Pub property polarised
Simon Hall, director and head of agency at Fleurets, says since the enforced closure of hospitality venues at the end of March, the pub property market has become increasingly polarised.
“The very top end prime sites are still in demand, although very few owners have been prepared to sell,” he tells The Morning Advertiser (The MA). “I had one deal in a city centre that before lockdown, I had an offer at £2m, we continued negotiating into lockdown and ended up doing the deal at £2.5m.
“Was this impacted by Covid-19? Would they have paid more or less if Covid-19 hadn’t happened? No one can say, but my view is that this deal would have happened at this price regardless, so in effect there was no effect from the pandemic on the sale price."
Hall adds that the other end of the scale has seen increased activity off the back of the pandemic as well as greater demand for low value freehold pubs that are suitable for conversion.
“Here we have experienced several contract races, several best and final bidding situations, sites that were sticking now generating offers and being sold,” he continues. “Most interest has been for residential conversion. The market has seen this as one sector where demand hasn’t fallen and as a result is a relatively safe and attractive investment opportunity.”
Reduced middle market activity
The main area of activity involving trading pub operations has involved nil premium, free-of-tie lettings, Hall continues.
“Here the landlords have been willing to grant rent free and stepped rent periods to reduce operator exposure to the lower levels of trade anticipated during the period of social distancing.
“These deals have been progressed, all be it with some caution, due to the ever-changing guidance and prospects for recovery.
However, Hall explains that the middle market, where the value of a business is determined by the profitability, has proved more challenging amid the ongoing crisis.
“Here vendors, like at the start of the financial crisis in 2008, aren’t under pressure to sell due to low interest rates, mortgage holidays, Government grants, Government loans, the Coronavirus Job Retention Scheme (CJRS) and business rates relief etc, so they aren’t prepared to accept a price that the buyer is prepared to pay. As a result, there is very little activity in the market.”
Pressure to sell as support winds down
Hall, however, forecasts increased activity in all areas of the pub property market as Government support is wound down and operators are put under more financial pressure to stand on their own feet.
“We are aware of several cash rich buyers waiting to take advantage of an increased supply of vendors needing to sell,” he explains.
According to Altus Group, one-off cash grants for hospitality venues with a rateable value less than £51,000 cost the Government £882m during lockdown.
What’s more, more than four in every five (83%) hospitality operators furloughed at least 90% of their staff during the novel coronavirus crisis, with 96% of sites putting more than 70% of workers on the coronavirus job retention scheme according to CGA’s Business Confidence Survey.
‘Slight’ expansion anomaly
Hall adds the number of new openings and a ramping up of in some operators’ merger and acquisitions strategy has been a surprising turn in the Covid-19 pandemic.
“As a slight anomaly, we are seeing increased numbers of new openings and an increase in the number of acquisition requirements being promoted.
“This is evidence that well-funded multiple operators and eager to use the present market conditions to expand their portfolios.”
Such acquisitions include Three Joes’ purchase of 14-site strong pizza chain the Stable from Fuller’s in early June.
Discussing the deal, Three Joes’ co-founder Tim Hall said at the time that he believed the sector could yet see more merger and acquisition activity as operators seek to focus on reopening core estates ahead of subsidiary brands.
"As boards of larger businesses start to focus on the reality of reopening huge trading estates, they're more likely to be thinking that smaller subsidiaries are a distraction to them, and therefore they would be likely to divest themselves of them,” he said. “But, there's not long to go before people are going to be reopening.”
Increasing interest
According to Stephen Owens, managing director of pubs and restaurants at Christie & Co, pubs came into their own during lockdown with many finding ways to keep active. “These outlets are now being rewarded, as those working from home make use of their local which many had forgotten,” he tells The MA.
“Over the past few months, we’ve seen more and more pubs and restaurants opening on a weekly basis with sales following an upward trend, albeit it from an initial low base. This has been helped by the cut in VAT and, in particular, the Eat Out to Help Out Government scheme, which has resulted in busy trading in the early part of the week.
“Buyer appetite has followed a similar trend, this is reflected in the Christie & Co’s new Buyer Registration Index, which shows a 64% increase in buyer registrations for pubs and a 67% increase for restaurants since the initial easing of lockdown restrictions.
“This increased interest has translated into transactional activity, with 55 deals being agreed by Christie & Co on hospitality premises alone since the beginning of April.”
On top of this, Fleurets’ saw viewings increase six-fold during lockdown. According to Hall, in the first 10 weeks of lockdown viewings averaged per week, however in the past 10 weeks to 10 August, this climbed to 30 per week.
Additionally, the number of pub property details downloaded doubled from 18,000 in the first four weeks of lockdown to 37,500 in the four weeks to 10 August.
Town or country?
According to Owens, one of the noticeable pub sector patterns during the Covid-19 pandemic is an increased preference for more rural, community based, operations.
“Business for pubs in city centres remains quiet, as office workers are mostly either working from home or are still furloughed,” he explains. “The fast-casual dining sector has felt the brunt of this, with hardly a day going by without another restaurant group entering into some form of restructuring process.
“Community, tourist and rural locations have performed better, particularly those with large external areas and the ones which can and have successfully dealt with social distancing guidelines.
“At Christie & Co, we’ve noticed a particular increase in buyer interest in community-based operations - those pubs and restaurants which have accommodation and those which are located in tourist and rural areas - as customers seek staycations and short breaks in the UK and many buyers seek opportunities for a lifestyle change.”
Subjective values
Paul Davey, managing director of Davey Co explains his agency is currently seeing a trend towards highly subjective and very site-specific values.
“A number of client operators are reporting sales over the past few weeks are well up on the same period last year,” he explains. “Some clients are seeing trade at 60% to 80%, some sites are yet to reopen.
“Accordingly, market sentiment, demand and pricing closely follow how the subject sites are performing under the current restrictions.
“An assessment over likely winter trading performance is also a factor determining market appeal.”
Marked increase in post-lockdown activity
“During lockdown the pub property market was effectively paused across the board with, unsurprisingly, very little activity taking place,” Davey explains.
“The only real exception to this was that we did continue to receive a number of enquiries on for sale stock and viewing requests slowly began to stack up pending the ability to arrange site visits.
“We lost very few transactions from our sales agreed pipeline, a single figure percentage in fact and these deals began to move forward again as lockdown measures were lifted, notably on the same terms and pricing as agreed prior to the 20 March."
However, following the reopening of pubs on the 4 July, Davey Co has seen a marked increase in activity with viewings, offers and new sales being agreed.
“The profile of sites in greatest demand are market towns, suburban, community, village and destination pubs and inns,” Davey continues. “There is not a discernible regional trend but more so specific location, trading style, business mix and size. Those sites offering depth in the business in terms of wet, food, accommodation and outside trading space facilities are in highest demand.
“Private leases where the freehold owner is looking to sell the business on a new lease at a premium and with an option to purchase the freehold are unquestionably the most sought after.”
