Burger King Enters the South African Commercial Real Estate Market

You may have heard of Grand Parade Investments (GPI) but you have almost certainly heard of Burger King. It’s all about branding. But the fast food business is also all about real estate.

When McDonalds first came to South Africa with their real estate policy, insisting on owning every freehold site, they encounted many obstacles souring their early days in the country. Steers has landed with their proverbial bum in the butter acquiring access to scores of outlet sites at service stations country wide. With arguably most of all the best sites taken up already what will be left for Burger King?

It’s now well publicised that JSE listed Grande Parade Investments has struck a deal with Burger King, (the US’s second biggest Burger fast-food chain after McDonalds) after 18 months of negotiation with the view to the fast-food franchise setting up shop in South Africa. Intriguingly GPI has a long range vision set on the pizza, pasta and chicken market too.

GPI is no stranger to the food franchise market with Cape Town Fish Market and Leonardo’s under its belt.  GPI is known primarily though for its casinos, slot machines and hotels. The first Burger King outlet will open on Adderley Street in Cape Town, around May next year. Initially all the stores will be company owned. The financial side of the deal has not been disclosed. GPI will make a substantial investment in the venture, which will be funded from existing cash resources and new debt. The deal is still subject to the SA Reserve Bank approval. This is required because royalties will flow out of the country.

Hassen Adams of GPI

The competition is very high but Hassen Adams of GPI seems unfazed. MoneyWeb’s Hilton Tarrant asked Adams about sites and whether landlords and property management companies had been calling them? He replied: “I am absolutely gobsmacked by the interest. We said that we would sort of roll out this whole concept in Cape Town very, very conservatively. I can tell you, we are going to have to do it in a very aggressive way. I’ve got the go-ahead from my board to now go full-steam, and I think that we will be rolling out a lot of these Burger Kings much quicker than we anticipated. We obviously are going to start in Cape Town first, then Gauteng and then Durban.”

According to Wikipedia “Burger King derives its income from several sources, including property rental and sales through company owned restaurants.” According to NetLeaseAdvisor, Burger King generates revenues from three sources: retail sales at Company restaurants; franchise revenues and property income from restaurants that BKH leases or subleases to franchisees.

We already know the maxim: location, location, location. So what of the fact that other fast-food chains are way ahead of Burger King in this regard? What does Burger King want in a store? “Burger King’s restaurants are usually free-standing buildings, located on outparcels in shopping centres and on high-traffic urban streets”, says Randy Blankstein, president of the Boulder Group, a net lease brokerage firm based in Northbrook, Illinois, US.

To get really specific, the highly regarded Net Lease advisor rates Burger King as similar to other quick-service restaurant (QSR) operators, Burger King prefers locations in high traffic areas with superior access. Accordingly, net lease Burger King properties are usually supported by strong real estate fundamentals. The underlying asset is typically a 278.7sqm building with a drive-thru window, situated on 2023.4sqm to 4046.8sqm of land. It is important to note that Burger King franchises the majority of their locations, while only 15% of Burger King locations are corporate-operated. Therefore, there are a number of various lease agreements and guarantors operating under the Burger King banner. Corporate-backed leases have been trending towards ground leases of 10 – 15 years in length with rent increases of 8% – 10% every 5 years. Franchise guaranteed lease terms vary, as do their respective cap rates based on perceived credit-worthiness of the operator. However, if a site has high quality real estate and strong sales, some leases have been known to offer annual rent increases or percentage rent.
The nearest indication we can get with regard to Burger King’s intentions are, real-estate-wise here in South Africa, is Adam’s answer to a question about the location of outlets. “We will find the right sites. But also we have 400 slot-machine outlets, (mostly in pubs), and this creates opportunities. Why go the quick service route? In those sites we can create a Burger King that is a hole in the wall. You need to be creative.” It seems quite an ingenious move to piggy back the roll out of Burger Kings through the already tried and tested market of GPIs slot-machine outlets.

But it won’t end there if Burger King’s move into China is anything to go by. A recent article in Business Journal about Burger King Worldwide, opening 1,000 new restaurants in China offers a bullish insight into the future of the commercial real estate market in the People’s Republic.

That Burger King Worldwide is moving into China in such a massive manner is bullish for the commercial real estate in the country for a variety of factors.  The most obvious is that there will now be 1,000 pieces of commercial real estate in China that will have a Burger King restaurant as a new tenant. The commercial real estate market in China can only benefit from that development.

Also of significance is that Beijing is welcoming new businesses into the country. That will only increase the demand for both residential and commercial real estate in China. This new demand from foreign investors, by the basic laws of supply and demand, will raise property prices in China both in the commercial real estate sector and market for homes in the People’s Republic. These same principles apply in South Africa. If Burger King is coming to town this is an encouragement for other foreign direct investment in South Africa in general and in commercial real estate in particular.

So we wait with baited breath to find out what GPI and Burger King plan for South Africa’s roll out. The 400 slots outlets are not quite the same since no purchase of land is taking place but when the foot is in the door, given Burger King’s record, it shan’t be long before real estate is being bought up.

So how stable is Burger King you may ask? Well to start with the company has a ‘B2’ rating with Moody’s’ – judged as being speculative and a high credit risk. By way of comparison McDonalds has an ‘A2’ rating. Standard and Poor rates Burger King ‘B’. An obligor rated ‘B’ is more vulnerable than the obligors rated ‘BB’, but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitments- according to S&P. McDonalds is rated ‘A’.

Net Lease advisor rates Burger King as a solid net lease investment set of properties. “For a non-investment grade net lease tenant, Burger King provides stability in an uncertain market.”  Apart from adding some jobs to the markets and variety to our fast food habits, Burger King seems to have the track record to suggest that a move into South Africa can only be a confidence boost to the commercial property market even if its direct effects are delayed by the strategic embedding of Burger Kings into GPIs slot-machine outlets. Not everyone who wants a burger plays the slots and Burger King knows this. Commercial real estate will have to be purchased for the proposed big roll out in the Cape Town, Gauteng and Durban.