03.09.2009

Straining at the lease

As retailers throughout the land comb every nook and cranny of their businesses looking for different ways to keep costs down, Barber Wadlow is ensuring they don’t miss out on the bigger picture, by offering some guidance on their property costs.

Property-related overheads generally equate to 30-40% of a petrol filling station’s gross profit, says Amanda Barber, a former partner of GVA Grimley, with 25 years’ experience in the retail, petroleum, automotive and roadside sectors. She set up the company in July, with Adam Wadlow, also formerly from Grimley’s.

With business rates potentially set for a 100% increase next year, the significant volatility in the price of utilities and insurance, as well as the complexity of lease agreements, it is often difficult for petrol retailers to keep on top of their costs, she says.

The bigger groups will likely have it all covered, but some of the smaller retailers may not be able to afford to get expensive advice. So we have issued some guidance which could prompt them into taking action. And, in terms of business rates, there are quite a few avenues that can be explored to reduce that liability.

Barber says retailers do have the ability to appeal against the new business rates, and especially given the anticipated rise – for certain sites the increase could equate to as much as 1ppl – she says it is more critical than ever to put forward a strong case to secure a rate saving.

Securing a reduction in your current rateable value will mean that you could receive a rebate payment for the past five years, as well as unlock savings going forward for the period 2010-2015.

Note that the deadline for appeals to the 2005 Rating List is March 31, 2010.

If you have made an appeal to the original 2005 rating assessment, but there have been changes to the property or locality that you consider have had an adverse effect on the value, then further appeals can be made. Examples would be increased competition from a new or refurbished forecourt, changes to the road layout or road works, says Barber.

Other areas for potential cost reduction could come from rent savings for tenants, and Wadlow advises retailers to be proactive about such matters, rather than reactive: “Tackle the landlord before the rent review is due, to give yourself time for a sensible negotation, rather than leaving it to become confrontational, after all, there might be something in it for both parties,” he says. “In the current climate more landlords are negotiating with tenants who have imminent break options and coming to some agreement – whether it is a reduced rent or capital investment in the property.

The worst thing for a landlord is a void in the current market. After all trading performance would be permanently damaged if the site was to close. Also the current drop in trading performance would mean that a site’s rental value would be adversely impacted if a new lease was to be agreed in the current climate.
Wadlow says leases have become increasingly common in the fuel retailing business because over the past three to five years there has been an emergence of a ‘sale and leaseback’ culture, where an operator has sold a freehold interest in the site in return for a lease.

Around 25% of the national forecourt network is now leasehold, according to Barber Wadlow’s figures, although that falls to around 15% if you take out supermarkets. Oil companies tend to have more leasehold properties – only about one in 10 sites in the independent sector is leasehold. But there is an opportunity for certain independent dealers, some of whom are considering leaving the industry, to lease their sites instead. “This way they can retain an income, without the hassle of running the site,” explains Wadlow. “Indeed, this can provide an attractive private pension scheme for a retiring dealer. And sometimes a new operator with some fresh ideas, or a bigger group with better buying power, will generate more income, which creates more rent potential for the retailer as a landlord.”

While no-one has escaped the economic climate, Barber says the petrol filling station sector has weathered the recessionary climate relatively well. “It’s a good cash flow business which has remained relatively profitable. Obviously it’s got to be the right business – the right balance between fuel, shop and other elements. But it’s good to be working in a market that’s comparatively buoyant compared to other markets. For example, a client came to us the other day wondering what to do with a development site. We were able to recommend it for a potential roadside service area, with filling station, possibly some overnight accommodation, a decent shop and so on. If anything, we’ve seen more new-builds on greenfield sites in recent times, because given the barriers to entry in the traditional market – less of the right forecourts available to buy – the opportunity for a developer to release a one-acre plot of land may be an attractive option, and then they install a good forecourt operator as a tenant.”

[article as detailed in Forecourt Trader September 2009]