We report below on Fleurets – the leisure property specialists – annual review of the public house sector which, though it “carries on in spite of adversity”, is described by MD Martin Willis in much more optimistic terms:
“Today, we find ourselves in a much more positive environment than we have experienced for over five years.
“Instead of daily reports of doom and gloom and the cynic’s death knell for the industry, we now have daily reports of positive performance, new companies, prize winning licensees and growing markets within the sector, such as traditional real ales.
“We reported our optimism in the sector back in 2008, and each year since, despite the doom mongers. We are pleased that our faith in the sector and our predictions have both been proven correct.”
The bad news is behind us
The bad news about the licensed trade has been exhaustively reported:
- The smoking ban
- The duty escalator raising taxes above inflation
- Wages and power costs rising above inflation
- The general recession inhibiting spending power
- Off sales undercutting the price of on sales
But well run pub companies have coped with this and have been announcing increased like-for-likes in the managed sector and less bad like-for-likes in the tenanted/leased sectors.
The positives for 2013 include:
- Pubcos have outperformed the FTSE 100
- The ALMR announced that small owner/run companies increased like-for-like sales by 4.9%
- The ALMR announced that the running costs of a public house stabilised in 2012
- Bar & Restaurant insolvencies fell in mid-2012
- Fewer pubs are closing (down from 40 to 12 per week)
- The elimination of unviable pubs improves the potential of those that are left
- 71% of public house tenants said they were happy with their landlord
- Regional breweries and smaller pubcos have benefited from the sales by the larger pubcos
- The larger pubcos are getting their debts down to more manageable levels
Public House Sector Breakdown
The public house sector encompasses traditional public houses, bars and pub/restaurants. Increasingly there is a crossover between these formerly distinct subsectors.
This trend is evident in the growth of food sales with now 80% of all traditional public houses offering food. This trend has also seen growth in the sales of wines and soft drinks, which has partially offset the decline in beer sales, which have fallen 28.4% since 2006.
The three sub sectors of the public house market can be broadly identified as:
- Predominantly wet driven local inns, often run by owner managers under a lease or tenancy agreement (traditional public houses)
- Town centre venues, mostly occupying converted shop, office or bank premises and often branded e.g. Yates’s (bars)
- Large destination food venues, again often branded and catering for families e.g. Harvester (pub/restaurants)
The market is further complicated by the operational format with managed, tenanted or leased outlets. Typically traditional public houses occupy largely suburban, village or rural locations. Pub/restaurants in the managed sector tend to occupy the better and more prominent main road or suburban locations, or within retail/leisure parks. Some private sector pub restaurants have more remote destination locations and are heavily reliant upon established reputation. Each market and sub sector has demonstrated distinct variations to the effects of recession.
Managed House Sector
The managed house sector continues to drive the wider pub market. Trading performance and transactional activity have recovered strongly. Trading statements from both National and Regional managed operators show well managed, well invested pubs are generating positive like-for-like (LfL) sales growth. London is said to have done particularly well over the past couple of years.
The growth of food sales has also been a significant driver of total sales growth with food sales now accounting for almost half of all sales at Mitchells & Butlers. Whilst food sales at other major pub operators remain lower, the trend is consistent.
Competition for sites suitable for operation under management is thus strong, with existing operators and private equity investors all seeking sites, with prices demonstrating continued growth, well ahead of the rest of the market.
Tenanted/Leased Sector
Whilst the managed sector performs well, the tenanted/leased sector continues to suffer the greatest from the effects of the economic recession, decline in consumer spending and the oversupply of ‘bottom end’ traditional public houses. Rental levels, particularly within tied leases, also remain under downward pressure.
Large tenanted Pub Co’s, such as Punch, Enterprise & Admiral, have tackled their large debt levels by the disposal of significant numbers of poorer quality sites, where future trading potential as a public house is seen as limited.
The recent economic pressures on the trade have resulted in high volumes of property disposals by the tenant pub companies whose estates have fallen sharply in size over the last 3 years. Indications are that this trend is likely to continue for the next 12 months at least.
As a result of the supply of ‘bottom end’ public houses, the alternative use market has remained buoyant with the number of sites sold for alternative use accounting for 54% of freehold properties sold by Fleurets during 2011 (up from 50% in 2010). Residential development is the dominant alternative use, accounting for 47% of transactions (down from 50%), followed by
retail developments, which accounted for 26% (up from 14%).
Transactional Activity
Group transactional activity has slowed down in the past 12 months, but there are rumours of larger deals in the offering and these are likely to surface in 2013.
In the current economic climate, a key driver to achievable price and required marketing period is the availability of funding to prospective purchasers. The likely category of purchaser is of prime importance. The established corporate operators continue to have readily available funds.
Contrary to this, privately owned companies and individuals are presently less able to secure financial backing. A number of traditional lenders have become increasingly cautious of the sector and are reluctant to support new ventures or customers. Leasehold interests held on rack rental terms have experienced very significant declines in value and are now considered by many lenders to be unacceptable security for loans.
Whilst freehold properties continue to be traded in mixed market conditions, many transactions relate to distressed assets where sales may be adversely affected by the absence of trading information, operation under temporary management or restricted timescales. Prospective vendors not obliged to sell are more inclined to put off sale decisions and await better market conditions. As demonstrated by the market over the last 3 years, a steady stream is anticipated of distressed sale properties coming to the market in 2012/2013.
Fleurets in the Market
Fleurets has a particularly close relationship with the public house industry and has done so for nearly 200 years. Its current involvement includes directors being consulted at all levels, not only by those owning and operating public houses but also in advisory roles with organisations that are
consulted by Government or make representations on industry wide bodies.
For further information on Fleurets, visit www.fleurets.com