The South-east of England is one of the most profitable regions of Europe in which to do business, and consequently the effects of the economic downturn have been felt less there than in other areas of the UK. Ben Walker reports on what this means for the property market in the restaurant, hotel and pub sectors.
London is the economic powerhouse of the UK, making the South-east of England as a whole one of the most profitable regions of Europe. However, property prices have held up better here than in other parts of the UK: investors are happy to take a long-term view of the hotels sector, and there is plenty of competition for sites in sought-after areas
South-east England is one of the nine official regions of England: it comprises Berkshire, Buckinghamshire, East Sussex, Hampshire, the Isle of Wight, Kent, Oxfordshire, Surrey and West Sussex. It has the 14th-highest gross domestic product (GDP) per capita in Europe, according to Eurostat, the statistics office of the European Union.
The dominant influence on the region's economy is London, which records the highest GDP per capita in Europe as well as the largest population. Taken as a whole, therefore, this densely populated, affluent and cosmopolitan corner of England is one of the most profitable regions of Europe in which to do business.
Consequently, the effects of the economic downturn have been felt less there than in other areas of the UK.
"If you live in London or the South-east and you're in employment with a mortgage, low interest rates mean you probably feel better off now than you did two years ago," comments Graeme Bunn, a director at chartered surveyor Fleurets.
For hotel operators, London is the most profitable location in the UK. According to TRI Hospitality Consulting's survey of chain hotels, during the 12 months to February 2010 hotels in the capital reported an average gross operating profit (GOP) margin of 46% compared with 31% for hotels outside the M25.
Average GOP per available room in London was £60.56 - more than twice as much as the amount achieved by the sample of branded hotels in the rest of the UK (£28.43).
The economic downturn and high barriers to entry have undoubtedly slowed down the London transaction market in 2010, although significant single-asset transactions - the Stafford, St James; and Park Inn, Russell Square - were put away at the end of last year.
Interested parties, including sovereign wealth funds and high net worth individuals, continue to hover, attracted by the decline in the value of the pound against the dollar and the euro, and a growing perception that values have bottomed out.
"Buyers from Russia and South-east Asia, who are likely to be cash buyers, are looking for London hotel assets and taking a longer-term view on price," says Henry Jackson, associate in the hotels and leisure department of Knight Frank.
Activity is hampered by the lack of available stock. In some instances valuations are not coming in at the levels that enable deals to progress. There is a difficulty in getting properties to value-up, so vendors are happy to sit on their assets.
This lack of product makes London an extremely competitive market, hence the strong interest in the Park Inn Hyde Park, which has attracted more than 40 viewings since the 188-bedroom hotel was put up for sale at the start of March for £35m.
Good-quality freeholds which are trading at a sufficient level for management - £15,000-plus in weekly turnover - are being sold quickly off-market to companies such as Fullers and Youngs. Other active buyers in the South-east include Greene King, JD Wetherspoon, Shepherd Neame, Orchid Group and Hertfordshire brewery McMullen.
"There is still good appetite for freehold corporate disposals in the South-east. Fullers has put around nine on the market - perhaps they were tenancies with a poor history of rent collection that have a higher intrinsic property value," says Bunn.
Nearly half (42%) of all freehold transactions through Fleurets last year went to alternative use. Some former pubs are knocked down to make way for small supermarkets; others have become doctors' surgeries, police stations, nurseries and car washes.
Fleurets is marketing a number of Scottish & Newcastle freeholds, including the Windmill in Lambeth, south London, which has an asking price of £450,000.
More freehold corporate disposals will come to market this year, but to a lesser extent in the South-east than in other parts of the country. Licensed property agent and broker Christie & Co is marketing 150 Admiral Taverns pubs countrywide, of which about 20 are in the South-east. The sites, which have not previously been on the market, are almost all freehold and range in price from £100,000 to £600,000. There are also still some Punch Taverns freeholds available in locations including Stratford, London; Reigate, Surrey; and St Leonards, Sussex.
A much cheaper route into the pub trade is to buy a leasehold, which means you are effectively buying the business and not the property. Christie & Co is marketing a number of Scottish & Newcastle Pub Company "free-of-tie" 15-year leases in South-east locations such as Banbury, Askham, Harleston and Holbeach. The minimum capital required ranges from £24,000 to £27,000, which includes fixtures and fittings, a quarter's rent deposit, an allowance for stock and glassware, working capital and legal fees. Rent will increase annually in line with the Retail Prices Index and be reviewed every five years.
In the restaurant sector, food sales in London and the South-east account for nearly two-thirds of the total UK market. Total sales and market share are both rising. Food service data provider Horizons says that restaurant food sales in London and the South-east increased from £3.72b in 2007 to £3.88b in 2009 when they accounted for 61.9% of the UK market, compared with 58.9% two years previously.
About 90% of restaurants available are leasehold and the predominant choice for the buyer is between initially paying more - a premium - for a sought-after location, or less - nil premium - for a former high-street chain restaurant or an empty unit in a leisure centre or new development.
Well-located restaurant units are currently being sold and more quality sites are being brought to market by vendors who have put their plans on hold for long enough, says Simon Chaplin, director of restaurants at Christie & Co. Although buyers generally have the upper hand, some prime London sites have recently resulted in competitive bidding.
The former Segafredo café on Baker Street attracted 12 offers before being sold to a small multiple operator. Similarly, the Suburban bar and lounge in Fulham attracted a number of viewings and was sold to a private buyer for a relatively high price. The former Hamburger Union in Islington was also recently bought by Gondola Group for conversion to its Bar & Burger brand.
Demand is not as strong for sites outside London, although the best locations in Canterbury, Tunbridge Wells, Sevenoaks and Brighton are sought after, says Chaplin.
There are plenty of corporate disposals available at nil premium for £50,000 to £75,000. These are often former Pizza Hut, Zizzi, Prezzo or Wagamama restaurants on commuter-town high streets which were fitted out at considerable expense just a few years ago, Bunn says. Some are being sold to individual buyers, predominantly operators of Chinese buffets and Indian or Italian restaurants.
A new operator will want to strip out the front-of-house decor and give the restaurant its own identity so this expense will need to be considered. On the plus side, kitchen equipment and back-of-house tend to be of a very high standard in corporate units.
Rob Meadows, acquisitions and disposals agent at licensed property experts David Coffer Lyons, advises looking closely at the terms of the lease, however. The restaurant chain in question may have decided to close the restaurant because the rent was unsustainable for their concept, but may still be contractually bound by the landlord who is keen on retaining it as the head lessee. The restaurant chain may therefore be sub-leasing the unit to mitigate its losses. If an individual restaurateur takes on a sub-lease and does reasonably well, selling it on after four or five years can be problematic as sub-leases do not usually have the right to renew.
"For the independent operator, large restaurants can be large liabilities and with potentially higher-than-market rents, they may not be a good bet," he says. A much better bet is to take over a going concern or a failed independent restaurant which would also be fully fitted and reduce the requirement for capital expenditure.
Prices have fallen in London and the South-east but not as much as elsewhere in the UK and premiums, as previously highlighted, are still being paid, particularly in key London locations such as Soho, the South Bank, Shoreditch, Marylebone and Notting Hill.
"There is a current perception that assets can be had for next to nothing, yet spending perhaps more than you anticipated on an existing restaurant in a good location is much better than going into a shell. At least you know everything's there, such as the extraction system and the premises licence," Meadows advises.
"Restaurant leases of small sites in Soho are still changing hands at substantial premiums and when you take into account refurbishment costs, the investment can start to stack up. However, a good operator should be able to pay this back in the short term," he adds.
Landlords of leisure centres or out-of-town developments want to see units occupied and successful, rather than lying empty, hence the offers of rent-free periods of up to two years - six months in the best locations - and contributions to fit-out costs.
"Landlords are looking for concepts with long-term stability so the purchase price isn't always the deciding factor," says Chaplin, highlighting that businesses moving into such units are in a strong negotiating position.
David Haining and Alejan Merino bought St Stephens Guesthouse in Canterbury, Kent, for an undisclosed sum off a guide price of £70,000. The property was marketed by Christie & Co.
The previous owners had decided to retire after a number of years in the industry but wanted to retain the freehold of their 12-bedroom guesthouse. They asked Christie & Co to assist by creating a commercial lease and sourcing a suitable buyer.
As a result, a number of offers were received and the successful buyers were Haining and Merino. Haining has many years' experience working in the industry, having started his career as a night porter at the George hotel in Stamford, Lincolnshire. Having gained experience in a number of hotels, including the Hilton and more recently as a reception manager at St Giles, Heathrow, Haining and his partner Merino decided to buy their own business.