Staying power

If your letting rooms aren't being exploited to the max, you could be missing a trick. Tony Halstead shows you how to be perfectly accommodating

The letting accommodation business is in buoyant mood at the start of 2007, whichever sector of the market you care to examine. Hotels, B&B properties and pubs with letting rooms are generally experiencing high levels of room occupancy. Demand from buyers is on a high and property values are rising accordingly. Put a good-quality small hotel or pub with rooms on the market and there will be no shortage of prospective buyers knocking on the door.

Tourist areas and city centres have long been the jewels in the crown for the hotel business, but now location tends to play a lesser role so long as the demand for accommodation is there.

Traditionally, the sector is divided into three distinct customer categories - business travellers, tourists and weekly contract workers.

Set up the right kind of offering to service any one or more and you should have a flourishing business to sell at a good price when the time comes to move on.

Rooms with a brew

If one particular strand of the accommodation market is on a roll at the moment, it must be pubs with letting rooms.

Licensees are quickly discovering that income streams from overnight guests is no longer a mere addendum to the overall business. A continued drop in wet-trade business - set to be compounded by the summer smoking ban - means that hosts need to look hard at capturing new financial yields. Paying guests can provide just that - not only with revenue from the room rate, but also from the incremental sales of food and drink which come as a result.

Steve Rodell, associate at chartered surveyor Fleurets, says: "Demand for pubs with letting rooms is high and many operators now see the introduction of accommodation as a positive addition to the bottom line and subsequently the value of the property. The diversity of the income stream offers the potential for added security and protection against downturns in any one area of the business."

Michael Eaton, associate director at the Exeter office of Christie+Co, says the south-west has experienced strong sales as buyers realise the value of the additional income they can provide, but he warns that merely opening up one or two rooms to guests may not provide sufficient financial return.

He says: "The income from one or two rooms may not warrant the hassle, but usually, four or more rooms means the style of business changes to encourage trade. This means that costs level out and sensible prices prevail."

Despite the boom in the pub letting-room market, it seems that many licensees are still shy of capitalising on the financial benefits they bring.

Martin Nicholson, partner at agent Brownill Vickers & Platts (BVP), believes that licensees aren't making the most of the extra space they have. "I think licensees have to look hard at what they have upstairs and make the most of any redundant areas," he says. "Letting rooms are playing an increasingly important role in a pub business and more and more buyers are approaching us to find properties offering this all-round type of business.

"Customers want the more laid-back at-mosphere that a pub provides and prefer it to the more formal atmosphere of a branded hotel. Midweek trade from businessmen or contract workers can provide valuable income, while weekends offer mileage in the 'eat, booze and stay' package.

"I would say that letting accommodation is now so important to a pub that, in some cases, you could be talking between 20% and 30% of turnover," he reveals.

BVP has recently marketed the historic George at Piercebridge in Northumberland, a 19-bedroom pub with bar, restaurant and large function room. The freehold of the former London & Edinburgh Swallow Group property was put up for sale by its head landlord, inviting offers of £750,000.

Nicholson reports that, within days, an offer exceeding this amount had been received and general levels of interest had been exceptional. "Whenever we market a pub that can offer wet trade, food business and letting rooms, it flies off the shelf," Nicholson confirms.

Corporate involvement

An increasing number of corporate buyers are looking for pubs with letting rooms, reports Colin Wellstead, head of public houses and restaurants for Christie+Co.

Companies look at these as managed houses to take profit from the rooms or to lease out where a lessee pays enhanced rent to reflect the increase in income.

"A significant profit can be made, as most costs are already covered by the pub, so it is a way to increase profit on a managed operation or enhance income from a leased pub," says Wellstead. "A pub with letting rooms often fills the gap between a traditional hotel and a purpose-built budget hotel. Most people staying in pubs are looking for a more personal feel as opposed to the remote functionality of a budget hotel. They are not necessarily looking to drink late into the night, so there is often little change to the business operation."

Guesting game

National hotel values are rising steeply, with the average freehold price in 2006 equating to £70,000 per bedroom, compared to £51,000 the previous year, reports Steve Rodell from Fleurets. "Perhaps a more important statistic is that the average price was equal to around nine times net profits, which remains unchanged since 2005," he says. "The average price of a leasehold hotel equated to around £16,000 per bedroom, compared to around £10,000 in 2005. Again, the important statistic is that the average leasehold price was equal to just over twice the adjusted net profit, compared with around one and a half in 2005."

Although Rodell says care must be taken in interpretation, these statistics confirm what has generally been reported. "Demand continues to outstrip supply for good-quality hotels with a proven track record," he adds.

Capital investment

The advent of the 2012 Olympic Games in London is already changing the pub profile in the east of the city. Olympic developments are bringing in streams of contractors and the demand for cheap, unfussy accommodation is growing.

"There is a growing trend in the London area for pubs to add letting rooms," reports Simon Helm from the London office of Christie+Co.

Licensees are also thinking about the summer smoking ban and searching for new sources of income beyond wet sales. "They want to bolster revenue through dry sales and B&B accommodation, and as the trend grows, I expect to see more gastropubs with a mini boutique hotel offering," Helm predicts.

Income from letting accommodation can often provide more than just an ancillary

boost for a business, although currently, many hosts still look to their rooms as a simple bolt-on to the overall operation. Even a pub with just six letting rooms on an 80% occupancy charging £50 per night can yield a useful £1,680 per week.

With a return like that, letting out rooms could be the best move you ever make.