Fast food can be good for you

Fast food can be good for you

Total Property - Issue 5 2017

It’s the commercial property industry’s version of a value deal.

At a critical point in the recent McDonald’s biopic The Founder, the company's first CEO, Ray Kroc, is staring into the financial abyss after trying to expand the fast food restaurant, when he is thrown a lifeline. “You’re not in the hamburger business,” a friend tells him. “You’re in the real estate business.” Kroc’s face lights up and he pivots into buying up more real estate, which he then leases back to McDonald’s. Thus, a multi-billion-dollar burger empire was founded on property.

In the majority of cases, McDonald’s owns the land and buildings in which its stores are located and leases them out to franchisees. McDonald’s has 168 restaurants in New Zealand. All up, it occupies more than 100,000m2, which makes it a major player in the commercial real estate market.

McDonald’s New Zealand national real estate manager Warwick Stevens says the company’s preference is to own free-standing sites rather than lease. “We own 89 free-standing sites and four in-store/street retail sites in New Zealand,” he says.

While McDonald’s fit-out model gives it the flexibility to operate from various building envelopes -- from food courts to large free-standing restaurants -- the company’s preference to develop its own real estate ensures it achieves the perfect fit for a desired operation.

Mr Stevens adds: “Bare land is preferred to avoid potential demolition costs. However, holding onto a property that provides supporting revenue up until the desired development date also has appeal. We are also comfortable to landbank bare land in high-growth areas while we wait for trade to develop to the point it can support a McDonald’s restaurant.”

Fast food is hugely popular in New Zealand. Kiwis are the fourth highest consumers of fast food in the world, and per capita, there are more KFC restaurants in New Zealand than in the United States (New Zealand ranks second behind the US when it comes to McDonald's restaurants per capita).

With 270 stores throughout the country, Subway is the largest quick service restaurant chain in terms of outlets. It occupies more than 20,000m2 of prime retail space, all of it leased. Other major players include: Restaurant Brands, which has 215 outlets through its KFC, Pizza Hut, Starbucks and Carl’s Jr brands; Burger King, which has 84 restaurants nationwide; and Domino's Pizza, which has about 100 stores. Leasing is a big part of the fast food landscape, although unlike McDonald’s, most brands lease space from third parties not their parent company.

Antares Restaurant Group, which is the main New Zealand franchisee for Burger King, says it leases the land and buildings for 80 of its restaurants.

Antares development manager Kevin De Jong says lease payments total $14.5 million a year and that most of its restaurants are on long-term leases.

“When choosing a site, we look for long-term relationships, transparency and fair terms in rent. We are always looking for new opportunities and have ongoing growth targets for new restaurant openings,” he says.

Like McDonald’s, Antares’ preference is for standalone restaurants with drive-thru facilities. Typically, these are 300m2 buildings on 1,500m2 of land.

Agents report that there is a strong investor demand for food retail sites, with mainstream franchise brands under the $1.5 million mark appealing to mum and dad investors. This is reflected in the yields being achieved.

Fast food retail attracts investors for several reasons, chief of which is that they are often located on large sites that could provide future alternate uses.

Most assets are on long-term leases with wealthy, financially secure restaurant operators, and the industry is not known for restaurants regularly vacating their sites, with the fast food sector proving resilient in economic downturns.

For buyers, the biggest hurdle is supply and demand. Fast food retail sites in high-value locations rarely appear on the market and when they do, they sell quickly. Added to this, investors tend to hold onto them.