For the UK’s licensed property market, it could well be that the only way is up. Neil Morgan, national head of pubs at agent Christie & Co, has mapped sales trends against the last recession and believes “we’re right at the bottom of the market” predicting that values will start to climb from 2014.
Responding to comments from a multiple operator in northern England who expressed frustration at not being able to buy the right sites (see below), Morgan said that the north’s recovery was lagging behind the south where signs of an upturn are already evident.
“The phones have been red hot since we put 11 Pubs ‘n’ Bars sites on the market last week,” he said.
Traditional freehold freehouses suitable for food-led operations are generally in short supply, however.
“Those who bought pre-2007 will still be under the water in terms of the debt to value equation, while those who have bought post-2007 will have purchased the pub out of administration or from pubcos and won’t be selling. So the pubs now on the market are more likely to be wet-led than food houses.
“And any independent looking for these kind of sites will be competing against regional brewers that weren’t willing to pay the price before 2007 and stored away the cash. Now they’re buying at low multiple values, squeezing independent multiples out of the market.”
Morgan says that the period since 2007 “absolutely mirrors” the 1989 to 1995 recession, and there is a “line of hope” from 1995 to 2001 “which suggests the market will begin to recover from next year”.
“Administrations have slowed and we’re coming to a tipping point, I think, but it will be a slow recovery, not a hockey-stick return, and we won’t get to the multiples we had before.
“The average price for a freehold was £235,000 last year compared to an average house price of £192,000, and I can’t remember any time when those two figures were so close.”
Operators in the north, too, are likely to have a different experience to their southern counterparts. “The rule is that recession starts in the north, and recovery starts from the south,” says Morgan.
But according to George Walker, director at agent James A Baker’s Birmingham office, “the divide is not entirely black and white”.
“The north and Midlands have significant amounts of pubs competing for a diminishing market share in areas where traditional industry has disappeared or diminished and many are being sold.
“But the number of buyers is limited and obtaining funding is challenging. The market in these areas is very price sensitive while values in the South, especially London, are unpinned by higher property prices and the alternate use market.
“But this doesn’t mean there are not development opportunities in the north, there are just fewer of them and prices achieved are less.”
Simon Hall, Leeds-based director of Fleurets, affirmed that the northern freehold market is “still very active, although the volume of transactions is down from the peak in 2009 to 2011.
“For the last five years the market has been dominated by pub company and administration sales,” he says. “Vendors who don’t have to sell generally don’t.
“There are signs, though, that this may be starting to change as bigger and better quality units come to the market and, more to the point, are being sold.
“But it is still a split level market. At the top end a few very high quality sites are being sold in off-market deals at very high prices.
“The same principles and forces are at work in the south,” he continues. “The average sale price is higher because it’s supported by alternative use values, a lower level of supply and stronger economic conditions, but it’s still based on a need to sell.”
Hall looks to a recovery of the housing market to trigger an improvement in the licensed sector.
“It would lead to greater confidence, increased spending, higher demand and the ability to release a source of equity that people can tap into to buy a freehold or leasehold pub.
“A few thousand fewer pubs would also help by reducing the supply side,” he adds.
Expansion difficulties
Phil Strong, chief executive Chameleon Bar & Dining, a successful operator of six large food-led pubs in Lancashire and West Yorkshire, told M&C Report of his frustration at not being able to find the right sites for expansion.
“The marketplace is very slow,” he said. “Generally, pubs are marketed as a distress sale, for financial or lifestyle reasons. Punch and Enterprise have only been selling small businesses at the bottom end.
“Add to that the fact that it’s difficult to get funding, and prices have come down a lot. Where once you were paying eight, nine or 10 times annual profit, now it’s five or six times.
“The exceptions are for good businesses in better areas, which are not so hard to sell and go for a higher price. In fact we’re struggling to find a good deal on freeholds. We’re looking but the prices are unattractive.
“In time there will be more good businesses on the market, and I’m looking to managed pubcos to review their estates. But it won’t be a quick turnaround. I can’t see it being substantially different for two or three years.”
