The price is right

A shortage of quality available freeholds has led to a steady rise in pub values, according to agent Christie & Co. Michelle Perrett reports.

Pub values rose by 6.2 per cent in 2003 driven by a lack of available freeholds, according to Christie & Co's annual business report. In its Business Review 2003 & Outlook Report 2004 the agent says that demand for pubs throughout the country "greatly exceeded" supply, with freehouses being in particular demand.

But prices are not running away as the increase in pub values is less than the 8.1 per cent jump in 2002. Christie & Co says the drop is due to the fact that there are fewer quality pubs on the market.

According to the report: "The shortage of available sites has not resulted in an explosion in pub values. In most cases, vendors still have to be realistic about the price to ensure a successful sale of their business."

"I don't see it as slow-down in the market," said director Colin Wellstead. "Trading is pretty reasonable for pubs and we are finding people are tending to stick with the better quality pubs.

"The figures are all about the quality of pubs up for sale. The shortage of freehouses was driven by a number of factors, not least of which were a benign economy and an unexpectedly hot summer which meant most publicans enjoyed a good year's trading and were under no pressure to sell."

Also, there was increased pressure on the market as expanding pub companies, unable to make a major pub takeover deal, scoured the country looking for individual sites or small packages of pubs.

The strong residential market has also fuelled the sale of pubs for higher alternative-use values. This in turn has taken more freehold pubs off the market.

According to the report: "In many cases, particularly high-value pubs in cities, the development value of the site far exceeds the price that it could be achieved as a going concern."

High street​

It is not all doom and gloom on the high street, says the agent. While 2003 was notable for the continuing problems experienced by operators of high street leased sites, some operators are still willing to take the plunge.

The series of receiverships such as Old Monk and Mustard Entertainment made investors nervous about entering a market that is seen as over-rented and under-trading.

The result is that operators are taking a more selective view and will bid competitively for the right high street location on an outlet-by-outlet basis.

"One of the advantages of such sales from a buyer's point of view is the ability to cherry-pick the sites they want, often leaving behind the most unviable and over-rented sites, which are often being passed back to landlords," says the report.

Meanwhile, some pub operators which found certain high streets saturated have turned to smaller market towns to expand their portfolios. This has put them in direct competition with more traditional pubs.

Rent reviews​

According to the report rent reviews are becoming more "contentious". The agent says this is a clear indication of the widening gap between tenants and landlords.

Christie & Co says that while high rents were acceptable during stronger trading times, increased competition is hitting the bottom line and tenants are finding it harder to pay the rents.

However, landlords are still expecting a return on their investments and believe that it is justifiable to continue rental increases. The result is that rent reviews are becoming strongly disputed.

But because there has been a reduction in the number of new lettings on the market there is a lack of information about rent levels.

"With each side fighting for every penny, it is hardly surprising that rent reviews are becoming more challenging," says the report.

"The shortage of new lettings means that there is little evidence on what rental levels operators are prepared to pay, forcing rent review experts to look for alternative evidence such as other rent review settlements or information on lettings further afield."

The future - 2004​

Christie & Co predicts that as long as the economy remains strong the shortage of pub properties and the rise in values will continue into 2004.

David Rugg, chairman of Christie & Co, said: "If Britain's economy remains benign with continuing low interest rates, low inflation, low unemployment, positive GDP growth and still rising, albeit slowing, residential prices, we confidently predict that this growth in values will continue throughout 2004, driven in part by a continued shortage of quality businesses available."

In 2004, there will be more sale and leaseback deals, he predicted, plus one or two sale and management deals, as well as disposals from Spirit Group following the integration of the Scottish & Newcastle Retail estate. The report also claims that there will be many finance companies eager to buy pubs in 2004.

Colin Wellstead said: "We still expect there to be many finance houses eager to acquire pubs in 2004 and, through proactive management, maximise their income. "This may include disposals from the top of the estate as well as selling from the bottom end. However, taking into account all the activity of the past 15 years, there must come a time when there are fewer big deals struck."

Survey of private buyers​

A Christie & Co survey of private buyers who had bought businesses during the first 10 months of the year revealed that 44 per cent were first-time buyers. About 57.5 per cent of sales were freehold and the remainder were leaseholds.

A third of buyers said they intended to own the pub for between three to five years and a further 30 per cent for five to 10 years.

The previous occupations of purchasers included sales managers, accountants, police officers, a transport manager, a factory worker and a social worker.

Pictured: The Adam & Eve Tavern was leased through Christie & Co's Nottingham office in 2003.​