Property Focus – Pub buyers seek value for money

12 October 2012
Property Focus – Pub buyers seek value for money

The pub property sector in the North of the UK was much harder hit by the global recession than the surprisingly resilient South, and little has changed since. Elly Earls finds out why the market is still typified by distressed deals, lack of debt funding and a keen focus on value for money

Values in the North of the UK have dropped dramatically from their peak in 2007; indeed at the peak of the market, values in the North were in some cases twice as high as they are now - for two key reasons.

"Most of the pubs we're selling now have had no investment in them for the past five years and trade is probably much less than in 2007," says Colin Siebert, director at Colliers International Manchester. "Therefore, the fall in value is a combination of this and the falling values as a result of the recession. It's effectively a double whammy because pubs are valued on turnover and profits."

Values are also being dictated by the availability of debt funding which, at the moment, is almost non-existent.

"Deals have been trickier than last year and this is primarily down to debt funding or rather the lack of it," confirms Brian Sheldon, director and location manager at Christie & Co Glasgow. "This is certainly impacting the prices buyers will pay for a business."

Yet, while values are down 30-40% from their peak in 2007, they have remained fairly static over the past couple of years. For example, the average sales price for pubs in the North, according to Fleurets' 2011 Survey of Pub Prices, has gone from £167,526 in 2009, to £168,596 in 2010, to £153,127 in 2011.

The North-South divide - more pronounced than ever

Values in the North of the UK have always been lower than in the South, but the financial crisis has seen this gap widen significantly further.

"London, in particular, has seen strong demand from corporate occupiers and investors with deals such as Young's purchase of Geronimo and Greene King's purchase of Capital pubs showing multiples that are significantly ahead of those that might be expected elsewhere in the country," notes James Shorthouse, head of Colliers International's specialist division.

"Demand for individual assets also remains high and while it may be possible to acquire freeholds in the North of England for £100,000-£200,000, it is unlikely that anything in the South-east could be purchased for less than £400,000 or £500,000.

"Moreover, while difficulties in securing bank funding for certain types of asset are as real in the South as in the North, there is a greater appetite in the South from private investors, with funds available from both UK and overseas sources."

Yet, that's not to say that the North is completely bereft of good-quality property deals. Affluent areas such as parts of Cheshire, the Yorkshire Dales or prosperous Manchester suburbs are always of interest in the North of England, for example, while Edinburgh, Aberdeen and, to a lesser extent, Glasgow, are holding their values better than other areas in Scotland.

"In general, the areas of greater demand tend to follow the wealth of the location," says Simon Hall, head of pubs at Fleurets. "Areas with a wider economic base, with universities and a higher demographic profile, have been in greater demand than areas of lower wealth and lower disposable income levels."

"In order to sell, however, properties still have to be keenly priced," Siebert emphasises. "The levels of achieved EBITDA [earnings before interest, tax, depreciation and amortisation] must also stack," adds Alistair Letham, director at Colliers International Edinburgh. "If they do not, then it's either: no loan, no deal or a significantly lower price. Prices from 2007-2008 are already down by some 25% and where trading and/or profitability are not holding up, there will be another knock-on effect. Rarely is anything straightforward."

Distressed assets offer buyers best value for money

Distressed stock is having a huge impact on the market in the North of the UK, not only because buyers want a good deal and the distressed market is a popular arena for those buyers, but because values in the distressed market are influencing the North's property sector as a whole.

"The distressed sales are setting benchmarks against which non-distressed sales are based," Letham explains.

And for Hall, the influence of distressed stock is not set to slow any time soon. "Distressed sales of one form or another are dictating a large part of the market activity, with current sales and the prospect of more to come holding back an increase in market value," he says.

So, in terms of pricing, it is certainly a good time to buy in the North of the UK - if you have the funds in place. Indeed, a large proportion of deals are being done on lower-value properties.

"The majority of pub activity has been in respect of lower-value freehold pubs and nil-premium, free-of-tie lettings," Hall notes. "Restaurant deals have been largely leasehold and in city-centre locations, while hotel deals have been driven by the opportunity to buy at great value, often forced on to the market through administration situations.

Sheldon agrees, noting that the majority of deals have been completed on properties valued below £500,000. "Above this value, there are not so many buyers, the only contradiction to this being, say, a high-profile hotel in Glasgow," he remarks.

"All buyers value the pound in their pocket and will want to buy as much as they can for that pound."

PROPERTIES WITH POTENTIAL

Airedaile Heifer Keighley
Airedaile Heifer Keighley
Airedaile Heifer, Keighley, West Yorkshire
Fleurets is currently marketing 84-seat, food-led pub-restaurant the Airedaile Heifer on a nil-premium, free-of-tie leasehold basis with a guide rent of £45,000 per annum.

Situated in a roadside position between Bingley and Keighley, this attractive and historic property has been operated for many years as a food-led public house and, although it would benefit from a bit of TLC, has everything an enthusiastic operator would need.

The pub-restaurant which, Fleurets advises, may suit outright operation as a restaurant, also offers private accommodation, an extensive beer garden and car parking.
Contact details
Simon Hall
0113 234 0304
leeds@fleurets.com

Kenton hotel Scarborough
Kenton hotel Scarborough
Kenton Hotel, Scarborough, North Yorkshire
The Kenton hotel, which has been run by its current owners for more than nine years between the months of March and October, is being marketed by Fleurets for £295,000 (freehold and contents).

A profitable business with 16 letting bedrooms, private accommodation with two bedrooms and extensive car parking, the Kenton hotel would suit a couple, possibly new to the industry, who could build on the existing consistent trade.

The guesthouse is situated on the North Shore with panoramic views of the sea to the front, but it is not just the business's prime location which has attracted a significant amount of repeat business from regular guests, including international and school parties. The current owners have also maintained the property on an ongoing basis and to a high standard, and it has recently been refurbished and decorated both inside and out.
Contact details
David Broschomb
0113 234 0304
david.broshchomb@fleurets.com

TWO RECENT BUYERS

Spencers Leeds
Spencers Leeds
Spencers, Leeds
In June 2012, Michael Chamberlain, with the help of Colliers International, completed the purchase of Spencers - a busy, three-storey city-centre pub just metres away from Leeds Railway Station - from the Spirit Pub Group.

Prior to Chamberlain's offer, the vendor had received several offers that were either fully funded and too low, or at an acceptable level and unfunded. "After these frustrations, we advised our clients that a reduction in guide price would assist in generating a greater level of genuine interest," says Leigh Parsons, director of licensed and leisure at Colliers International.

"A short period of further marketing followed and we subsequently agreed a deal at the full revised asking price to a fully funded purchaser. Liaising with all principal parties, their lawyers and advisers ensured a smooth progress towards exchange and completion."

For Chamberlain, the location was absolutely key in his decision to purchase the characterful and imposing red brick building, which was one of Joshua Tetley's original ale houses in the 1800s. "It's in a landmark location just opposite the main railway station, adjacent to the gateway roads into the city centre, within the city's restaurant and bar and professional office area, and within metres of Trinity Leeds, a major new retail destination, set to open in spring 2013," he remarks.

Spencers, which remains as a traditional pub and is a favourite haunt of Leeds United supporters and other weekend revellers, has been redecorated and updated and is currently being traded as a free house. However, Chamberlain is exploring redevelopment plans for the venue in due course. "The second floor will be reinstated and refurbished for offices and the ground floor and cellars may be kept as is but are also available to offers for conversion to a restaurant, coffee shop, retail space or for financial services."

Steampacket Swanwick
Steampacket Swanwick
The Steampacket, Swanwick Small pubco the Pub People, which decided to buy the Steampacket in Swanwick earlier this year, plans to invest and reopen the property as a community pub, perhaps specialising in cask ale.

"It's a pub we've known for 15 years and we've seen it go through many ups and downs over the years - mainly downs - with the individual pubcos, and eventually it popped out at the bottom," says Andrew Crawford, operations director of the Pub People. "It has had little money spent on it over the years but is actually in a reasonable location and, with a small capital expenditure spend, we plan to re-establish it as a solid, community pub."

For Crawford, it's absolutely essential in the current market to identify pubs in your area that have reached the disposal bracket, and jump in at the right moment. "If you can keep your eye on what's happening in your local area, you can wait for a pub to reach that category and then it is often available for sale at a fair price," he notes.

It's also crucial to ensure that before making an offer, you have your funds 100% in place. "My impression is that the pubcos have a lot of time wasted by individuals who don't actually come up with the money," Crawford remarks.

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