It's been said that McDonald's (NYSE:MCD) is really a real-estate holding company that just happens to hawk a few burgers on the side. Whether your local Mickey D's is a franchise operation or a company-owned location, McDonald's itself likely owns the building and the land it stands on. The company puts a ton of effort into finding top-notch locations with all the right demographics, traffic patterns, and long-term viability. Sites are chosen as much for long-term resale value as for immediate burger-selling prospects.
McDonald's has crushed its peers in the Dow Jones Industrial Average (DJINDICES:^DJI) index over the long haul, largely thanks to its acumen in land selection and development. Fellow Dow component Wal-Mart (NYSE:WMT) is also keen on reaping cash value from its enormous real-estate holdings, and it has beaten the Dow by a similarly large margin. Non-Dow retailer Walgreen (NASDAQ:WBA) happily pays a large premium for corner lots, knowing that easy access makes for spectacular returns on the investment -- and yes, that's another tremendous market-beater:
Google (NASDAQ:GOOGL) may not seem like an obvious copycat of this strategy, but Big G is indeed ripping that page right out of the McDonald's playbook.
You may have noticed when Google sank $1.9 billion into a 15-story city block in the Manhattan borough of Chelsea. That property was bought in 2010, while property values were still reeling from the impact of the real-estate-powered financial crisis of 2008. Google has spruced the area up with free Wi-Fi access for all, and it hopes to cultivate the site into a seriously valuable property over time.
And the real-estate fun continues. This week, Google revealed that its three small offices in London will be consolidated on 2.4 acres of prime land near the massive King's Cross subway station. The company will spend about $1 billion to buy the plot and build an 11-story tower with 1 million square feet of office space, and the whole thing should be worth some $1.6 billion when construction ends in 2016.
That's a 60% return on the investment before Google even moves in and starts using the building. McDonald's would be proud.
This investment also helps Google do something useful with the substantial cash reserves being held overseas. At the end of 2011, $21 billion of Google's $45 billion in cash equivalents sat in foreign accounts. Management has no plans to bring that money back home anytime soon, at least partly due to repatriation tax penalties. This might be a sign that Google is thinking of even more big-ticket real-estate investments around the world.
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