Many leisure operators are missing a trick when it comes to their property portfolios. Property – whether leasehold or freehold – is all too often viewed as a challenge to overcome, rather than something to exploit. The property market has experienced a post-recession renaissance and portfolios need to be reviewed from top to bottom.
Many operators will have property at the top of their focus when assessing business development. They will consider the occupational costs of running their business
not only as a KPI but also as a risk as we see rents increase, not only in central London, but also in the suburbs. Additionally for those growing businesses, the scarcity of good sites combined with rising rents and premiums, is a key consideration of any business plan. For smaller businesses especially, finding sites is almost always the biggest challenge.
It is important to look beyond your business and at the wider influences. The property sector has been transformed by a number of factors, which, when combined, create a competitive market that presents opportunities for good operators to capitalise in a way never seen before – not even at the peak of the market in 2006 or 2007.
It’s not just about London. The well-publicised boom in the capital’s property market has been caused by investors from all over the world who see it – especially in prime locations – as a safe haven. They have piled in and invested significantly in London property. However, as the market has become more competitive, many are looking further afield at other locations for investment opportunities.
Soft spot for leisure
The breadth of these investors is diverse and ranges from sovereign wealth funds to ultra-high net-worth individuals; private equity property funds; and overseas opportunity funds. Finally, and not to be underestimated, the UK pension funds and institutions are aggressively targeting property spanning all asset classes.
All these property investors have one thing in common – they like leisure. We are all leisure consumers and have an inherent instinct as to whether the business, the concept and even the location is successful.
This soft spot for leisure is reinforced by the sector’s strong underlying property fundamentals: long lease lengths (often coupled with strong covenants), excellent growth prospects, strong alternative
occupier demand for sites, and, quite often, visibility of trading performance.
Pubs, for example, are a classic illustration of why investors like leisure property. They are predominantly institutions – they have often traded as the same use for hundreds of years and offer a very secure long-term income with the added security of strong underlying bricks-and-mortar value.
It is this long-term stability and growth that property investors are chasing. The UK institutions, which are the most competitive buyers outside central London, like occupiers who will sign long leases and offer indexation-linked uplifts. It is very difficult to replicate inflation-proof returns in almost any investment class outside property and this is the reason for increasing proportions of investment funds’ capital being allocated to property.
Unlock property portfolio values
There is, however, a disconnect in the market, which is allowing savvy investors to take advantage of some less switched-on owners and operators, who are often lethargic when it comes to their assets and not actively looking to capitalise on their underlying value. Indeed, many do nothing until they are approached by a buyer and then accept the first offer that is put to them. This is a crucial mistake because there are numerous ways in the current market where more informed operators, with the right advice, can use their property to strengthen the business and protect their best assets against rental uplifts.
Sale and leasebacks are increasing greatly as investors look to unlock value from their property portfolios while maintaining operating locations. This is fuelled by significant market growth, rising freehold values and, in London in particular, huge premiums being paid for a wide range of sites. Many of these sale and leaseback arrangements are on the basis of fixed, often index-linked uplifts,which are beneficial for all parties involved – the operator protects its business from open market reviews and potentially huge rent hikes and the investor receives guaranteed growth throughout the term. We have also seen a boom in ground rent deals as institutional investors, particularly from home soil, look for innovative ways to acquire index-linked investments with surety of income. The low-risk nature of these assets means buyers can pay exceptionally low yields and be left with businesses with very strong cash flow. These arrangements are an intriguing proposition to operators and we are exploring ground rent and quasi-ground rent arrangements on behalf of a number of corporate clients across segments of the leisure sector.
Conversely, operators with short leases are looking to buy in freeholds to secure their occupancy, particularly in locations where competition for sites is intense and leases are changing hands for substantial premiums. We have been involved in numerous transactions where we have introduced a third party to fund the sale and leaseback transaction, providing the operator with a new lease, possessing a long term and protected rental growth.
Exciting phase
Tenant break clauses also offer an opportunity for businesses to engage landlords and agree reverse premiums or substantial rent-free periods. Landlords are very keen to guarantee lengthy unexpired terms, particularly outside London where tenants possess much greater bargaining power.
Additionally, with over rented property, the value of both the property asset and the operating business are compromised and there is often the opportunity to re-gear leases to the benefit of all parties. We have recently advised on two portfolios where an opco and a propco worked together to add value to both.
There is no doubt the leisure market is in an incredibly exciting phase and we have seen a significant number of operators and investors taking advantage of the potential in the market and the numerous ways they can maximise their property’s value.
Mark Sheehan is managing director of Coffer Corporate Leisure. He has led many corporate projects across the leisure sector and advised operators and investors on projects worth in excess of £2bn
