The Pubs team at CBRE give their views on the inclusion of a market rent only option in the pubs code and look at opportunities and challenges for the pub sector:
The Valuers’ View
Siân Tunney - Senior Director, CBRE
The value of leased and tenanted pubs will be subject to a whole raft of different considerations if the MRO is enacted. Currently, value is derived from three income streams being rent, beer margin and machine income. A multiple is applied to the income based on comparable transactions of similar property.
The ability of the tenant to opt for a MRO, creating a pure property income, will change the dynamics of the market. The type of pub which will suit conversion could attract a wider pool of buyer and value could be enhanced. The type of buyer who may buy a free of tie pub might compare the income to that derived from a tertiary retail or industrial unit where net initial yields are closer to 8%.
The value of pubs which make successful tied operations will be of greater interest to those operators whose skills lie in maximising that value and consequently the multiplier for those may also improve. The legislation could crystallise improved value in the sector.
The Agents’ View
Paul Breen - Senior Director, CBRE
Pub companies looking to dispose of units individually can expect to have excellent liquidity for those assets that are let on free of tie market rents, something they would usually only get when selling with vacant possession.
Until now, pubs let on substantive tied agreements have only been sold to other pub companies, which is rarely carried out on an individual basis, or to developers who are looking to secure vacant possession at the earliest opportunity as most buyers view the beer tie as too complex to try and manage.
Pubs which are let on free of tie agreements will appeal to a broader buyer pool from individual local investors to large financial institutions which we expect to be positive for pricing.
The Analysts’ View
Simon M Johnson - Business Development, CBRE
On the announcement that the MRO amendment had successfully been introduced into the Small Business, Enterprise and Employment Bill, equity and debt analysts understandably concentrated on the likely impact on the two largest companies affected – Enterprise Inns and Punch Taverns.
Initial analysis took as its base the much reported figure that a tied landlord who moved free of tie could be around £4,250 better off – and the assumption was made that this would be at a similar expense per pub converting to the pub companies – thus up to £24m for Enterprise Inns and £17m for Punch Taverns. However, the reality of the timescale before implementation, the lack of clarity within the amendment as to the mechanics of any such change, the likelihood of tenants choosing to go free of tie and the response of all the pub companies affected has meant that views have been revised.
Analysts at Barclays looked at some of the mitigating factors that might be introduced (the removal of discretionary concessions and reduction of central and in the field support costs) – meaning that the impact of PBT could be less than 10% on either company. At Cenkos, the focus was that “the MRO option will encourage the return of the entrepreneurial landlord who has a different returns profile to that needed by an existing pubco”. All analysts are agreed that we are entering a period of uncertainty and potentially opportunity for the pub companies.
