How to invest in your local service station

These days, service stations offer much more than milk, bread and fuel.

Investors are also catered for, with stable, hassle-free rental income available at your convenience.

Five auctions of 7-Eleven service stations have taken place in NSW in the past 18 months.

Ten service stations went under the hammer on September 25 in what was the third successive auction to achieve a 100 per cent clearance rate.

“This is a great result, which speaks volumes for the strength of convenience stores as an asset class,” Jones Lang Lasalle’s head of sales and investment for metropolitan markets, John Macree, says.

Sites were available in suburban areas such as Rozelle, in Sydney’s inner west, as well as regional areas such as Glendale in Lake Macquarie.

The stations were sold on an average initial yield of 6.27 per cent and prices ranged from $2 million in Glendale to $4 million in Croydon Park, a suburb in Sydney’s inner west.

Buyers inherit a brand new 15-year lease, plus three five-year options, and rental increases of 4 per cent.

All outgoings are paid by the tenant,
7-Eleven Stores, except land tax.

“Self-funded retirees and those with self-managed super funds are particularly attracted to the 7-Eleven assets,” Macree says.

“The flight to quality trend is something we have been witnessing since the GFC hit.

“Investors are looking for safe investments and with continued uncertainty on the stockmarket, commercial property is becoming a popular choice.”

Kerry Partridge is a self-funded retiree who picked up a 7-Eleven service station in Granville. “It’s something you can buy and walk away from, go sail your boat, go fishing and not worry about it,” he says.

While yields are low relative to other commercial property, the hands-off nature of the investment sweetens the deal.

The chief executive of buyers agent propertybuyer.com, Rich Harvey, says the risk of environmental contamination should be taken seriously when investing in service stations.

“If they’ve been able to deflect that contamination risk, then it certainly makes it a more attractive proposition,” he says.

All tanks, pumps and line work are the responsibility of 7-Eleven, as well as site “remediation” to make it legally safe for redevelopment when the lease expires.

He says that while these service stations may seem a good deal for those after stable income, the opportunity cost of the investment should be considered.

“Consider what else you can get for the money, look at the yield and the cash flows and the exit strategy,” he says.

7-Eleven chose not to speak in detail on the sale of the stores but confirmed that 7-Eleven is the lessee.

“The franchisee occupies the site under licence by way of the franchise agreement,” a company spokesperson said.

This means the landlord has no exposure to the franchisee, only to
7-Eleven directly.

“You’ve got the underlying real estate and you’ve got the income,” Macree says.

In Australia, 7-Eleven Stores is privately owned by the Withers-Barlow family. The company operates under licence from 7-Eleven Inc, which is a subsidiary of Japanese firm, Seven & I Holdings Co.

In 2010, 7-Eleven bought the 295 company-owned or leased service stations from Mobil. 7-Eleven has since been divesting assets in NSW, Queensland and Victoria.

Another 10 service stations will go under the hammer in NSW in December, as well as six in Queensland. This is all that they want to be selling in the near future,” Macree says.

Investors would be wise to choose a site with redevelopment potential, Macree says.

The service station sold in Rozelle achieved the lowest yield on record for a 7-Eleven franchise of this kind, at 4 per cent.

The site is a couple of doors down from the Balmain Leagues Club, which has been linked to big redevelopment proposals.

Redevelopment potential of each property has been a selling point, as it provides the buyer with security should 7-Eleven ever go under.

It also allows the buyer to think beyond the expiry of the lease.

“I always felt that when I looked at these, before you even have a look at rents or anything, have a look at the site,” Partridge says. “[See] what can you do with it?”

He says that due to the long lease terms and redevelopment potential of his service station, it should prove to be a great inheritance for his children.

• Tweet