Over the past few years, service stations have been a favoured investment option. However, 2023 has seen a significant reduction in sales volumes according to new data.

Ray White Commercial found that there was $1.07 billion invested in service stations in 2022, a time when the set-and-forget nature and attractive yields of the asset were highly sought after. However, with interest rates rising, the initial five months of 2023 has seen just $66.8 million invested in the sector.

Despite this slump, Vanessa Rader, Head of Research at Ray White Commercial, said that investment volumes are still 47% higher than 2019. "Even though the market remained active in late 2022, we saw several investors, particularly smaller first-time buyers seeking to profit from the 'set and forget' trend of these assets, exit the marketplace," Ms Rader said.
 

"This created room for more seasoned investors who, despite the escalating financing costs, considered the durability of the lease covenant and fixed increases as a safeguard against these mounting expenses."

Ms Rader also said that the investor base was further constrained by the increased LVR requirements, in contrast to other asset types, during a period of rising deposit rates.

She explained that investor interest has shifted geographically over the past year. "During 2022, our investment pinnacle year, volumes were largely driven by NSW and Queensland assets, with a heightened demand for WA and SA assets, whereas Victoria lagged behind its historical volumes."

Ms Rader said that the pursuit of an affordable, quality, high-return commercial investment maintained sales activity in regional markets, with areas like NT and Tasmania also seeing an improvement. Despite the ongoing trade in regional assets, she said that activity has reverted back to the prime east coast markets, primarily NSW, Victoria and Queensland.

"We anticipate investors will refocus on market fundamentals and pay more attention to the future redevelopment potential of assets for the rest of the year, which includes greater emphasis on location.

Consequently, assets that are deemed secondary in terms of location, quality, or lease covenant might face greater pricing pressure, leading to potential increases in investment yields."

According to Ms Rader, an analysis of yields already indicates a growth trend initiated last year as interest rates began to rise. Yield lows were reached during 2021, with metropolitan assets averaging below 4%, while regional markets tightened significantly to just 5.88%.

"As we moved through 2022 and into 2023, with the cash rate transitioning from 0.10% to 3.85%, investment yields have escalated to 4.71% in metropolitan areas and 6.25% in regional markets, although some assets do exceed 7%," she said.
 

Rader mentioned that the ambiguity regarding future interest rate hikes has made investors hesitant to seize investment opportunities promptly. "For many investors, capitalisation rates need to rise further to trigger investment decisions,” she said. However, we foresee a limited number of assets entering the market as owners persist in reaping the benefits of their steady income stream.

“Though distressed assets might start to surface, volumes are likely to remain muted in 2023 until a shift in sentiment occurs and confidence in financing is restored.

Subsequently, this will stimulate investment activity in one of the favourite alternative investment classes among smaller, private investors – the service station."