Pub market recovery from 'seismic shock' will not be uniform

The specialist business property adviser’s ‘Business Outlook 2021: Review. Realign. Recover’​ report revealed that two-thirds of operators expect that it will take the pub sector up to three years to recover from its Covid symptoms.

What’s more, while almost every pub operator (98%) from a surveyed pool stated that Covid-19 had a high degree of impact on trade over the past year, around half (49%) feel optimistic about seeing some recovery in 2021. 

While Stephen Owens, managing director of pubs and restaurants at Christie & Co told The Morning Advertiser (MA), ​that he ​believes the sector’s “bounce back” will be reasonably fast, he doesn’t believe it will be a blanket experience across the industry.

"I don't think that three-year period will apply to all, I think actually some businesses will see a very quick rebound,” Owens explained. “I think the larger question mark is over the wider economy generally, what discretionary income looks like going forward to the latter end of this year. 

"If you go back to August and the Eat Out to Help Out scheme, the businesses we saw trade really well were local community businesses, restaurants and bars serving people who were working from home and who weren't commuting like they had done in the past, and in particular those tourist coastal and rural destinations where people were either taking holidays, extended breaks or day trips. Those rebounded really quite positively - probably ahead of pre-Covid levels. 

"I think those businesses which struggled were city centre operations – wet-led in particular – purely because the numbers just weren't returning to those large office populations. 

"I think we'll see a similar picture when pubs and restaurants are able to reopen,” he continued. “Particularly as we're looking at spring time – you can just see the appetite for people wanting to go back to hospitality venues.”

‘Lowest point’ in April 2020 ​

Christie & Co’s report also revealed an uptick in market activity after what Owens describes as a “seismic shock” in April 2020, driven largely by smaller, single asset transactions. 

The property adviser’s pub price index for 2020 revealed a 6.4% decrease in average prices, alongside greater demand for pubs costing less than £650k – which the report claims attracts first time buyers and independents.

These figures come as 33% of operators told Christie & Co that they are planning to sell their business while 24% detailed expansion plans for 2021 and beyond.

"I think if you look at both our value and transactional divisions, April was undoubtedly the lowest point because I think everybody had stepped away from doing any sort of transactions whether it was banks lending money or people transacting businesses,” Owens explained.

"The large M&A market was pretty much closed for the past year, but I think individual purchasers grew in confidence and particularly when they were able to open in August with Eat Out to Help Out, I think people saw the trade had rebounded quite positively.  

“I think we saw a combination of people thinking 'now is probably the time to sell, I'm not sure I want to go through the hassle of reopening' and equally we had seasoned operators and investors who thought 'actually, pubs and restaurants fundamentally when they can trade offer a good return',” he continued. “I think we saw that gather momentum as we moved throughout the year." 

Recent reports have also documented potential new investment from the likes of former Greene King boss Rooney Anand​, the recently formed Valiant Pub Company​ and the former bosses of Revolution Bar Group and Liberation Group, Mark McQuater and Mark Crowther respectively.

However, Owens has observed a combination of new money often in the form “lifestyle” buyers and existing operators also contributing to the aforementioned uptick. 

“I suppose we always find when times are difficult that we get people who make lifestyle choices,” Owens says. “I think we've seen people working from home and people not going into the office saying 'well actually I fancy running a pub or a restaurant either in my local community or in a local or seaside area'. I think those lifestyle buyers are always in the market but particularly in recessionary or difficult times. 

“But equally I think where existing operators see value and opportunity they use it as a chance to acquire businesses as well,” he continues. “I think it's a mix.” 

However, Christie & Co’s report found that irrespective of buyer type, cash has been king in the pub property market’s resurgence since April – noting a 2% increase in the proportion of cash buyers for pub properties less than £650,000, and cash offers on properties over £650,000 jumping from 44% of the total to 78%. 

"The important thing, which we pretty much picked out in the sentiment survey, was the importance of cash,” Owens said. “I think we see that cash is king in these markets – lifestyle buyers who are releasing equity from their residence or house and seasoned operators sat on some cash, are able to buy in this market when perhaps banks are being a bit more cautious."

Emergence of ‘zombies’

What’s more, Christie’s report also forecast that as Government support in the form of grants, moratoria and rates relief begins to ease, a wave of distressed assets will come to market due to “zombie” companies being unable to pay off debt or raise cash to grow.

"If you look at levels of distress, it hasn't been as great as many thought it might have been, though probably the exception to that is the casual dining sector where we were already seeing distress pre-Covid anyway and it's probably just accelerated that process,” Owens said.

"I think as those restrictions ease, and we come out of this, there's going to be a greater need for businesses to call upon cash to reopen – and I think that the easing of support is likely to lead to further distress. 

“I think what we have seen is that companies who've not been able to access cash either through Government support or those PLCs raising it through existing shareholders are the ones who've struggled,” he added. “We've seen some of the smaller companies perhaps struggle more than others in this situation."