Changing the house rules

Leasehold and tenanted pubs are by far the most dominant players in the trade and their hold on the market is strengthening. Tony Halstead reports

More than 50% of mainstream trading pubs are now operated by self-employed licensees paying a rent and other tied dues to their owner landlord. It's good business for bricks and mortar owners, many of whom cream off a triple bonus from their properties.

Revenues from healthy rental returns, tied drinks supply and a repairing and maintenance onus on the lessee, offers little in the way of risk for owner landlords. For the licensee, the prospect of a long-term leasehold agreement provides the opportunity to realise a healthy capital return by selling the lease on a selected date during its tenure.

But it was not always like this. During the brewer-tenanted era, agreements were rarely, if ever, assignable and it was the emergence of the new breed of pub companies which changed the ground rules. The arrival of pubcos led to rapid growth in the number of long-term leasehold pubs available. Many are now high-quality venues that are attractive to entrepreneurs and multiple operators.

For licensed trade property agents the lease market represents a large part of their business, which has accelerated even faster over the past two years because of the increased number of pubs being converted from managed to leasehold.

Cost not viable

Christie+Co director and head of public houses Colin Wellstead says more high quality pubs are being released by managed operators.

"Managed house transfers are becoming more common. This year we have handled

a number of letting campaigns for com-panies that have recognised the benefits of

transferring managed houses into their

leased estates.

"Unless pub companies have significant numbers of managed houses, at least 100 and ideally 250 to 500 pubs, the cost of operating a division is often not viable.

"Red tape and costs such as staff liabilities, utility charges and head office costs can mean managed houses are sometimes a more expensive model than the simpler leasehold tenanted operation," he adds.

"Some of the regional brewers are particularly vulnerable and they need to take a close look at their managed house estates and consider their options," he warns.

Wellstead points to the transfer of 740 former Spirit houses to leasehold by Punch, which he describes as houses with "exceptional quality." He says: "The average turnover of the first batch of 212 properties was £440,000 and we were seeking premiums of between £20,000 and £70,000 per unit.

"The second batch of 249 properties had an average turnover of £490,000 and the third batch comprising 266 properties enjoyed average turnover of £500,000," he reveals.

Despite making premium payments, Christie+Co believes the new lessees will make a profit after the initial two year non-assignable period.

The bulk of leases sold in the trade by the company are priced between £75,000 and £200,000. Premiums over this level are rare. There have been examples of assignments of about £400,000 to £500,000 but Wellstead stresses these are exceptions.

Flexibility key to attracting entrepreneurs

Admiral Taverns, one of the newer pub companies with an estate of 1,800 pubs, is

seeing a steady switch to 10-year and 20-year lease agreements.

The company has traditionally acquired houses that have simple tenancy agreements, but says more and more licensees are favouring the longer-term assignable route.

Chief operating officer Lynne D'Arcy

believes flexibility is the key to attracting entrepreneurial operators. She says: "We offer people a menu of different lease agreements so they can tailor them to their own needs and match them to the trading format of

their pubs.

"Different types of pubs require different types of lease terms and we try to offer a package which relates to a pub's trading strengths.

"For example, a rigid beer tie in a predominantly food-led house is not suitable so we try hard to work out a lease formula which works for a particular style of house," she explains.

D'Arcy feels there is still much work ahead for Admiral and the rest of the trade, when trying to attract skilled licensees.

"The pub trade still has an image problem and we have to sell our industry to entrepreneurs and move away from the old-fashioned view that it is an option for an easy life.

"Running a successful pub is hard work and requires good commercial flair, so we have to market our pubs in the right way," she warns.

Attracting the right people

Successful recruitment will be one of the key factors when determining whether the leasehold sector continues to flourish, according

to Fleurets director of chartered surveyors

Yaser Martini.

Martini says the trade is not doing enough to find new entrepreneurs to take on the pubs entering the leasehold market.

He adds: "We still do not seem to have the ability to attract the right people and there has not been any major initiative regarding recruitment outside our sector.

"People do want to take pubs and set themselves up in business, but the licensed trade has a stake in ensuring that the right calibre of recruits are used," he warns.

Martini feels outsiders still have a blinkered view of the pub trade which has to present a different image to get top-class operators interested. "There is still a reasonable rate of recruitment but the numbers are not sufficiently plentiful.

"With the quality of pubs now coming onto the leased market the climate is absolutely right for entrepreneurial operators.

"We also need to significantly increase the numbers of multiple operators, and encourage individuals to run several pubs.

"The churn of managed houses to leaseholds will continue and means more quality pubs will become available.

"We have to be more sophisticated in the way we recruit people to run these pubs,"

he warns.