The View... Market Reality Check

25/11/2015 - 14:12
The licensed property market is undoubtedly in far better shape now than it has been for the past few years. However, how does it manifest itself in reality for pub operators looking to buy or sell? Paul Davey, Managing Director, Davey Co, Specialist Licensed Property Business Agents & Valuers explains.

Firstly, rental values. The general trend for rent reviews and the view on setting rents on new leases has been a remarkable switch from unrealistic, aspirational and unsustainable rent demands to a wholly reasonable downward shift. The penny has finally dropped with the major pub company and property asset rich brewers that an unsustainable mix of high rents and tied supply agreements is toxic – both for themselves as landlords and their lessee owner operators.

The accepted rule of thumb for a fair maintainable rent is 10% of net annual sales. Thereby, if your net, not gross, annual sales are in the order of £350,000 your rent should be around £35,000 per annum; £250,000 net sales £25,000 per annum: £750,000 net sales £75,000 per annum. There can be site specific reasons to shade this up or down, but our data across our five offices over the past few years has shown this to be an accurate assessment of the substantial leased market segment.

If a lease is tied, for as long as that trading arrangement may continue under pending legislative changes, this may in reality have a minimal effect. A fair maintainable rent is by definition, a fair maintainable rent. The emerging strategy of the major pub company and brewers is to try and convert exiting lessees, or proposed assignee lessees, to switch to a traditional form of short term tenancy and tied supply agreement. Lessees and buyers beware.

The issue here is that lessees own their businesses, short term tenants do not. The length of tenancy may be shorter and be absent the usual liabilities of a longer term lessee, usually 1-3 years in duration, but all you will ever own is the inventory of fixtures and fittings. If you significantly improve the trading performance of the business, you are not building future value for yourselves to sell on, all you own and can ever sell is the inventory alone.

Conversion of leases to managed operations is also in the ascendancy for the major operators. However, economy of scale in terms of operational viability dictates that these conversions only usually apply to sites that are already, or are deemed capable, of achieving net sales of well over £1,000,000 per annum in order to stack up.

The free trade sector is in very good shape and growing rapidly. Values, determined by multiples of adjusted net profitability or EBITDA (Earnings Before Tax, Interest, Depreciation and Amortisation) are improving but not rising sharply. The improvement in the market is more accurately reflected in achieving realistic asking prices through significantly improved market confidence and thereby evidenced by an increase in transactional volumes rather than a spike in values.

The unprecedented low interest rate environment we have experienced for some years will undoubtedly change soon. This is, however, likely be gradual, over time and manageable and we believe it is extremely unlikely interest rate rises alone will present a significant roadblock to an otherwise sustained economic recovery.

As for the year ahead, our view is the market will continue to perform well, confidence will continue to grow and values will firm up albeit with no significant change on multiples. In other words, if you want to see significant improvement in the value of your business, you must significantly improve your trading performance. That said, make no mistake about it, if you have a good business there is a good market for it and you will achieve a good price for it.

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