Christie & Co's annual report is optimistic that 2022 will bring refreshed investment strategy

03 February 2022
Christie & Co's annual report is optimistic that 2022 will bring refreshed investment strategy

Rates, VAT and rent rises and the end of government support are squeezing operators, but Christie & Co's annual Business Outlook report is optimistic that 2022 will bring a refreshed investment strategy across hotels, restaurants and pubs.

After two years of tumult, property adviser Christie & Co's industry experts have considered what may happen when the last gasps of government support come to an end, and who might be in a position to benefit from an industry turned on its head.


Carine Bonnejean, managing director of hotels at Christie & Co, said the removal of the testing requirement for travellers entering the UK was "a game-changer" for the market, and as a result she expects to see more international buyers exploring opportunities.

She said investors were still very interested in London hotels, despite the low occupancies the city has seen during the pandemic but the real change had been in the increased demand for regional leisure assets.

"The appetite is still there, it's just that nothing has really come to market," she says.

A lack of opportunities, particularly scale opportunities as operators hold off selling to focus on reopening and benefitting from the summer staycation boom, created competition for deals, and in some instances pushed sales above asking prices. Christie & Co's hotel price index for 2021 saw a moderate recovery, with average prices increasing 4.3% on 2020. Last year the group saw a 50% increase in deal volume versus 2020 and a 30% uplift in the number of offers received.

Christie & Co's Business Outlook report suggested transaction volumes were likely to increase in 2022, with the end of government financial support schemes potentially leading to more distressed assets. However, a wave of distressed activity that would have a significant impact on pricing was described as unlikely, although some larger-scale opportunities may come to market.

"Since we've been back, there have been rumours in the market and people approaching us for due diligence on off-market opportunities of scale – you can see the signs just in the last two weeks," said Bonnejean.

"And it's not just single, regional assets, it's going to be large transactions, £50m-£100m-plus. We're going to see more of that in the UK, where a lot of the activity is centred."

She said this would include portfolios of hotels, with the group seeing more activity than this time last year, many of which were portfolios of "national reach".

"Some have lender influence behind it," she said. "The market is strong and there's lack of stock, so it's a good time to come out. People are starting to think about strategy for their portfolio and thinking it might be a good time. The bank needs a bit of cash back, they need some money to invest in Capex, so they need to have a strategy and think about what to keep."

Christie & Co predicted that demand for business and international travel is likely to pick up in 2022, which may lead to a correction in domestic leisure demand and average daily rates (ADR). However, recovery in occupancy, notably in corporate destinations, may be further delayed into the second half of the year. The report suggested ADRs would remain high to absorb some of the cost pressures, with operating margins still being affected by economic pressures, staffing shortages and payroll increases.

Christie & Co also forecasted that buildings that can prove their sustainability credentials will be highly sought-after, although the development pipeline was likely to slow due to rising construction costs and limited financing appetite.

"It has an impact on yield and how much they're willing to pay for it as well," said Bonnejean. "On the larger transactions with institutional funding… it's among the first questions now, ‘what is the asking price, where is it located, what about the ESG [environmental, social and corporate governance]?' and if they see any kind of certification, that's ticked the box already. It's become one of the few criteria that are critical for some properties and some investors."


Harsh trading conditions and the end of eviction protection measures in March make it likely the restaurant sector will see more casualties in 2022, but the favourable terms available for new tenants will provide opportunities for emerging businesses.

Christie & Co's Business Outlook estimates some 10,000 hospitality businesses have closed in the past two years, with the pandemic costing the top 100 restaurant groups approximately £660m in lost revenue. Simon Chaplin, senior director – corporate pubs and restaurants at Christie & Co, said: "This year will be interesting, I think there are a number of restaurant operators who are going to be close to the wire. It has been a tough couple of years and a lot will depend on landlords. If landlords want to get tough, they will start to act."

Chaplin said a pressure point could be on the horizon as rents and rates come in alongside a VAT rise and increased costs across the board. When eviction protection measures end, landlords could start proceedings against tenants, particularly if they are under pressure from their own lenders. But Chaplin says this is a lengthy process that can end up before a court and may be unappealing to some.

Prices continued to fall in 2021, with a 12.9% decline recorded by Christie & Co. Landlords seeking to fill sites are continuing to offer incentives such as rent-free periods and contributions towards fit-outs, easing entry into the market for smaller players and pushing some existing operators into traditionally higher value locations for the first time.

Despite a number of business failures, 2021 did not see a glut of properties come to market.

"Some sites are not on the market as they're being held until the market improves," says Chaplin. "But the stock emerging has been interesting and we are starting to see property being advertised in the likes of Soho and key West End locations, which for years have never hit the market."

Despite a challenging backdrop, there are opportunities in the sector, with takeaway and delivery continuing to perform well off the back of 30% growth during the Covid pandemic. Chaplin anticipates this growth will be sustained with relaxed planning rules leading investors to increasingly consider property for solely takeaway use.

Chaplin explains: "For many takeaway and delivery saved their bacon. Dark kitchens will keep on going. People have got used to sitting in front of the television and ordering and that's going to stay particularly as the quality of food on offer has got better, the packaging has got better and there are now so many different ordering systems available."

Chaplin also expects to see an increase in franchised businesses and quick-service restaurants, which both saw growth in 2021 as a means of expansion with lower capital outlay. There are now more than 48,000 franchised businesses in the UK, up 25% in a decade.

Suburbs and market towns are expected to remain popular locations as employees spend less time in the office. Chaplin explains: "People are being encouraged to go back to the office two or three days a week, but they're still at home two or three days. People are arranging things so that they won't have much dwell time when they are in the office – they just want to go and pick up some lunch.

"I think the medium-sized market town or smaller city is something that is now very attractive with people working from home and having that cheeky lunch nearby. Manchester, Leeds, Glasgow and Edinburgh will still be problematic during this year, but it will come back. It always does." He adds: "There are pressures ahead and operators need to get clever. I think we'll see operators making better use of their resources and making more money. They'll need to make more profit, as lack of staff and increasing costs will drive them down that route. Clever operators will do better, but those who are lazy and flabby may fall by the wayside."


The market for pub sales remained buoyant in 2021, despite the challenges the sector faced. Christie & Co transacted some 375 individual hospitality businesses in the year and Neil Morgan, the firm's senior director, pubs and restaurants, expects this level of activity to continue.

"We had a tremendous year for individual pub sales. It was a similar story in 2020, which I appreciate is counter-intuitive," he says. "As a valuer and agent it's hard to sift through what is a normalised year, given the turmoil in the past two years. It's a jumble in terms of how you read accounts at the moment, but at present there's a lot of activity."

The Business Outlook reported that pub sales volumes were up 103% on the previous year, which was another strong year as people turned to property as a safe investment. Some 47% of these properties were sold to private buyers and 87% were purchased for continued use as a pub. Coastal properties were the most sought after, driven by staycations.

"When 2007 happened and there was the downturn, interest rates were bolstered, but this time interest rates have remained low so lending is easy to get, provided you have a sound business model," Morgan explains. "When there is uncertainty in the economy, people gravitate towards property and that's exactly what we've experienced during the pandemic."

Margins were driven by premiumisation, Morgan adds, and operational efficiencies. He says that the pandemic also enhanced creativity, with operators exploring every possible revenue stream to bolster their business.

Morgan says: "People are looking more for multiple income streams and have embraced outside space. Previously people hadn't looked at their gardens outside of the summer. I've been hearing of some operators getting up to £50,000 out of their garden alone in a week."

After the acquisition of Punch by Fortress this month, Morgan thinks that in the main the market will be dominated by smaller transactions, below £10m.

"We're continuing to work with RedCat on its expansion, while the Restaurant Group is also continuing its expansion plans. Pubs are some of its most profitable assets. In fact, red was the colour for us last year. We sold Red Mist Holdings to Red Lion Holdings, which was the first deal of the year. Red Oak then acquired a portfolio for Charles Wells and we then acted for Red Oak on a portfolio for Hall and Woodhouse. We then sold Little Britain to RedCat."

Image: Adobe Systems/Shutterstock

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