Yield compression, this time in fast food

Tuesday 15 May 2018

Cashed-up investors continue to squeeze returns in every property asset class with fast food assets now posting a low average 4.92 net yield down from 7 per cent five years ago, a new report by Burgess Rawson says.

Yield compression, this time in fast food.

This Guzman Y Gomez outlet in Coffs Harbour sold at a tasty 4.5 per cent yield in December.

Demand for these assets leased to groups like KFC, Hungry Jack’s and Red Rooster have outstripped supply both in metropolitan and regional areas, particularly for assets priced between $1 million to $9 million, Burgess Rawson adds.

“These highly sought after assets have a low-risk profile with an upside and continue to grow in popularity, particularly with investors who own self-managed super funds. They offer long-term indexed income streams, underpinned by strong land value,” Burgess Rawson’s Simon Staddon said.

“Demand continues to increase for these tightly held ‘set and forget’ assets, with many landlords holding multiple properties. Investors are prepared to pay a premium to de-risk their property portfolios.”

In the past year, the commercial property market has witnessed strong sales like the freestanding property leased to Mexican fast-food chain Guzman Y Gomez in regional Coffs Harbour in NSW, which sold at a net yield of 4.5 per cent last December.

Strong demand has forced usually lucrative regional yields to the same level as metropolitan yield.

In Melbourne, KFC Richmond and Hungry Jack’s Altona North both passed in at yields sharper than 4.41 per cent last year, Burgess Rawson’s Billy Holderhead says.

“McDonald’s or KFC would have attracted the tightest yields, followed by Hungry Jack’s and Red Rooster respectively.” Mr Holderhead said.

The same de-risking strategy is seen across all property asset classes including industrial, not just in fast food assets, as seen in the sale of Smeaton Grange distribution centre at 43 Dunn Street in Sydney’s south west at a net yield of 5.24 per cent.

Fast food properties offer strong lease covenants and a defensive investment, says Honan Partners Chartered Accountants’ Neil Honan, who has many investor clients.

“Fast food is a defensive asset class that is recession proof. People always need to buy food… and new fit-outs, which cost in some cases hundreds of thousands of dollars, enable strong depreciation.”

While industries like retail struggle, revenues in the fast food services industry in Australia has risen 3.7 per cent between 2013 and 2018 to $20 billion, according to research group Ibisworld.

“Retail, I am very scared. I will not touch retail assets,” a private investor with Burgess Rawson said.

“Where are people’s money? In mortgages, and so there is no discretionary spending.

“But everybody needs food, so I will go for fast food properties, especially with a lot of land with development upside.”

A large landholding is an advantage for future redevelopment opportunities, such as residential projects, Burgess Rawson adds.

Other key factors that make a property a good investment are leases to global brand operators, which have embraced technology such as Uber Eats; main road locations with multiple access points and egress points; having long-term tenants.

Areas with government, planning controls, which restrict tenants’ ability to find new sites, also provide upside.

Download your FREE copy of the Fast Food Property Investment Report here.

View the original article at The Australian Financial Review.

To find out more about the properties in our portfolio, and how we can help you with sales, leasing and property management services, please contact us.

Originally written by Su-Lin Tan, published by the Australian Financial Review

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yield compression
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