Commercial landlords are offering the “the most flexible lease regimes ever”, according to a new study, but how does this translate into the pub sector? John Harrington talks to the experts.
Is now the right time to take a commercial pub lease? Recent evidence suggests that tenants have the best chance yet to dig in their heels and insist on favourable terms, as landlords demonstrate their eagerness to avoid being stuck with un-let properties.
According to the British Property Federation, the body for property owners, commercial landlords are offering “the most flexible lease regimes ever”. The group’s Annual Lease Review and a separate study from the Investment Property Databank (IPD) found the average rent free periods in leases increased to 13.4 months in 2010/2011, a rise of 2.6% for retail businesses. The proportion of leases with break clauses increased from 29.4% to 31.1%, while BPF says landlords are increasingly willing to offer shorter leases. As for rents, the group says these have fallen in real terms by 37% over the past 20 years, for shops at least.
BPF chief executive Liz Peace says the property industry has “significantly changed the variety of its offer” since the early-1990s recession, when the institutional lease, featuring onerous terms such as upward-only rent reviews and no break clauses, were commonplace. “Landlords are increasingly flexible and retail property leases continue to adjust to economic conditions,” she states.
Positive signs, but what does it mean for the pub sector? The BPF survey does include licensed premises, but a more thorough picture can be found in Fleurets’ latest Pub Rental Survey, which looks at rents at free-of-tie community pubs and high street bars. This paints a gloomy scene for landlords, pointing to opportunities for would-be tenants looking for a good deal
Fleurets’ survey found that most areas of the UK experiencing a decline, flattening or - at best - modest increase in rents in 2010 against 2009. Even in London, traditional free-of-tie pubs in the West End were the only category to report significant growth (5.11%), to £95,716, between 2009 and 2010 - rents here increased 22% since 2005. Rents actually fell, year on year, in the City (-1.04%) and outer London (-0.99%); across the five years they increased 12% and 17% respectively.
Elsewhere, regional variations were pronounced. The Midlands saw strongest growth, with average rents reaching £47,088, up 1.73% on 2009 and 19.5% over five years. The south west/Wales experienced a more modest 0.67% hike in the year, to £48,932, a 9% increase since 2005.
High street bars performed even less well, with year-on-year rents down in all three regions of the capital (1.9% in the West End, 11% in the City and 5% in outer London). Fleurets said there’s evidence of re-let properties having rents below historic levels, and limited evidence of new lettings during the past 12 months. Outside London, rental rises have been lower than inflation across the past five years (1.4% in the south east, 3% in the Midlands, and 5.5% in the north - the south west and Wales saw rents decline 2.1%).
Fleurets director David Sutcliffe said the current economic difficulties are “arguably the worst” in the 26 years the agent has produced its survey. “What started in late 2007 is still with us four years later and still having an impact on rental values. Given the current Government spending cuts, rising taxes and persistent inflation, it is difficult to predict when we might start to see an uplift commencing.”
He predicts a possible uplift in rental values once positive results from major managed pub companies filter through to the property market. However, “this may be some time away”.
The flip side is that it can be a good time to be a tenant. Christie + Co head of pubs Neil Morgan says operators are using their expertise to renegotiate leases and rents with landlords, with many venues available at nil premium. “To further safeguard their investments, many landlords will also be prepared to renegotiate on rents, or even offer long rent-free periods.”
There’re also isolated cases of landlords being willing to let sites on reverse premiums. Grand Union, the highly-regarded London-based multi-site operator, negotiated a “massive” reverse premium, along with an 80% rent reduction for the first two years, at its site in Paddington, held on a private lease.
For Ross Kirton, director of licensed and leisure at Colliers International, the picture is mixed, even within London. “Broadly speaking, the market has polarised with London and the south east remaining high on a number of occupiers’ target towns list; trading in the capital has remained resilient with substantial premiums still being paid.
“Well-located properties of good configuration continue to attract strong levels of demand and as a consequence, we are seeing operators agreeing to RPI linked reviews on new leases and in some cases receiving either little or indeed no rent free period at all. However, those properties which have been closed for some time and/or are situated off pitch are being offered with substantial incentives to an in-going tenant.”
BNP Paribas senior director Nigel Ball, who advises large pub companies on rent reviews, takes a similar view. Speaking at the MA250 conference, he highlighted impressive lease terms recently achieved by operators - for example, Orchid achieving a 25% rent reduction, and a nine-month rent-free period, at the Wenlock & Wessex in Islington, London. But Ball stressed that such deals would be harder to come by today.
He highlighted BNP forecasts of rental movements, which show that a period of negative growth that started in 2008 is expected to end some time this year. Rental growth will hit 4% by 2014, with a hefty 7% uplift predicted for central London by that time (the figures relate to the retail sector, but Ball expects pub values to follow similar lines).
“It means you have to look harder for these [good] opportunities. These opportunities will probably be outside the London market.”
Ball’s advice is to play hardball. He gave the example of JD Wetherspoon, which negotiates no rent increases for five years, with a 5% hike in year five. (The company is also targeting sites in smaller towns, where freeholds are easier to come by and represent better value for money.)
Ball also hit out at RPI rent clauses on pubco leases, saying operators should try to “eliminate” them “all together”. To support his claim, Ball showed a slide that showed that RPI rents climb steeply against market rents over the past 11 years or so.
It may be an odd thing to say in these difficult times, but for the rental market at least, it seems that operators have never had it so good; the immediate future may be a little less rosy.
