Restaurant investors – are you being served?

Australia’s decade-long love affair with fine food continues – but investing in restaurant properties requires a discerning palette, Paul Thornhill finds.

Australia’s fascination with all things cuisine has served up the celebrity chef, top-rating cooking shows and an endless supply of foodie blogs – not to mention an expanding national waistline.

Restaurants are big business, generating $14 billion in revenue and employing 69,000 people, according to IBIS World, but a flood of new entrants is creating a little indigestion in the market place.

Patrons still flock to glamorous venues like Neil Perry’s Rockpool or the ethereal Spirit House at Yandina, but high-profile closures including Robert Marchetti’s North Bondi Italian and My Kitchen Rules host Pete Evans’ Little Hunter have rocked the confidence of some investors.

The food business has certainly had its challenges of late, most notably a fall in the average cover (industry jargon for spend per patron) over the past two years, dropping from $61 to $54 according to an estimate by reservations website DIMMI and Citibank.

Restaurant insiders cite a number of reasons for the fall, including Gen Y’s preference for gourmet burgers over fine cuisine, a surge in online coupon marketing to fill empty tables and decade-long rise of new entrants.

Property investors should note that today’s owners plan their ventures with their sights set firmly on the here and now.

“Our generation brings a different set of expectations; we come in with a five or 10-year vision, not a mindset that we’re going to be here for 30 years”, Carolynne Troy of Restaurant Amusé told RealCommercial.

Troy epitomises this generation’s approach; her degustation restaurant has won a string of awards, despite its out-of-the-way East Perth location and a fit-out completed on a distinctly unglamorous budget.

“I expect many new ventures are moving away from high rent locations and taking the DIY approach to fit outs,” Troy says. “For us, food isn’t about form over function and I wonder how some cope with the high cost of impact interiors, which can really put a dent in your cash flow, and leases that mean you have to be open for four servings a day.”

“We’ve fixed our lease to make it easy to face outgoings like power and water, labour and product costs which jump around each year.”

This focus on occupancy costs is driving some interesting trends, such as the proliferation of hole-in-the-wall venues serving as few as 10 patrons a short-form or chef selection menu.

Another is the outplacing of back of house functions, exemplified by the popular Chin Chin, which prepares most of its meals in the industrial suburb of Moorabbin before trucking them into Melbourne’s Flinders Lane precinct.

So what types of restaurant property are likely to prove the most rewarding in today’s market?

In a famously fickle industry, that will depend on many different factors, but what’s certain is that the trend towards quirky venues in lower rent locations is proving enticing to new entrants and seasoned restaurateurs alike.

And while some high-profile venues remain popular with patrons and still able to command yearly rent increases, demand for high rent CBD venues, particularly those requiring $1 million refits, continues to wane.

Investors should also note that the average cover varies widely and tends to fall following a spike in openings of new restaurants – good for ACT and NSW right now and tougher for Victoria and WA after a surge of new venues three years ago.