caltex opened their first new look service station in the inner western Sydney suburb of Concord. The site now offers consumers daily laundry services, a ParcelPoint pick-up mailing service, fresh food and a coffee shop. As part of the company s retail strategy, supply partnerships were formed with The Corner Store, Brasserie Bread, Sumo Salad, Boost, Guzman Y Gomez and Australia Post. On the other side of the country in Western Australia, Puma Energy has partnered with IGA supermarket to extend its convenience offering. Coles Express service stations are also implementing a small Coles supermarket format on some of their sites. The most notable supply trend in Australia s service station industry has been the rapid reduction in the number of sites. According to the ACCC, as at 30 June 2014, there were approximately 6,350 retail fuel sites in Australia, a decline from approximately 8,000 sites in 2003 and 20,000 sites in The ACCC s involvement in the Australian service station industry has been because of a high concentration of large groups in the sector. 8 JLL November 2017

9 The proportion of Australia s population living within a capital city has risen from 62.9% in 1991 to Improved technologies used in underground petroleum storage systems at some Australian service stations has helped to reduce soil contamination at sites. This has allowed landowners of environmentally certified service stations to reposition their sites to an alternative commercial use. Good environmental practice and management at retail fuel outlets has been encouraged and rewarded by federal government policy in Australia. Penalties are in place for excess air pollution, land pollution, noise pollution and disposal of waste. This has helped to protect the soil quality below ground and reduce contamination issues traditionally associated with this asset class. 65.4% in 2016 The improved design of underground petroleum storage systems in today s market has reduced fuel leakages and improved the dispensing process of fuel from beneath ground to the pump. Modern service stations now have double walled fiberglass tanks as opposed to the outdated steel tanks. New technology has also improved the emergency response and monitoring procedure of fuel quality and inventory readings a retail fuel outlet must conduct. The increased awareness of environmental damage a retail fuel outlet can potential inflict on the surrounding environment has caused some operators to invest in new technology and remediation procedures. This has effectively improved the attractiveness of the asset class as land owners of some sites are not subject to decontamination periods if the site has achieved a low environmental degradation. This allows a large development upside on some sites if there is a desire to change the use of the property. Focus on Service Stations 9

10 The Investment market Sale rates per sqm achieved on service station transactions across Australia s eastern seaboard have increased from an average of $1,180/sqm in 2011 to $2,050/sqm in 2017 (as at August), representing growth of 12.3% per annum. 43% of asset sales since the beginning of 2016 have achieved a land rate above $2,000/sqm. FIGURE 8: Sale rate per sqm of land Sale rate/ sqm of land $2,400 $2,200 Sale activity peaked in 2016 with over $400 million worth of service station transactions recorded across Australia s eastern seaboard. FIGURE 9: Sale transaction volume by year and state Total volume of transactions $2,000 $1,800 $1, $1,400 NSW QLD VIC $1,200 Source: JLL Research as at August 2017 $1, Source: JLL Research as at August 2017 Sale rates per sqm have remained high in 2017 (year to August 2017) averaging $2,050/sqm. A Coles Express tenanted service station located at Enogerra Road, Alderley in Queensland recorded the highest land rate thus far in 2017 of $4,860/sqm. The 1,996 sqm property transacted in June 2017 for a total consideration of $9.70 million on a 5.40% initial passing yield. This was below the $7,310/sqm record achieved on a United tenanted petrol station sale in NSW at 625 Pittwater Road, Dee Why in September The size of the property is likely to have contributed to the high land rate, spanning a small 985 sqm site. Average sale rates per sqm in Queensland have doubled over the past three years, increasing from $1,100/sqm in 2014 to $2,210/sqm in 2017, the strongest growth across the Australian eastern seaboard. Australia s service station market has been relatively liquid over the last 24 months, with a number of vendors choosing to sell their holdings and capitalise on the current low yield environment and strong buyer appetite. Solid lease covenants and the transition to a broader retail offering by service stations have increased the attractiveness of the asset class. Sale activity peaked in 2016 with 50 transactions recorded based on JLL data. Both Victoria and New South Wales recorded 18 sale transactions over 2016 followed by Queensland with 14 transactions. Large portfolio transactions by existing fuel operators has contributed to the large number of asset sales over the past 12 months. Many operators have chosen to sell off their assets and retain a sale and lease back arrangement. BP is currently in the process of acquiring a $1.78 billion portfolio of 527 Woolworth s service stations (predominately leasehold) and 16 development sites. The deal has been reported to be subject to ACCC approval. Service stations with Caltex, 7-Eleven, United and Viva Energy/ Coles Express operators have been the most commonly traded in the past three years to August JLL November 2017

11 FIGURE 10: Number of sales by operator, NSW, VIC, QLD, 2011 to 2017^ Source:JLL Research ^ This is not reflective of all service stations sales over this period of time (as at August) Focus on Service Stations 11

12 The Investment market The average initial passing yield recorded on sales transaction across Australia s eastern seaboard has compressed 97 basis points from 7.07% in 2011 to a 6.09% in FIGURE 11: Service Station transactions, initial yields % Nov 2010 Dec 2011 Apr 2012 May 2013 Aug 2013 Sep 2014 Dec 2014 Jan 2016 May 2016 Jun 2017 Sep 2017 Victoria Queensland NSW Source: JLL Research Note: Reported transactions only Significant yield compression on service station assets located across Australia s eastern seaboard has been recorded over the past five years, a trend consistent to the wider retail sector. Victoria achieved the sharpest average initial passing yield of 5.15% on assets traded in 2016 followed by Queensland (6.24%) and then NSW (6.45%). Victorian service stations have continued to be aggressively priced in 2017 year to date with an average 5.36% initial yield being achieved. The average annual initial passing yield achieved on Queensland service station transactions compressed from 7.27% in 2012 to 6.05% in 2017, the sharpest tightening across Australia s eastern seaboard over the five year period. Victoria recorded a 70 basis point compression over the same period of time. The decompression in Victoria s average initial yield in 2015 (Figure 11) was a result of 12 assets tenanted by Shell and Caltex predominately transacting on yields above 6.0%. 12 JLL November 2017

13 Private investors are the dominant buyer cohort of Australian service stations sites. Self-managed super funds and more recently investment funds are emerging buyer cohorts. Offshore buyer activity has also increased, a trend experienced by the broader Australian property market. International buyers commonly hold a preference for service stations located in metropolitan regions. Australian property markets appeal to international capital sources for a number of reasons; transparency, security over property rights, the ability to acquire on a freehold basis and the solid economic and political frameworks. Furthermore, the service station sector is regarded as a defensive asset class given the non-discretionary nature of fuel sales and the stable demand profile. Convenience Retail REIT, which is managed by APN Funds Management and was listed recently in July 2017, with a 67 asset portfolio. The REIT had a weighted average capitalisation rate of 7.2%, with the majority of sites leased to Puma Energy Australia (65%), Woolworths (10%) and 7-Eleven (6%). Puma Energy Australia major shareholders and partners are Singaporean multinational commodity company, Trafigura and U.E.E state owned parstatal company, Sonangol Holdings who control the petroleum and natural gas production in Angola. The strong ownership structure qualifies the strength on the REIT s lease covenants. Viva Energy REIT as at June 2017 held a portfolio of 431 freehold service station properties. The weighted average capitalisation rate of the portfolio was 5.9% in June Listed groups have also emerged as players within Australia s service station sector. Two petrol station property trusts have listed on the Australian Stock Exchange in the past 12 months, Viva Energy REIT and Convenience Retail REIT. Self-managed super funds and more recently listed investment funds are emerging buyers in the sector. Focus on Service Stations 13

14 The increase in new car sales shows an ongoing reliance on fuel consumption by Australians and positions service station assets as an appealing long term investment vehicle 14 JLL November 2017

15 Our service station transaction team Victoria Sam Baines Executive, Retail Investments - VIC New South Wales Stephen Bolton Director, Retail Investments - VIC Stuart Taylor Director, Retail Investments - VIC Dylan McEvoy Associate Director, Sales & Investments - NSW Paul Hunter Director, Sales & Investments - NSW John Macree Regional Director, Sales & Investments - NSW Queensland Campbell Bowers Executive, Retail Investments - QLD South Australia Doug Rapson Senior Executive Retail Investments - QLD Western Australia Tom Bailey Executive, Sales & Investments - SA Sean Flynn Associate Director Sales & Investments - WA Focus on Service Stations 15

16 Contact Victoria Sam Baines Executive Retail Investments M: New South Wales Dylan McEvoy Associate Director Sales and Investments M: South Australia Tom Bailey Executive Sales and Investments M: Western Australia Sean Flynn Associate Director Sales and Investments M: Queensland Campbell Bowers Executive Retail Investments M: COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved