MyShout

With pubcos continuing to buy freeholds, Colin Wellstead wonders how long the market can keep shrinking

There are approximately 18,000 freehouses in the UK but, as the demand for freehold pubs continues to increase, the quality and quantity of pubs coming onto the market is changing quite significantly.

The freehold market was largely created over the last century by brewers selling off individual units. These brewers tended to own a number of pubs in the same area, often including two or three pubs in the same village, and would choose to sell off their less successful pubs, particularly those in rural areas. Typically, these pubs would be the smaller properties, ideally suited to owner-operators. Historically, this was how the freehouse market was made up.

Twenty years ago, breweries would only look at buying freehold pubs at the top end of the market to operate as managed houses. More recently brewers and pub companies have become more demanding and less discerning as they seek to acquire public houses to operate under lease/tenancy agreements.

Following the Monopolies & Mergers Commission's Beer Orders Report in 1989, there were even more freehold sell-offs. Small community pubs which had previously underperformed were acquired by local entrepreneurs who, with a bit of enthusiasm, could reposition them, putting them back on track and turning them into successful businesses.

During the last five years, we have witnessed an expansion in the type, quality, volume and location of the freehold pubs that pub companies are willing to acquire. Rather than focusing on acquiring pubs at the very top end of the market, they are now acquiring lower-quality units to add to their leased/tenanted estates. The quality of units they are prepared to consider is expanding and they are also willing to widen the geographical net by buying pubs in rural areas that they would have avoided in the past. Areas such as the Yorkshire Dales and the Lake District are now sought-after, as well as previously less favoured areas such as West Wales and parts of Scotland.

In fact, pub companies are prepared to consider acquiring any pub capable of making a reasonable return. As quality freehold pubs are bought out of the market, creating shortages, pub companies are being forced to make purchases further down the quality scale in order to expand their estates.

Freehold units with redevelopment potential are being taken out of the industry altogether, having been acquired by property developers with the capacity to obtain planning permission for a variety of uses.

The cost of acquiring individual pubs has also risen significantly over the last few years: now it is not uncommon for pub companies to pay more than £1m for an individual pub which can be converted to a lease or tenancy. Only a few years ago, £1m pubs would only be acquired for use as managed houses.

Pub companies continue to churn their estates in a constant effort to improve quality - an activity which releases some freehold pubs onto the market.

Although the number of pub companies has diminished, the appetite for individual pubs hasn't. One must question how much longer the market can cope with the disappearance of 200 to 300 freehold pubs into corporate ownership per annum without this significantly affecting the overall freehold market.