Separate approaches
One reason why pubs let fully-fitted with the bar in place are valued using the profits method is because they’re ready for the tenant to take the keys and start trading almost immediately.
A high-street pub or bar, by contrast, will generally be let as a developer’s shell with bare concrete walls and floors, and capped-off mains services.
The tenant will then have to spend several hundred thousand pounds fitting out the property to suit their individual trading style.
This does not necessarily mean if the property is already fitted out, however, it should be valued using the profits method. I have been involved with high-street bars that have been largely fitted out and valued on a rate-per-square-foot basis. Adjustments have been made to reflect the savings the tenant is likely to make compared to whether they’d had to fit the unit out from a developer’s shell.
Whether the lease is free-of-tie or not is an important consideration as to which method to use. This is because traditional pubs tend to be let on tied leases where the landlord benefits from income, not just from the rent, but also the tie.
As the pubco’s income is directly linked to the turnover of the pub it makes sense that the rent is based on the profit a reasonably efficient operator should be able to generate from the pub.
By contrast, high-street pubs and bars tend to be freehouses and the landlords of these types of properties, which tend to be property companies, insurance firms or pension
funds, do not get actively involved in how the pub is run. They are interested solely in the income generated by the property in rent.
At a rent review or lease renewal it is important that the appropriate method is adopted. For example, I acted for a major pub operator on a pub in a retail and leisure scheme.
It was let as a shell and was free-of-tie. As a result, I valued it on a rate-per-square-foot basis by looking at the rents paid on other similar licensed premises in the area.
The landlord’s agent looked at it in the same way but also tried to estimate the turnover — and therefore the rent — on a profits basis as a cross-check. The arbitrator dismissed this argument as he did not think a profits-related valuation was relevant to the property.
Comparables focus
Whichever valuation method is used, it is vital to refer to comparables. Sometimes, when using the profits method, valuers rely on market norms, and their opinion, and ignore evidence available in the market, which may show something different. Even if using the profits method, it is important to consider the turnover and levels of profit generated by similar properties in the area. This is to ensure the rent calculated is realistic and that any over or under-trading due to the particular operator is disregarded.
It may be appropriate to use either method to establish the market value and in some cases to use both as a cross-check.
Most importantly, however, regardless of which method is used, the valuer must dispassionately stand back and consider what the market would pay for the property. In today’s market, that can be the biggest challenge of all.
■ Jonathan Essex is senior surveyor at Colliers International