Keeping the faith in buy-to-let pubs

One could be forgiven for assuming that the failure of London & Edinburgh Swallow Group (L&ES) which, I believe, precipitated the collapse of Provence, would rock the integrity of the licensed property investment market. But frankly, this is simply not the case.

The business models of both L&ES and Provence were remarkably similar. And yet they differ fundamentally from the mainstream private investor sector, which is based upon the principles of commercial reasonableness and sustainability.

The old adage 'if it looks too good to be true, it probably is' has never been more pertinent than when applied to the business models and investment offerings of both L&ES and Provence.

A proposal to investors of more than double the returns available from the commercial property sector, and upwards of four or five times that available from the residential investment market, certainly appealed to the greed of the ill-informed investor, as much as it did those who facilitated the transactions - the banks and the auction houses.

It also appealed to the greed of the protagonists, the seller and operators, far more than it did to any sound commercial judgement they may have had.

The simple fact is, however, that pubs can represent a great investment opportunity and provide an important diversification to balance an investor's property portfolio.

As I said in The Publican in September, with yields on residential property investments languishing at around three to four per cent and with mainstream commercial property at five to six per cent, the attraction of buying into licensed property yields of eight to nine per cent continues to drive investment in the sector.

Clearly each new investment opportunity needs to be considered on its own merits: price relative to rental income; rental income relative to sustainability; sustainability relative to trading performance; trading performance relative to rental growth; covenant strength relative to the lessee/operator's experience and track record of success.

This approach is far more sensible than merely snatching at the headline investment statistics quoted in an auction catalogue, and cuts the risk of the investment failing.

There are many opportunities to acquire pubs capable of offering a sound investment in terms of yield.

One investment proposition does stand out from the crowd - that of the private owner/operator leaseback. Differing distinctly from the corporate model, the private owner/operator leaseback permits single investment opportunities to be judged with a far greater degree of transparency.

The owner wishing to sell his property as an investment, with themselves as the newly incumbent lessee, would be unlikely to be willing to do so if he did not believe his business could afford the rent he is offering in order to support the integrity of the investment.

The investor would be allowed to consider the strength of the trading entity by inspecting the trading accounts - and this in itself permits an assessment of the covenant strength of the lessee.

Subsequent lessees would be subject to the approval of the investor as landlord, who would be able to meet, see references and previous/ existing business accounts, as well as having sight of a business plan for trading in his investment prior to issuing consent to assign.

In summary, I believe that the integrity of the pub investment market, which despite recent events has experienced very few corporate failures, remains intact.

Momentum, if anything, is continuing unabated.

Paul Davey is managing director of property agents Davey & Co ​