Banner Asset Management has tipped petrol stations and convenience retail assets to outperform other commercial property asset classes in a higher interest rate environment, after raising $50 million for a specialist property fund targeting the popular sector.

The Melbourne-based fund manager and non-bank lender expects to grow its Service Station & Convenience Store Property Fund into a $200 million-plus investment portfolio within 12 months and hit $500 million within three years through a strategy of funding new developments and acquiring completed properties.

“Generally speaking, essential-services retail like fast food outlets and service stations give better returns than standard retail property – it’s a pretty sound investment,” said Nicholas Lakin, chief lending officer at Banner.

Underpinning the investment, he said, were long-lease terms to multinational tenants – the weighted average lease expiry on its service station fund is almost 13 years – along with future development potential thanks to service stations being in high-profile and sought-after locations.

The latest addition to the fund is a brand new $10 million service station and convenience retail centre in Burdell, west of Townsville, part of a 16-site national development pipeline with an end value of more than $200 million.

The new Burdell property includes a 7-Eleven service station, a 24/7 convenience retail store, and a Hungry Jacks fast food outlet with a drive-through.

Three or four more properties are expected to be completed before the end of the year, Mr Lakin said.

Banner is targeting a distribution yield of 7 per cent for its service station retail fund and total returns of more than 14 per cent on the back of rising rents and strong capital growth over the next five to six years.

Mr Lakin downplayed the potential impact of electric vehicle usage on these assets over the medium- to long-term.

“Australia’s slow take-up of EVs means that fuel companies commit to 10-15 years leases, suggesting they remain comfortable with their business model,” he said.

“However, as demand for alternate fuels increases, these service stations will likely be transitioned to incorporate EV charging stations and offer other alternative fuel solutions.”

Mr Lakin anticipated that rising interest rates would lower asset values and increase capitalisation rates “over time” but said this would be offset by “strong rental growth”.

He added the new research from brokers Ord Minnett highlighted that mainstream asset classes like office property was more exposed to a downturn than convenience retail.

The push into real estate investment is an extension of Banner’s non-bank lending business, which has provided construction funding on projects like Chevron One, a 41-level Gold Coast development being undertaken by Bensons Property Group.

Among its debt offerings is a Wholesale Fixed Interest Income Fund, which invests in commercial mortgage loans.

These include $12.61 million of loans provided to Young Rich Lister Andrew Welsh’s development group Wel.Co to fund construction of the Armstrong Creek Town Centre near Geelong.

A March investor update noted the “unlikelihood of capital repayment and returns, due to the potential for under performance of the asset”.

The loan notes on these investments are due to mature next week.

Extracted in full from: Investors pump $50m into service station retail fund (