Brexit and the pubs code: predicting the pub property market

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Paul Davey, managing director, Davey Co

The two principal factors that will influence and shape the licensed property market over the next two to three years are the effects of the market rent-only option (MRO) and the state of the wider UK economy.

The delayed implementation of MRO has had a significant effect on the supply of leasehold businesses to the market over the past few months. Major pub companies have already started to approach lessees with offers to acquire their leases with the intention of either converting sites to managed houses, or to fixed-term tenancies. This will reduce the number of sites available for owner-operators to acquire their own leasehold businesses and may result in an uplift in values given reduced availability. 

In addition, the conversion of tied leases to MRO leasehold freehouses may also result in improved values due to enhanced desirability and improved profitability. Sites that remain tied but take advantage of a substantial refurbishment provided by the pubco as an incentive to retain the tie will improve the standard of those sites.

The state of the wider UK economy post-EU referendum over the next couple of years is far from certain. With significant external pressures from the state of the Eurozone and decidedly gloomy forecasts from other major economies, the growth the UK has experienced is notably out of sync and could slow considerably or even go into reverse. That said, the old adage “the cream will always rise to the top” would, in my view, continue to hold true.

Simon Hall, director and head of pubs, Fleurets

Locals will continue to close as supermarkets soak up wet sales trade, social trends move towards more food-led operations, and new bigger and better pubs are developed with much higher trade capacity. Freeholds may have alternative use potential, but poor leaseholds may struggle to sell. 

The crossover between food-led pubs and wet-led or mainstream restaurants will continue to blur. Pubs will reduce in number, but food-led pubs/restaurants, café bars and gastro units will increase.

The number of venture capital-backed package acquisitions will increase. Smaller multiple operators formed in the recession will seek to expand, resulting in merger opportunities. 

There are always supply and demand issues. Pubco sales have been low for a while, but might be kick started by MRO. The pressure will be on for multiple operators to expand, but also to streamline and strip out under-performing units. Private sales will increase as demand increases.

Many purchasers who have the choice, value the security of owning their own freehold. This absorbs much higher levels of capital and reduces potential options. Operators may take advantage of the wider choice and more efficient use of capital that leaseholds provide.

Simon Chaplin, head of pubs and restaurants, London, Christie & Co

The future’s looking several shades of grey. While the direct consequences of MRO and Brexit are yet to be seen, uncertainty is plaguing the sector. However, we expect this to dissipate over the coming months, which will bring the market back to normal in the medium-term.

Another factor to look out for is any UK-wide rollout of the drink-drive limit reduction. According to a survey by Christie & Co, a year on from its enforcement in Scotland most pub owners reported a negative impact on trade with concerned about the future.

Overall, there are fewer pubs in the marketplace than there have been. While most sold sites are staying as pubs, more restaurant operators are starting to see these as opportunities to expand their brands. Similarly, the trend of restaurants becoming quasi-bar/restaurants is creating more competition, and therefore pressure is increasing for owners to diversify their offering.

With the current lending climate, freehold opportunities are the ideal preference for most buyers. However, there are more leasehold opportunities in the better locations with good potential to grow, despite lack of long-term security.

Stephen Taylor, managing director, Guy Simmonds

My opinion has always been, during the past 35 years I have been at the helm at Guy Simmonds, that correctly valued and profitable businesses, with verified accounts, should sell, whatever the external market conditions.

Sales of private free-of-tie leases are especially buoyant. We forecast this sector to grow by about 35% over the next two to three years. Similarly, freehold sales have been very buoyant. We have seen both operators, with the requisite financial resources, and ‘cash buying’ private investors secure their desired sites.

Private investors are of the view that freehold investment/income, is much less risky and less volatile than investing on the money markets.

With regards to pubco leases, the outlook is much less certain. The MRO situation continues to confuse both the general public and our beleaguered hard-working publicans. We are pleased to report that we are still recording reasonable sale levels in this tied sector for profitable businesses, and at reasonable rents.

We are also finding that, sometimes, pubcos may wish to negotiate to take the property/business back in house. 

However, it is quite clear that adverse publicity, and many over-rented/unprofitable businesses are not helping this sector generally. We can only hope that, in the foreseeable future, pragmatism will rectify this sector.

Richard Jones, manager south-west region, Sidney Phillips

The economic recovery had consolidated the licensed property market and a clear vision was appearing as to how it may perform.

The privately owned freehouse, if realistically priced, is once again in demand and has benefited from the scaling back of the corporate disposal programme. Financiers are willingly supporting applicants with sensible business plans and a reasonable deposit.

The numbers of privately owned free-of-tie leasehold pubs accelerated in the recession years. It proved practical to both landlord and tenant that a private free-of-tie lease gives the landlord a return and the lessee a viable business opportunity. Landlords continue to look favourably at these agreements with the realisation that the rent gives a better return than the majority of investments. Recent increased

market activity has seen some vendors willing to provide a second charge mortgage as the terms provide a favourable return compared with investment rates elsewhere.

The freehold and private lease market is therefore, generally, in good health. The tied lease market has the uncertainty of the implications of MRO; not good for any market and this is evident with a slowdown in the demand for assignable leases within the estates of large pub company landlords.