Buyers beware

Property experts predict that the smoking ban will create challenges for the pub trade, but it's not all doom and gloom, reports Tony Halstead

The ban on smoking indoors, starting in July, is set to dominate every aspect of the pub trade over the next 12 months - and the property market will be no exception.

It is impossible to disguise the fact that the ban is, arguably, the biggest single piece of legislation ever to hit the industry, and the dramatic changes it will bring to all in the trade cannot be understated.

Pub deals of all shapes and sizes will continue unabated in 2007, with licensed property agents predicting little or no slowdown from the helter-skelter disposal fever which dominated 2006.

But every tranche of pubs that comes on to the market - whether large or small - will be put up for sale with an accompanying warning: "Buyers beware"

The usual parameters of turnover, profit, location and potential will continue to provide purchasers with the basic information they need to assess the quality of pub stock up for grabs.

And there is no doubt that blocks of quality food-driven, destination houses will continue to sell readily and easily at prices which reflect trading performance.

What will not be easy to assess is the value of more run-of-the-mill packages of properties which invariably offer buyers a mixed bag of different pubs.

Business turnover

With the smoking ban firmly in mind, prudent buyers will be asking more searching questions, even after a detailed look at barrelage returns and business turnover.

How many pubs are landlocked? How many beer-led houses will have the scope to launch a meaningful food service? What scope is there to provide any sort of outside facilities for smokers?

Faced with a wet sales drop of anything up to15% when the smoking ban starts, these are the sort of questions which sellers and their agents will have to answer if buyers are going to bite the bullet.

Simon Hall, director of chartered surveyors Fleurets, concedes that the looming ban is bound to throw up many imponderable factors for the trade and some of the effects may not even become apparent until many months later.

What is clear however, is that the number of lower-end beer pubs coming onto the market looks set to increase significantly.

Churning operations by bigger pub companies and regionals such as Greene King, Marston's Inns and Taverns and others, will accelerate as more disposal pubs are identified thanks to the trading limitations that the smoking ban brings.

"I believe the property-based pub company operators are likely to continue to grow over the next year picking up the fall-out from bottom-end disposals," says Hall.

"With the Punch managed housing division shaping up to be a long-term commitment, it certainly suggests more significant acquisitions are to follow, possibly with one of the larger operators of managed and leased operators as the prime target.

"Trade-related problems caused by the ban could also flood the lower end of the assignment market where local boozers are likely to be worst affected, besides those susceptible to supermarket competition."

He adds: "Experience tells us that with change comes opportunity, and it is the good-quality operations with a clear focus and an eye for detail that will succeed."

Christie+Co director and head of public houses and restaurants Colin Wellstead predicts independent and corporate purchasers will remain active in 2007.

Wellstead believes a stable UK economy, a gentle increase in interest rates and a thriving residential market driving sales of commercial businesses mean independent and corporate buyers will remain active.

Costs not viable

The increased numbers of managed houses transferred en bloc to leasehold in 2006 will continue this year, Wellstead predicts.

He says the trend of smaller pub companies switching blocks of managed houses to lease could also be a feature of the year ahead.

"Many of the highest quality units entering the lease market today are emerging from the managed estates.

"Unless companies operate significant numbers of managed houses - between 250 and 500 pubs - the cost of operating managed divisions may often not be viable when you consider head office costs, staff liabilities and associated red tape, and sometimes do not offer the best return," says Wellstead.

Although Wellstead believes the smoking ban throws up major challenges, he says the trade should also concentrate on the possibilities it will offer.

"While the main areas of debate are about the effect of the ban on the propensity of smokers to use pubs, we should not forget that non-smokers are the significant majority in the UK," he says.

Strengths and weaknesses

Buyers will be forced to take a broad view of bulk pub-packages on sale this year, says Rodger Vickers, partner in Sheffield-based chartered surveyors and property agents Brownill, Vickers & Platts.

Vickers says the smoking ban will mean purchasers summing up the strengths and weaknesses of pub tranches on offer and assessing the attractions of the overall deal accordingly.

While bottom-end beer pubs and landlocked town-centre pubs with no pavement areas represent a concern, he remains confident that damage to trade will be minimised.

"It's not all doom and gloom for the great majority of the licensed property industry. The UK is renowned for showing initiative in overcoming issues and being a nation of inventors, and there are definite positives about the ban."

Vickers predicts that by July, there will be intense competition as each licensed property re-launches itself, intent on procuring as much trade as possible in the new era.

He says the shape of things to come is becoming apparent in pubs which have already launched outright bans.

"Licensees in my part of the world report that drinkers seen only during the festive season are coming out of the woodwork.

"They may not become regulars in terms of drinking there every day, but they are appearing more often, sometimes markedly so. Why shouldn't the same happen in town centres?" he says.

Vickers believes the industry should not ignore the new trade that the ban could encourage and believes this could also manifest itself in the recruitment of more quality staff able to work in an atmosphere where passive smoking is no longer an issue.

"Just as the disability discrimination laws proved to be workable in the trade, let us hope we find a similar way of making a virtue of the smoking ban in the coming months," he says.

Vickers predicts "churning" will continue in 2007, with big pub firms continuing to dispose of outlets at the bottom of their estates.

"The presence of smaller pub companies with different criteria is key to the ability of the larger operators to dispose of their surplus outlets in packages rather individual sales," he concludes.