A strategy worth converting to?

When David Bruce and I formed The Capital Pub Company, in December 2000, our aim was to build up a portfolio of freehold London pubs. We wanted to achieve the same quality that Clifton Inns had achieved in the 60s and which Nicholson's carried on afterwards in the 80s and 90s.

Some industry commentators, while liking the strategy, said we would not be able to source the pubs to build up such a portfolio - but David and I were not put off.

We launched a fundraising exercise in early 2001 under the Enterprise Investment Scheme sponsored by Nobles and Co. Investors, especially individuals, liked the idea of investing in freehold London pubs because of the asset backing and over two years we raised more than £15m of equity.

New rivals

When we started to build up our portfolio of pubs we came across competition for these pubs from the usual trade rivals, which we expected. But there emerged a new rival which we had not expected: the property developer.

The upper of parts of many London pubs are virtually the last piece of real estate not to be converted. Look along any parade of shops in London and above these the upper parts have either been converted to offices or flats.

With pubs, however, there has been very little development of the upper parts and the property developers saw this as a good opportunity.

Our view was that if we want to grow an estate of quality pubs we would have to maximise the value of the pubs. Not only did we refurbish the pub itself to generate higher trade, but we looked at ways of selling off the upper parts for conversion to alternative use - mainly residential.

As a small company eager to expand we could raise proceeds from the sale into buying new pubs and thereby continue our expansion. Cutting running costs

Some people in the industry said that live-in accommodation was vital to the running of pubs and in some cases I am sure this is right particularly if the pub is a destination venue.

However, staff rarely live above the restaurants or nightclubs they work at and I do not see why pubs should be any different. In the course of our two years we have disposed of over £4m of upper parts. This has helped, not only to raise funds for investment in acquiring new pubs, but has helped to reduce our running costs of the pub in the form of utilities, business rates and repairs.

We sell to developers rather than do it ourselves because our skills are running pubs and not converting flats. We might loose out on the developers profit, but we focus on what is our core business and we also take out any risk as well.

There will always be issues in these types of deals and you have to choose your developer wisely before signing any contract. The developer and pub owner have to agree on issues such as sound proofing the flats, segregation costs and where things like ventilation /condenser units will be placed. It is not a straight forward process, but the crock of gold at the end of the deal makes it worthwhile.

Now might not be the best time to sell off the upper parts with the housing market being quiet and the developers being cautious on price.

But there is no harm in getting a local agent to come round and revaluate what the upper parts of your pub are worth. It could always be a nest egg for you, or in our case more money to buy more pubs.

Clive Watson is chief executive of The Capital Pub Company​