Property: there's value in them thar hills

There is a high density of licensed premises in the north-east and some towns have suffered from 'overpubbing' for years. However, as Noli Dinkovski discovers, buyers from the south are finding some real bargains.

The north-east licensed property market is a peculiar beast. On the one hand, it is regarded as segmented and specialised with no one big pub operator dominant, and on the other, it suffers from a high density of licensed premises, leading to suggestions of overcapacity.

"Many sales are for alternative use, which isn't a surprise because a number of locations in the north-east have been over-pubbed for many years," claims Fleurets director Simon Hall. "If anything, there are signs of a more positive vibe emanating from the south-east, but this ripple effect has yet to reach the north-east in any significant way."

It's not all bad news in the north-east, however. From the popular destination city of Newcastle to the picturesque North Pennines, the region has a number of desirable locations. This, coupled with the fact that the area offers better value for money than other parts of the UK, has led to a noticeable increase in buyer interest from the south of the country, according to Stephen Taylor, managing director at Guy Simmonds.

"Our applicants, often driven by redundancy from the corporate sector, are looking for a lifestyle business in an attractive and desirable location," he says. "The north-east matches their aspirations well."

And while the region is not immune from the market forces that govern the rest of the country, those much-vaunted green shoots of recovery are, as far as the north-east pub property market is concerned, at least starting to appear.

"So far this year we have seen a 60% increase in the number of agreed deals across our Leeds and Newcastle offices compared to the same period last year," says Christie+Co associate director Martin Stansmore. "Viewings have climbed from 360 to just under 600 as confidence has grown."

Upturn​

Pub property agents may well be showing signs of an upturn, but the market promises to be a very different animal to the one that existed before the bank lending crisis. Whether it's a freehold or a leasehold property, buyers are now much more shrewd and no longer prepared to pay top dollar for outlets that are not guaranteed profit makers.

"Gone are the days when overpriced businesses with no accounts or values based on potential will find a buyer," claims Stephen Taylor at Guy Simmonds. "On the other hand, it's fair to say quality businesses, priced realistically, will continue to sell to our savvy buyers."

This can also be attributed in large part to the continuing bank lending problem. Banks remain cautious when it comes to lending to the licensed sector, and are continuing to veer away from inexperienced operators, says Christie+Co's Stansmore. But there are alternative sources of help on offer to buyers.

"As long as a business can demonstrate sustainability in terms of healthy turnover and profits, banks will consider lending," he says. "While banks have been lending more to experienced operators, our sister company Christie Finance helped to secure funding for a number of first-time buyers this year. In all, the company has helped 24 pub buyers across the UK in the first six months of this year, compared to just six in the first half of 2009."

The introduction of the Enterprise Guarantee Finance scheme, and the professional advice it offers, is also assisting would-be buyers to secure the finance needed to acquire freehold opportunities in the sector.

Adrian Mattock, partner for licensed and leisure at Sanderson Weatherall, says three major lenders have returned to the sector and the funding problem is improving. "We have had some success in getting good-quality premiums for quality businesses," he claims.

While the funding issue is unlikely to disappear completely any time soon, the potential for a bargain in the freehold market remains strong as pubcos continue to sell their under-performing businesses, most of which are being snapped up by private individuals and smaller multiples.

Simon Hall, at Fleurets, appreciates there are good opportunities to buy from the pubcos at fantastic prices, but is reluctant to call the pubs good quality.

"It's true many have good potential, but they are sales from the bottom end of the pubco estates," says Hall. "Good quality freehouse deals are few and far between as the owners do not fall into the 'need to sell' category. Generally, those who have good trading units are sitting tight, although there have been signs since the election and emergency Budget that more are being inclined to test the water."

Leasehold market​

The leasehold market, either to let or for assignment, remains tougher, claims Hall. He attributes this to a glut of supply and little demand. "There are a great number available because pubcos have many properties closed or to let operated under temporary agreements," says Hall.

David Gibson, at agent Sidney Phillips, says the tied leasehold market has taken a pounding. He advises those wishing to sell to get the value of the fixtures and fittings — anything above that is a bonus.

"Pre-2008 we could achieve 25% to 30% of net turnover, given a decent set of accounts. Today, if we aim just over the value of the fixtures and fittings, depending on location and profitability, we'll be much nearer the mark," explains Gibson.

"The majority of tied leases are struggling. They can't compete with the free market on price cutting, and if they are in a circuit area, most young drinkers are raiding the supermarkets and going out later after downing cheap booze at home."

Gibson cites one lessee who, despite having a well fitted-out pub and managing to generate more than £8,000 per week, has had to reduce his valuation over time from £125,000 to £40,000 — the sum he originally paid for it. "We are now starting to see some offers, but they are still only around the £30,000 to £35,000 mark," says Gibson.

Agents believe the pick-up in the housing market is starting to filter through to the low-end pub disposal market. But times remain tough and the pub property market isn't helped by the shaky economy. Experts concur that the buoyancy of the market in the next 12 months depends on whether the Government can find the balance between cutting the debt and not steering the country back into recession.

Long term​

David Gibson, at Sidney Phillips, says: "I don't think anything major will change for years to come, but I believe the slowdown in the number of disposals coming to the market will encourage purchasers to be more confident in stepping back into the market. This may result in small increases in activity in the freehouse and possibly leasehold sectors."

The extent of that activity, of course, remains down to how much the banks are prepared to lend.

"We will see more quality freehold properties coming to the market as vendor expectations are realigned with the market value," says Christie+Co's Stansmore. "This will lead to further acquisitions by the regional and smaller multi-site operators, but bank lending will be key to any significant improvement."