Adrian Fonseca, the high-profile businessman and deputy chairman of AFL side the Giants, was a big winner from a commercial property auction in Sydney on Tuesday, after selling a McDonald’s restaurant in Newcastle, NSW, for $5.53 million on a record low yield of 3.25 per cent.

Mr Fonseca, who made property headlines last year when he paid almost $16 million for a Bellevue Hill mansion in Sydney and then sold a luxury equestrian property in Terrey Hills for a suburb record of $14.1 million, looks to have the midas touch when it comes to commercial property as well.

The former investment banker and lawyer-turned childcare centre investor acquired the 3000 square metre-plus site at 43 Pendlebury Road in Cardiff, Newcastle, for $3.1 million in December 2021 in a joint venture with developers Ben and Jono Isaac, of Isaac Property Developments, which specialises in retail projects.

The partners then developed the McDonald’s restaurant and a childcare centre on the site (operated by Mr Fonseca’s Oxanda Education).

Offering a new 20-year McDonald’s ground lease bringing in $180,000 per year, with 3 per cent fixed annual increases locked in, the Cardiff property generated more than 30 bids, starting with an opening salvo of $4.2 million. The property was declared on the market at $5.23 million.

Mr Fonseca said it was a “great result’ and a testament to the strength of the McDonald’s lease covenant and the underlying land value.

“In a soft market, other assets’ yields will widen, but McDonald’s doesn’t,’ he told The Australian Financial Review.

Mr Fonseca, who attended the auction in Sydney, said the winning bid for the McDonald’s came from a cash buyer from Melbourne.

“It’s a big block of a land next to a childcare centre, so you are not just getting the annuity-style income stream, but it’s also a land play,’ he said.

“Most of those in the auction room left after the McDonald’s auction.’

Mr Fonseca said the plan was to sell the neighbouring childcare centre at the Burgess Rawson May portfolio auction, with a leaseback to Oxanda.

Also delighted with the result were Mr Fonseca’s development partners, the Isaac brothers.

“We recently sold a McDonald’s in Unanderra (Wollongong) on a 3.51 per cent yield, so today it was great to see Cardiff achieve a tighter yield at 3.25 per cent,’ Ben Isaacs told The Australian Financial Review.

“McDonald’s is the benchmark in terms of commercial tenants, with a 20-year lease term [with 20-year renewal option], fixed increases, and fully net [yield] structure. They are rarely available, which is why they are so highly coveted.

“They are relatively immune from interest rate hikes, where 13 consecutive rate rises hasn’t moved the dial at all in terms of cap rate. Fast food in general has also performed well and continues to be the primary focus of Isaac Property.’

Burgess Rawson’s Yosh Mendis, who marketed the property, said it was a record low yield for a McDonald’s and one of the lowest for fast food outlets.

A low yield or return on an income-producing asset reflects strong demand and high property value.

According to Burgess Rawson, the average yield on a fast food outlet was 4.36 per cent last year, with many assets trading well below that.

“The sale of this McDonald’s highlights the appetite for triple-A retail investments,’ Mr Mendis said.

A yield of 3.25 per cent is 110 basis points below the Reserve Bank’s cash rate of 4.35 per cent.

However, such low yields are quite common for small retail assets such as fast food, childcare and petrol stations. Many private investors pay with cash for these sites, and are focused on the secure cash flow and expected capital growth over a long period of ownership.

A combined Taco Bell and Subway restaurant offering in Albion Park Rail, south of Wollongong, failed to sell, as did a Guzman Y Gomez in Tamworth, despite offering rental income of more than $240,000 and $260,000 respectively.

Mr Mendis said he was confident both properties would sell soon, with post-auction negotiations under way.

Highlighting the premium attributed to fast food premises, a JAX Tyres & Auto centre in the Bathurst city centre – offered with a new seven-year lease and 3.5 per cent annual rent increases – sold for $2.65 million on a yield of 5.66 per cent.

Also selling under the hammer was a fully leased retail complex in Nowra on the NSW South Coast. It sold for $1.92 million on a yield of 8.17 per cent.

A childcare centre in Mays Hill, near Parramatta, sold after auction.

Financial Review – Larry Schlesinger