Pubs with accommodation are in demand and make an attractive proposition for buyers. As Tony Halstead finds, the turnover derived from staying, and paying, guests can often overtake wet sales.
Property agents report that pubs with rooms are now one of the most sought-after business venues demanded by buyers.
Letting-room accommodation is fast becoming one of the key com-ponents of a pub business as an increasing number of licensees and pub operators seek to increase their revenue streams. Bedroom income is no longer viewed as a mere bolt-on piece of a pub's trade.
The proposition is an attractive one as turnover and profits derived from paying guests can often overtake traditional wet sales and turn an under-achieving pub into a successful one.
And, once a healthy occupancy rate from letting accommodation is achieved, it automatically transfers into extra food and drink sales that are delivered by overnight guests.
More cost-effective
Agent Guy Simmonds says it currently has both private and corporate purchasers urgently seeking freehold and leasehold pubs with letting bedrooms — such is the popularity of these multi-faceted businesses.
The adverse economic climate has resulted in many companies being instructed to book more cost-effective bedroom accommodation, rather than the four and five-star hotels used in the past.
Consequently, a quality pub with attractive letting rooms is currently very much in demand — providing the service, price, demographics and standards are all favourable. It is certainly apparent that, while customers are now focused on paying only a realistic tariff, they still demand high levels of customer service.
Guy Simmonds' managing director Stephen Taylor says: "The fundamental aspect that drives the desirability of pubs with letting bedrooms with our purchasers is that a business enjoying good occupancy (more than 75%) also reaps the massive benefit of additional spending in respect of food and drink sales."
"Another highly-desirable factor is the high gross profit derived from letting revenue, which is usually in excess of 80%," he adds.
Mutual benefit
Guy Simmonds also specialises in advising on, and creating, new free-of-tie leases with pragmatic annual rentals, helping to guarantee sustainability for the mutual benefit of the freeholder and the lessee.
"These venues often derive sufficient gross income from the bedrooms alone to cover the rent — hence they are hugely desirable and profitable for our purchasing clients. Many of these businesses are able to cover the overheads from the letting revenue alone, resulting in the business producing high net profits from the remaining income streams of food and drink," Taylor reveals.
One business just sold, which is an excellent example for this sector of the market, is the Melbourne Hotel, in the heart of the affluent conservation village of Melbourne in Derbyshire, close to East Midlands Airport, Calke Abbey and Donington Park.
The substantial premises have the benefit of large, ground-floor trading bar and dining areas, together with an expanded first-floor restaurant and letting bedrooms. The business has historically traded at £10,000 in weekly turnover. The free-of-tie
lease was marketed and sold off an asking premium of around £140,000, and attracted a range of potential buyers.
Taylor has owned this particular outlet for around 18 years and always applied a pragmatic view in relation to the annual rent. Current rent is circa £30,000pa. The highly-favourable free-of-tie lease has around 30 years remaining.
The lease was successfully assigned and purchased by Bespoke Inns, which is investing significant capital in refurbishing and altering the premises — prior to re-opening in the very near future.
Rooms a must in tourist hotspots
Letting accommodation is fast becoming a must-have commodity for pubs located in busy UK tourist regions.
West Country property agent Bettesworths says income from rooms can provide a huge boost for bottom-line profits.
"There is a huge incentive for pub operators to convert unused space and outbuildings into rooms because profits from room revenue are high and are also enhanced by valuable extra sales of food and drink," says managing director Matt Bettesworth.
"Buyers also see them as a very attractive proposition.Some may see letting rooms as hard work, but they provide excellent profit potential as long as they get the offer right," he adds.
Anthony Jenkins, of Christie+Co, confirms that the letting-room market, whether that means pubs, bed-and-breakfast venues or guesthouses, is buoyant.
"It's an important third income stream for many pubs today, not just those located in tourist spots," he adds.
"But people weighing up whether to invest in rooms need to carry out thorough research to establish whether the market is there."
Paul Hardwick, of chartered surveyors Fleurets, says pub letting rooms offer big potential revenues, but setting up accommodation rooms is not straightforward.
"Operators need to look at the local market to decide whether they can attract sufficient business to make rooms work for them. Tourist areas are one thing but, elsewhere, it may come down to whether local companies need to put up reps and visitors and whether the local market is already providing sufficient accommodation.
"More and more licensees are now focusing on getting the maximum return from their property, but proper market research is essential before anyone takes the plunge," Hardwick adds.
Tapping into the guest-room market
Graham Allman, managing director of property agent GA-Select, says he has been recommending for a number of years that pub businesses should look to alternative income streams to increase their cashflow. Allman suggests that entering the lucrative guest-room market would be a good move for many pubs.
"This means tapping into the growing availability of good-quality bedrooms, which in itself is a massive market opportunity being developed by not only the Travelodge style of operation, but also boutique hotels.
"The time is long gone for rooms being offered without facilities and, dare I say it, central heating," Allman says.
"Letting rooms may be a labour-intensive business, especially when provided in a limited number. However, the potential profits earned will compensate for this inconvenience.
"Coaching inns are proof of demand, especially when located within our quintessential British market towns or pretty countryside.
"But there is a caveat and that is that they have to be of good quality while good service is a pre-requisite," he adds.
Allman goes on to say: "The income from just four bedrooms with a rack rate of £50 could have the ability of adding £73,000 to the cashflow. Even at 50% occupancy, this equates to £36,500pa.
"And with 80% profit it should be considered 'a nice little earner' and will add value to your business, be it freehold or lease.
"Get the standard and price-point right, and you will find a highly-profitable addition to your business by way of income and asset valuation," Allman stresses.