Adam Chapman, Head of Knight Frank’s Automotive team comments:
Oil tumbled to its lowest level for nearly 12 years last week, raising the prospect of further falls in fuel prices at the pumps. Brent crude is currently trading at around $33/barrel, a slide of 70% in just 18 months (June 2014: $113/barrel). As one would expect, prices at the pumps have in turn fallen, from £1.35 per litre in June 2014 to just under £1.00 per litre (at supermarkets) last week – but this is a drop of just 25%, revealing a stark difference in the rates of decline, and lending weight to the claim that pump prices ‘rocket’ up and ‘feather’ down.
External factors such as exchange rates, taxes etc. do of course influence pump prices, but the (relatively) modest fall at the pump compared to the cost of the raw product has resulted in fuel retailers benefitting from a lengthy spell of higher margin fuel sales. As oil prices have slumped, fuel retailer profits have in fact risen.
The profits generated (on both fuel and shop sales) is the key driver of property value. With some fuel retailers currently enjoying fuel retail margins of over 6 pence per litre (ppl), they are able to generate £2.40 profit (assuming an average sale of 40 litres) on every vehicle that fills up on its forecourt. In recent years, the sector has experienced a margin of around half that figure (c. 3ppl).
In the absence of a crystal ball, it is impossible to accurately predict what will happen to wholesale fuel prices, and therefore retailer profit margins. As such when appraising forecourt values, it is necessary to consider a ‘sustainable’ margin, which will level out peaks and troughs. Moreover, fuel drives only part of the value; a key contributor to profit is the (increasing) influence of the forecourt shop, which is largely ring-fenced from oil price fluctuations. Nonetheless, with a strong property market, increasingly sophisticated and profitable petrol forecourts, and the absence of any indication that oil prices will spike in the short to medium term, the likelihood is that rental and capital values for modern sites will continue to rise. We expect the fuel property market to outperform IPD in 2016.
