Freehouses: the land of the free

The already buoyant freetrade sector is predicted to grow over the next few years. Tony Halstead reports.

There are approximately 18,000 freehouses in the UK, accounting for about one third of the UK pub stock. Predictions point to this figure increasing well past the 20,000 mark over the next two years as more pubco sell-offs encourage entrepreneur buyers to become freehold owners.

Hundreds of new freeholders have already entered the trade thanks to the initial wave of disposals forced on the major pub operators, to create an emerging vibrant market.

Buyers have been able to acquire pubs, many of them closed down, at significantly knocked-down prices as the recent recession influences a new era of realism based on bricks and mortar prices rather than balance-sheet valuations.

The freetrade sector has been further boosted by a big increase in the number of free-of-tie leases, although the debate continues as to whether these pubs can accurately be classed as genuine freehouses.

Managing director of Guy Simmonds, Stephen Taylor, says the freehouse sales sector has increased this year, but the caveat applies that valuations must be realistic in order to achieve sales. Taylor says his company has been approached by numerous multiple operators and corporate clients looking to acquire further freetrade licensed outlets on a national basis.

"The freehouse and free-trade sector is extremely busy and to this end we have just engaged a further five valuers," he reports.

Taylor adds that another field of activity that is currently buoyant on a national basis is pub auctions. "The obvious advantage of this scenario is that providing a realistic reserve and guide price are set, the property will find its own level and true market value on the fall of the hammer.

"Pub auctions tend to fall into two main categories — those of the bottom end and usually closed pubs, which are generally entered into a group auction, or those sold as profitable, desirable going concerns.

"We find that holding a specialised on-site auction at the pub produces a high level of local interest, in addition to national bidders seeking to acquire a profitable going concern."

Free-of-tie leases​

Guy Simmonds specialises in creating free-of-tie leases for its vendor clients and is busy in this sector throughout the country.

Taylor says the free-of-tie lease option is extremely desirable, fuelled by demand from the company's corporate redundancy training programmes, which have built up a waiting list of applicants for a suitable outlet.

"Many of these free-of-tie leases are available at similar annual rents to the proliferation of tied leases currently on the market — but free-of-tie leases do, of course, have the massive benefit of taking advantage of the barrelage discounts available.

"To put this differential into perspective, a free-of-tie leasehold pub with a barrelage of circa 300 draught barrels would make an additional net profit of around £45,000 per annum when directly compared to a fully-tied leasehold pub offering no discounts at the same annual rent.

"Our aim is to provide our vendor clients with an initial up-front sum (premium) together with an attractive annual return on their investment, which is invariably a much higher and safer return than that achievable on the volatile and uncertain markets.

"The added benefit to our vendor clients is, of course, that they retain their property for investment, which also accrues in value as the years pass by. The sustainable rent is also linked to the RPI inflation index thereby protecting the return and investment," Taylor says.

Banks loosen grip on lending​

Confirmation of the busy freehouse sales market comes from Martin Nicholson, partner at Sheffield-based Brownill Vickers, which operates across the north of England and east Midlands.

Nicholson says good freehouse properties are always in demand, especially where vendors can demonstrate three years of accounts and present a well-run and well-maintained business.

And he says there is increasing evidence, especially over the past six months, that the high-street banks are finally loosening the brake on lending.

"Buyers still need to present a sound background and a good business plan and they have to be able to put down between 35% and 40% of the selling price. The banks will finance the remaining 60% or so, but the days when they would forward 70% or even more of the asking price have long gone," he reports.

"The market at the moment is prime for individual buyers who can capitalise on pubco sell-offs and, although the regional brewers and smaller multiple operators are still active, there does not seem to be the same number of corporate buyers out there at the moment."

Neil Morgan, head of pubs for agent Christie+Co, says pubco disposals programmes still account for a substantial volume of the company's business. He says prices continue to be competitive because of the "bricks and mortar" element, which ensures values remain on the low side.

"Three quarters of buyers currently tend to be individuals, with the remainder regional brewers and smaller operators. Another interesting factor is that 75% of buyers come from a 10-mile radius of the pub in question," he reveals.

"If current trends continue I would forecast that we could well see more than 20,000 freehouses in the UK over the next two or three years."

Simon Hall, director of agent Fleurets, says pubco sell-offs mean good deals are available, particularly for buyers looking to acquire closed-down pubs or those run on temporary management.

But he warns that the long-awaited recovery of the property market might not arrive until well into next year. "Until the full impact of the Government spending cuts emerge, I think a lot of people will hold back," he says.

Flexible purchasing options​

Graham Allman, managing director of GA-Select, says there has been a big increase in "freehouse leases" fuelled by the credit crunch.

He puts this down to the engineering of deals where freeholders offer their pubs out as free-of-tie leases with the option for the lessee to buy the freehouse further down the line.

He says GA-Select has helped to pioneer this sort of deal and has completed on a number of such agreements over the past two years.

One deal on the market is the White Hart Inn, located in the village of Lissington, Lincolnshire. The pub was on the market with another agent at £650,000 without attracting any interest.

"We have it on the market at £499,000 freehold or £49,000 for the lease with the purchase option, which is correctly valued in this market.

"The vendors have owned and run the business for 32 years and need to retire from the trade. The deal is attracting immense interest and we expect it to go under offer pretty soon," Allman reveals.

An example of a "done deal" is the Roston Inn, at Roston Village near Ashbourne, Derbyshire, which was put under offer within three days of taking instruction.

The lease went for £18,000; the freehold price is set at £325,000 if purchased within three years and the initial lease premium will be taken as a deposit against the freehold price. The vendors at this pub have been there 22 years.

Allman confirms a softening attitude to lending by some of the high-street banks.

"There is much misinformation about bank funding, but I can reveal that our panel of finance experts have access to funds from a well-known high-street bank conditional upon the experience of the applicants and strength of the accounts," he says.