Landlords who have bought pubs as an investment may start forcing rent reviews, Fleurets director David Sutcliffe has warned, writes Gurjit Degun. His comments come as the agent publishes its annual Rental Survey, which found rent reviews to be “relatively subdued for the immediate future”. However Sutcliffe called for rents to be maintained at sustainable levels for tenants to continue trading rather than failing, leaving empty properties. The report found that half of the pubs in the north of England saw rents increase, with an average growth of 17%. In the Midlands, 36% of licensees saw a rise, of 16.5% on average - by comparison, 18% saw a rent reduction by an average of 36%. Pubs in London saw the highest amount of rent reviews, with 54% seeing growth. In the south and west of England, 31% saw a rise in rent, with an average increase of 21%. Sutcliffe said: “Landlords who have bought investments will not wish to see rents continuing to remain static and may start forcing rent reviews, which could result in some further increases. “Where rents on fitted out pubs (be it on a free-of-tie or tied basis), continue to be valued having regard to trading potential, market rents should continue to be maintained at sustainable levels, particularly where there is an opportunity to reduce the rent should circumstances dictate. “In fact if all sectors considered a profits approach to valuations there is more likelihood of affordable rents being charged throughout all sectors. Whilst rent reductions may not be favoured by landlords it is surely far better to have a tenant in occupation who can continue to trade and afford to invest in the fabric of the building rather than failing and leaving a vacant property.” Sector breakdown: Tied pubs “We have increasingly seen the pub companies acting in a more conciliatory fashion,” said Fleurets. “Most rents are being agreed and in many cases at reduced levels. Pubcos are trying to keep good tenants either by way of temporary rent abatements or offering increases in wholesale discounts. This will help keep good tenants in situ and incomes will be retained rather than ending up with a vacant property that cannot be re-let even at the abated rent.” Fleurets said the fact relatively few cases are being referred to the new Pub Independent Rent Review Scheme “would suggest that there is an appetite from the pubcos to resolve matters by negotiation”. Free-of-tie pubs Fleurets said: “Generally, free of tie leases have had greater appeal in the market allowing tenants to purchase beer products outside of any tie thus increasing their margins. As a consequence of these greater margins we would normally expect higher rents than for similar properties held on tied leases.” High street bars Recent consolidation in the sector is “likely to continue into the foreseeable future”, Fleurets said. “We are also witnessing a number of secondary sites now closing and in some cases reverting back to retail use. Again, in general terms the high street market has been somewhat depressed with limited rent review activity. It is only prime locations where there has been particular demand or perceived growth that landlords have actioned rent reviews. Many are being settled at nil increases. “In addition, we have seen units that have been occupied by companies that have gone into receivership being taken over by other operators at rents well below the passing rent and in many cases now based on fully fitted units rather than on the same basis as the original shell letting.” Fleurets said a number of companies, particularly Wetherspoons, have been restructuring their leases, whereby they have entered into a new lease with fixed increases, doing away with five-year rent review patterns. “In addition, where tenants no longer wish to operate and try to dispose of their leases has been the difficulty of achieving an assignment due to excessive rents. We are therefore witnessing units being sub-let and in many cases below the passing rent, with the original lessee having to subsidise the rent for the foreseeable future.” Restaurants There is a merry-go-round in the restaurant sector, Fleurets said, with some brand owners deciding that certain locations or unit sizes are no longer suitable. They often chose to dispose of units rather than undertake the necessary £200,000-£300,000 refurbishment. “In most cases the people taking such units are new expanding operators who lack the covenant strength required by landlords who are often not keen to see assignments. Deals often have to be structured as sub-leases. The restaurant companies sometimes prefer this as it enables them to keep control of the new companies when they fail to pay their rents etc., rather than have a unit, which they have assigned, bounce back to them under privity of contract.” Fleurets said it has also witnessed assignees agreeing unsustainable rents without taking the necessary professional advice. “These have failed and reverted back to the original tenant at inflated rents. In today’s market they have to be sub-let in many cases at less than the passing rent. This can be increasingly difficult where leases prevent the sub-letting at anything other than the passing rent or above.” Nightclubs Fleurets said the nightclub sector has “probably encountered the toughest trading conditions of all sectors”. “To achieve any decent level of trade, operators have to invest heavily in what is becoming tired property stock. Whilst nightclubs have generally been valued by reference to floor area it is ultimately the operator’s ability to pay that will determine the level of rent. With these increased pressures the general trend can only be downwards.” Fleurets said that what’s required of nightclub firms has “changed dramatically over the years”. “The mega four or five roomed clubs with a late night bar with street façade and a smoking solution has been increasingly popular. Late night bar operators are looking for units that have surplus accommodation upstairs or downstairs or at the back that can be converted to clubs and allow trading on until the early mornings as the bar gradually morphs into a nightclub. “Understanding what is required (and what is not) is paramount. Pure nightclubs will generally pay a rent of £7-£12 per sq ft. Late night bar operators may have to pay the going rate for the main street facing bar (often £15-£20 per sq ft or more) but can trade surplus space that others do not want for £5-£10 per sq ft. It is for the valuer to ensure that evidence is analysed correctly to ensure that these split uses are correctly valued and not distort the true picture.” Bars in London Fleurets said the south east, particularly within the M25 where London is “considered to be a different market”. “City rents have not generally increased because there is evidence of big units being let at rents, which incorporated substantial incentives. There are some exceptions to this rule. The West End however continues to boom. “There has been some good uplifts in smaller (4,000 to 6,000 sq ft) units, which could also be used for A3 purposes. Growth in larger pure bars has continued to be slow. Most units in London however will be re-let at rents not substantially different to figure that pertained five years ago. “Many high street bars are 6,000 sq ft – 12,000 sq ft. They are too large to be taken by restaurant groups. In any event the restaurateurs do not wish to be in rowdy wet-led areas of town, even if the buildings can sensibly be broken down into three or four units. Coupled with the problems in general retail, it is difficult to see what may become of these units and what their use will be in the future.”