Leading analyst Douglas Jack, of Numis, has said the impact of the market rent only option being included in the pubs code appears to be declining.
Jack said operators were already gaining new means of minimising the potential negative consequences of the code.
The Small Business, Enterprise and Employment Bill – which includes the pubs code - is set for its third reading in the House of Lords next week. The Government has said intends to use secondary legislation to allow tenants and pubcos to agree a waiver to the MRO in the case of “significant investments” and “genuine franchise agreements”, subject to definitions.
Jack said the Government’s suggestion was sensible, adding: “As the beer tie finances capex, the MRO would dis-incentivise substantial long-term capex as it could allow the tenant to leave the beer tie in the middle of the capex cycle. We always believed franchise agreements would eventually become exempt once the politicians realised that they have no rent on which to apply a Market Rent.”
He said: “The outlook for the tenanted pub sector is gradually improving, in our view. Beer/cider sales growth was stronger in wet-led pubs than in food-led pubs in 2014, aided by an improving consumer, the FIFA World Cup and strong London trade. This has helped tenanted EBITDA to stabilise and debt to continue falling. To this, we should soon be able to add reduced uncertainty in relation to the beer tie.
“To the extent that tenants might wish to go free-of-tie (over the last six years, 98.3% of Marston’s lessees have rejected the company’s offer to go free-of-tie), there appears to be an increasing range of options to minimise the downside risk. We expect Punch Taverns and Enterprise Inns to trial franchising, with the latter also running managed pubs and considering creating a REIT.
“The proposed MRO amendments still have to get through the House of Commons. Nevertheless, their introduction is a positive development for Enterprise Inns (Add 125p), Punch Taverns (Buy 160p), Marston’s (Buy 180p) and other large pub operators, with tenanted/leased pubs.”
