Careers & Property: A bad time to take a tenancy?

Speaking at a recent BII seminar, Pat Walker of Brighton-based licensed property agent AW Gore had some no-nonsense advice for any lessees in the audience thinking of assigning their pub: don't. At least not for a while.

"My strong advice is to batten down the hatches and hope things improve," he said.

Strange words coming from someone who makes his living selling pubs, but of course we live in strange times.

The credit crunch and falling domestic property prices have made everyone nervous - although there are some putting a brave face on it.

Predictions that at least 4,000 estate agents will close this year caused Chris Day, international managing director of Christie & Co - one of the big two licensed property agents - to come out and insist that the slump in confidence in the housing market is not mirrored by business property agents and that pubs continue to sell.

"We anticipate more of a 'plateauing' than a crash," he said. "The house price index has started to fall but we believe there will be a less dramatic change in business property markets.

"Fewer novice operators are entering the market and for this reason we believe the market is less susceptible to changes in the residential market."

Still, that touches on the worry that newcomers to the industry will be prevented from taking a pub because the price of their home is falling."The slowdown in the housing market has, of course, had an impact on the tenanted and leased sector, as new entrants traditionally rely on equity released from their house sale to fund the business," says James Shorthouse, head of valuations and special projects at Christie & Co.

"However, for potential lessees who are able to release equity by remortgaging, or who are prepared to be realistic in their expectations for the selling price of their house, there are great opportunities in the current market. New leases and assignments of existing leases are available on good-quality pubs at sensible prices."

In fact, according to Scottish & Newcastle Pub Enterprises (S&NPE) acquisitions director Andrew Cannons, the first months of 2008 have seen "a large number of properties on the market, driven by a number of factors".

Price inflation, for instance, has squeezed profits for some licensees who have decided to call it a day, while "those at the top of their game have been thinking it might be good to sell before any economic slowdown impacts".It depends where you go in the country, though.

"While things are still fairly busy in areas such as the North and East Anglia, we are not seeing the same levels of activity in the South," says Cannons. "There, people who might have thought of selling but don't have to are deciding to hang on rather than get less for their pub than they think it's worth."

As far as prices are concerned, he thinks good pubs with sustainable businesses will continue to command a premium but he expects a new "air of reality" to enter the market.

"The underlying price of pubs has been buoyed by high prices in the residential sector," he says. "So uncertainty in the residential market should begin to have a knock-on effect on the pub market.

"In the meantime, it's important not to over-pay for any pub purchases," he advises potential buyers - if you need to be told.

The other small matter anyone contemplating taking a lease or tenancy must take into account is, of course, whether they can survive as a publican in today's challenging marketplace.

While the credit crunch is hitting consumer confidence, pubs are also having to do battle with the smoking ban, the weather and the whims of the Chancellor of the Exchequer.

Despite all that, people are still queuing to take a pub - as long as it's the right pub.

"To date, apart from a slight drop in the number of applicants coming forward in April, we have seen no impact on recruitment," says Fiona Robertson, S&NPE's lessee support and development manager.

"In fact, we currently have a higher number of quality candidates actively looking for pubs on our database than we have ever had, and are filling vacancies more quickly than ever.

"Many of these recruits are well funded so, as yet, stagnating or falling house prices are not affecting recruitment."

It may not be the same for all pubcos, though.

In the lower reaches of the tenanted and leased market it is hard to find people willing and able to run them - and pubs are closing as a result.There is a school of opinion that a shake-out of under-performing pubs would, in the long term, be no bad thing for the industry. In theory, what's left will be more profitable and, according to James Shorthouse, this process is already under way.

"Over the last couple of years the size and quality of pubs for lease has increased significantly," he says.

Pubcos such as Punch Taverns are conscious they must drive up the quality of pubs and the people running them.

"We have to recognise, both as pub companies and individual licensees, that pubs must adapt and evolve if they are to survive," says Punch's operations director Kevin Georgel.

"We firmly believe that the right entrepreneur taking on a lease with the support of Punch Taverns can create a strong, sustainable business. The key is finding high-calibre licensees who are able to innovate and work with us to create a really strong offer bolstered by support, training and investment."

Anyone taking a lease or tenancy today needs to be clear about how they are going to make that particular business work, and the pubcos have an interest in the success of that project.

It's up to both sides to do their bit to make that relationship work.