Northern Alternatives Market

Oliver Powell
Trainee Surveyor, Commercial Valuation

Driving Thru Growth

The drive-thru model is not a new concept to the UK market but, unlike the USA market, it has predominately been dominated by a few operators. The early retailers were KFC, McDonald’s and Burger King who all opened their first UK drive-thru restaurants in the mid-1980s and developed their network exponentially throughout the 90s and 00s. It wasn’t until 2008 that Starbucks opened their first drive-thru store and their success was recognised by the brand leader in the UK market, Costa Coffee, who went on to open their first ever drive-thru in 2011.

The growth in the drive thru market really started to ramp up during the pandemic and the changing of consumer habits. This was primarily a result of drive thru lanes being able to remain open during lockdown whilst other restaurants were forced to close.

However, since the pandemic the demand for that quick ‘on the go’ consumerism has continued. We continue to see occupiers compete for the best sites and land owners been more than happy to capitalise on what is usually surplus or defunct land.

We note the following recent updates from occupiers within this market which suggests that there’s not going to be a let up in demand.

Key Players - Project Growth

• Starbucks are looking to open c.250 sites
• KFC are currently on the lookout for 500 new sites. We note 53% of existing stores are drive thru units and as such it is likely they will continue this trend
• McDonald’s are the largest drive thru occupier in the UK, and are currently on the lookout for 200 new sites
• In addition to the above, numerous other occupiers are looking to expand including; Costa, Burger King, Tim Hortons and Greggs

The most active operators in the sector have been Costa and Starbucks who fight it out to secure the best and most prominent locations, although from the above, it looks like the traditional drive thru operators may be coming back to the table which will only create some upwards rental pressure in the market.

That being said, coffee shop style operators only require c.1,800 sqft of space whereas the food operators generally require 2,500-3,000 sqft to facilitate their larger kitchens and prep areas.

Traditionally, coffee shop style drive thru rents were always around £45-£50 psf (c.£90,000 pa) and you could typically bet that a new open market rent 6 to 12 months ago would be in and around this range. However, more recently and in the midst of ever increasing demand for the best positioned sites, we are increasingly seeing rents far exceeding this level with typical rents now in excess of £100,000 pa.

By way of comparison, the restaurant style drive thru’s (McDonalds / KFC) are typically £35 to £40 psf but on larger premises, so in light of rental growth on the smaller coffee shop style units, we certainly have a keen eye on any open market rental deals of the larger drive thru premise’s to see if these rents will follow suit.

Jewel of the Private Investor's Market

From an investor perspective, the drive thru market is attractive due to the often, long leases to good / national covenants which provide the security of income over a term. The resultant lot sizes of these drive-thru complexes means that the opportunities are often open to smaller investors and often private individuals where the opportunity to secure long term and secure returns from a £1m - £2m asset are rare to the market. I mean who wouldn’t want to get in on the action?!

This is why the investment market for let and income producing drive thru assets remain to be an attractive investment class for private investors and small prop co’s.

In their prime, yields in the drive thru sector were regularly achieving sub-5% although over the period where interest rates and the cost of finance jumped significantly, the sector experienced an outward shift in the yields, but maybe not to the extent that many thought it would.

Today, sites continue to trade with prime yields currently sitting around 5.50% for those with long unexpired terms and indexed reviews, as those who are less reliant on debt still see value in the investment attributes they provide. However, this appetite markedly drops for units with less than 10 years term certain due to many fewer indexed linked rent reviews and lesser term certain.

The speed in which the Drive Thru occupational market grew has meant that there has been influx of investment opportunities on the back of newly constructed and pre-let premises which has seen a relatively large amount of transactions within the space of the last 2-3 years as landowners look to attract value from surplus land at existing schemes.

The Big Question?

Has the market peaked? Or will investors take confidence in the strength of the occupier market and continue their bet on an already busy sub-market.

About Oli

Oli is a graduate in the Commercial Valuation team in Leeds at Allsop. Having joined the London office in July 2021 as an apprentice he has assisted on valuations of all asset classes with values ranging from £250,000 to £160m. Oli made the move up to Leeds in April 2024 and now begins his time at Allsop as a graduate, where he will spend his time split between the commercial valuation and national investment teams.

Oli has worked on a mixture of loan security and fund valuations including drive thru’s, petrol stations, large multi-let industrial estates, hotels and more.

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