Inn bed with my business

Adding accommodation to your wet and dry offer will not only improve turnover, but it could boost the value of the property itself, should you want to move on, says Tony Halstead

Pubs that can offer the three primary revenue streams of beer, food

and accommodation are becoming the jewels in the crown of today's licensed-trade property market.

Letting rooms, for so long dismissed as a mere accessory to a pub business, have shaken off their Cinderella image.

As traditional wet-trade income continues to decline, it's the pub offering a completely rounded and comprehensive business that is increasingly likely to produce the fastest and most lucrative sale.

Major operators such as Whitbread were among the first pub-based companies to recognise the potential of the budget letting-room market, giving birth to the motel-lodge era.

Now operators, large and small, are going down the same route and discovering overnight guests can be a valuable replacement for absent beer drinkers. And in an era when licensees are paying rent for every inch of their property and are faced with sweating for every pound of profit, extra income from new sources can be a godsend.

What's more, pubs are ideally placed to compete against grander and more expensive hotels still demanding £80 or more per night for a room that is often a bland square block in a modern town-centre building or A-road setting.

Paying guests are increasingly looking for the individuality and casual environment that a pub offers for a night's stay.

And any licensee able to offer a clean, comfortable room for, say, £30 or £40 will quickly find he has plenty of takers when the attraction of a cask-ale bar or quality pub food is also taken into account.

Overnight guests come in four main categories today. They comprise predominantly the contract builder or tradesman away from home on a job; the commercial salesman en route to see customers; the tourist and leisure user; and, finally, the more affluent guest. Those in this latter category are prepared to pay handsome rates to stay in historic coaching inns or prestigious country hostelries.

It's abundantly clear that the UK's rich diversity of public houses is more than able to accommodate any one of these categories of guest.

Licensed trade property agent Graham Allman of GA-Select says this market is ready and waiting as long as a licensee or pub operator has the necessary rooms or unused space to be converted into letting accommodation.

"My guess is that as much as 50% of pubs have under-utilised space, the funds to provide rooms and the energy to do it," says Allman.

Opening letting rooms, of course, comes with the usual statutory health warnings that precede any new venture. Apart from relevant planning permissions and consent from a pub-company owner, anyone going down the accommodation route has to stop and consider whether they are suited to this type of business.

The investment to build new rooms can be expensive and furnishing them with the right quality fixtures and fittings can also drain the bank balances. You also have to consider whether you have the right sort of hospitality culture to work the longer hours that servicing commercial rooms and looking after paying guests demands? If you can tick all the boxes and provide the right marketing to sell your rooms, you are quite definitely in business.

"Converting existing rooms in a pub building is one obvious way to capitalise on this market, but how many pubs today have redundant outbuildings or even barns they can develop?" asks Allman.

"Initial costs might seem steep in many cases, but, apart from room income, there is also the incremental revenue from extra bar and food sales to consider. All in all, letting rooms in pubs can contribute a nice little earner in times of reducing volumes," Allman points out.

Martin Nicholson of Sheffield-based agents Brownill Bateman says the more rounded a business the better its chance of a quick and successful sale. "In my view, a pub that can offer wet trade and food together with letting-room income is a more robust business.

"The changing pub environment of today means that a licensee who can display a business enjoying several different income streams is going to stand a much better chance of selling it, than one which relies on simply wet trade with perhaps a bit of food thrown in," he says.

"Even a pub that can offer only three or four letting rooms at, say, £30 per night can accrue very useful income, as long as occupancy remains healthy, and it all adds to the saleability of a business at the end of the day," he adds.

Let and live let

Pubs that already offer quality, budget-price letting accommodation could be winners in what may well be a difficult summer for the UK economy. As the sterling-Euro exchange rate remains weak and the slowdown in consumer spending continues, many Britons could opt to holiday at home this year.

"Higher air fares, airport chaos and the weaker pound may mean a boost for the home tourist economy," predicts Ian Taylor, negotiator with charted surveyor Fleurets.

"Licensees looking to add or make more of their letting rooms may have timed things just right," he says. "The leisure market continues to change and those pubs with smoking areas, car parks, dining areas and letting rooms will be the best placed to cope with changes in the law and lifestyles."

Taylor reports an increase in enquiries from buyers looking for businesses with letting rooms. "They are attracted by the good GPs that can be achieved, and those making full use of letting rooms will also enjoy the associated additional revenues, such as dining and drinking trade," Taylor says.

Neil Morgan, director of pubs at Christie+Co, says alternative income streams can make a significant contribution to a pub's bottom line.

Competitive rates

"Although pubs have provided accommodation since the days of the coaching inn, the present climate has pushed more operators into providing bedrooms at competitive rates," Morgan says.

"A number of pub companies have recognised the potential of letting bedrooms and have built portfolios of pubs offering accommodation, such as Punch with its range of Good Night Inns in its Spirit managed-house division," he adds.

"Barracuda, the managed-

pub operator, has also taken initial steps into the lodging market, opening three sites

with bedrooms over the past nine months. Other companies such as Young's, Shepherd Neame, Greene King, Charles Wells and Thwaites have also gone down the same route."

Morgan reports that the improvement in quality pub food was also having a positive impact on the desirability of opening letting rooms.

"Operators offering high-quality food with competitively-priced accommodation can attract customers who are looking for something with character, rather than what may be perceived as soulless national-chain offerings," he points out.

For operators who have no scope to develop rooms in existing premises or outbuildings, the chance to buy up nearby property remains the next best option.

Limited outlay

"For individual purchasers a small number of letting rooms can generate significant profit for limited outlay, which is also likely to be reflected in the sale price achieved when the property changes hands," Morgan says.

Buyers like to see depth in a business when they size up likely pubs for purchase, says Paul Davey, managing director of agents Davey & Co. Letting rooms add significantly to the potential of a proposed sale, but not every licensee makes the most of the opportunities.

"I frequently visit pubs where the owners recognise the value of adding three or more letting rooms to their premises, but have not seized the opportunity to do so.

"This can be a huge opportunity as, apart from initial refurbishment and fit-out costs, nearly all the income derived from rooms goes straight onto the bottom line of a business," Davey points out. "This is due to the fact that there are