Fast food ‘happy meal’ for investors

6:46 PM Friday September 29, 2017 Bayleys Business Team

McDonald’s leads the pack, property-wise with 168 restaurants in New Zealand. Photo / Supplied

Fast food is hugely popular in New Zealand, with Kiwis the fourth highest consumers of fast food in the world, says Bayleys national director commercial John Church.

Correspondingly, the amount of commercial space fast food chains occupy makes them influential players in the property market, Church says.

“Between them, the major chains have more than 700 outlets in prime locations across New Zealand — most of them leased.

“Given current market conditions, buyers are changing their views on what is a good and bad investment. In previous years, fast food retail wasn’t viewed as a preferred investment class, but this has changed.”

Church says demand for the fast food asset class has increased in recent years with most fast food retail sites occupied by financially secure restaurant operators on long-term leases. Because the sector has proved resilient in economic downturns, it is almost unheard of for major chains to vacate sites.

“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, the investors who have them tend to hold on to them.”

Church says Subway is the largest quick service restaurant chain in terms of outlets with 270 stores throughout the country. It occupies more than 20,000sq m 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.

Church says fast food outlets in CBD locations range in size from 110sq m to 210sq m, while large drive-thru restaurants can occupy up to 5000sq m. “As is the case with many commercial leases, the tenant of a fast food restaurant is responsible for the property’s ongoing costs and day to day management of the business.”

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 $14.5m 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.

Antares’ preference is for standalone restaurants with drive-thru facilities. Typically, these are 300sq m buildings on 1500sq m of land.

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A KFC restaurant in Green Lane. Photo / Dean Purcell.

Subway says its preference is for lease terms of between six and 10 years, with sufficient options of similar length to provide a total term of at least 20 years, if options are exercised.

Subway communications manager Ben Miles says locations are focused on high-visibility, high traffic count sites (pedestrian or vehicular, or both), with readily accessible parking for high road traffic locations, and strong day and/or night population base.

Church says McDonald’s leads the pack, property-wise with 168 restaurants in New Zealand occupying more than 100,000sq m. However, unlike major chains, McDonald’s owns most of its real estate. Globally, the fast food chain has more than US$30 billion in real estate assets.

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.

The emphasis on property makes sense, says Church. “Much of McDonald’s income is derived, not from burger sales, but the rent it charges its franchisees. McDonald’s owns the land and buildings in which its stores are located and leases them out to franchisees,” Church says.

“In addition, land and property values have increased considerably in New Zealand since the global financial crises, which means the overall collateral value of the company’s property has increased, too. When McDonald’s wants to borrow money for new investments, it can do so at relatively cheap rates. Its property portfolio provides insulation when the company needs to weather fluctuations in the larger burger business.”

Stevens 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.

“Bare land is preferred to avoid potential demolition costs. However, holding on to 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,” he says.

Evolving customer tastes and expectations is also influencing property decisions. KFC recently opened its first table-serviced store at 4 Fort Street in Auckland’s CBD.

KFC management says the fit-out of the leased space is in keeping with the “hip” vibe of the area, with the design provided by Mortlock McElroy Architects.

KFC plans to roll out other table-serviced restaurants, with a similarly-styled urban store set to open in Wellington CBD early next year.

Technology is also changing the sector’s property needs. Most of the big brands now offer home delivery via their apps, and Domino’s Pizza — which has more than 100 stores in New Zealand — successfully tested drone delivery late last year.

According to Church these advancements could change the way fast food operators prioritise their space requirements. Companies whose business is primarily home delivery — pizza outlets, for example — would no longer need to have real estate in prime locations to attract customers.”

Pizza Hut closed the last of its red-roofed, sit-down restaurant in Auckland’s New Lynn last year (80 carparks for Lynn Mall have taken its place) as the chain completed its near 20-year-long move towards becoming a takeaway and delivery service. The shift, replicated by Domino’s and Hell Pizza, has seen the chain move to smaller spaces, consequently paying lower rentals.

But technological advances could even end up increasing the property footprint of some fast food retailers. McDonald’s does not believe home delivery will have a negative impact on its property portfolio.

“In fact, a number of the restaurants will be required, depending on locations, to undergo improvements if they are to serve as delivery hubs in the future,” says Stevens.

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John Church, Bayleys