LESG pioneered auction sales trend

My survey of London & Edinburgh Swallow Group (LESG) auction activity in the six years prior to its collapse reveals a number of interesting trends.

It's fair to say that LESG-linked companies pretty much pioneered this kind of deal. Before the company's first sales in 2000 the market was very much in its infancy.

Investment properties tended to come from individual commercial landlords with nothing in the way of wholesale marketing of tranches of sites. In 1998, for example, there were just 178 leisure-sector lots offered in total - in 2004 LESG-linked sales nearly matched this number with 155 sales. In the late 1990s I should imagine that sales were inhibited by high interest rates. There was also, in all likelihood, a relative absence of investors.

The house price boom of the years following the millennium must have created a whole new class of small investors looking for a property-backed investment for their pension portfolio. The relative immaturity of the auction market is shown by the sale in 1997 of a property tenanted by JD Wetherspoon in London's Surrey Quays where the company was committted to a 40-year lease and a rent of £51,000 per annum for £525,000 - a yield of 9.7%. JD Wetherspoon is about as solid a covenant as it's possible to find in the leisure sector and the same property would probably sell for around £1m at auction now.

The first major auction activity involving LESG-linked companies was in 2000 - and investors were clearly a little wary of the quality of the London Inn covenant that was on offer. Although seven properties were sold, sale price averaged around £170,000 with yields as high as 9.8%. I counted 11 properties that were unsold and a number that were withdrawn from auction.

The following year, properties were being offered with a new LESG-linked tenant - executive chairman Alan Bowes himself and a company called First After. Successful sales trebled to around the 22 mark although yields were variable. as low as 7.7% in one case but as high as 11.3% in another. Average sale price was a little higher than the year before at £214,000.

In 2002, a further 22 sites were sold, with yields similar to 2001, although average sale price reached £390,000. 2003 was a very quiet year at the auctions, possibly because LESG was focused on its Winlease joint venture with Carlberg which grew to encompass around 120 pubs - and had also bought its first tranche of Swallow Hotels. Perhaps it was able to sell pub freeholds to private investors without tapping up the public auction market thanks to Carlberg's somewhat bizarre decision to guarantee head-rents to investors for three years.

Through 2004 and 2005 LESG auction activitytook off, fuelled by the acquisition of 252 pubs from Punch by William Pear and the Khalastchi family's Flodrive vehicle. It was clearly decided that the public auction market, where a new LESG company, Newlord, would be offered as a tenant, would be the right place to sell freeholds on a grand scale. Average sale price took a sharp upward turn. In 2004, I estimate average sale price hit the £450,000 mark with yields around the 7% to 8% mark - a sign that investors regarded Newlord as a very solid tenant.

Last year, the number of properties offered at auction dropped to the 100 mark but much higher sale numbers were being achieved - I estimate the average price hit the £630,000 mark as the odd Swallow Hotel site came on the market and reached as much as £3.5m in one case. The sheer unreliability of many of the investments is implicit in the facts: LESG was able to pay the rents on some of them for less than a year. I heard of one Swallow Hotel that was sold for £1.44m on the promise of a rent of £134,000 a year. It takes between £7,000 and £8,000 a week - the private freehold owner has been told the real market value is around £800,000.

I wouldn't be surprised if total auction proceeds - the difference between the selling price to investors and the price paid for pubs - were close to £50m in three years. It's nice work, this public auction business, if you can get it.