Don't panic - industry reaction to interest rate increase

Interest rates have been low for more than 10 years meaning borrowing has been relatively cheap for those in the pub trade.

But the first interest rate increase in 10 years​ saw the Bank of England raise levels from 0.25% to 0.5%. The last time there was an interest rate rise was July 2007.

Bank of England governor Mark Carney said that it was time to “ease our foot” off the accelerator. He also revealed that it was likely that interest rates would rise twice more during the next three years.

Trade associations expressed concern about the move, claiming it would put pressure on an already struggling sector. The British Beer & Pub Association called on the Government not to increase alcohol taxes in the wake of the announcement, while the Association of Licensed Multiple Retailers described current conditions as the “perfect storm of rising input costs”.

There is no doubt that pubs are already struggling under a raft of increased costs such as business rates, wage rates and food costs. So what will the impact of an interest rate rise be for licensees on their property?

Licensees who borrowed money to purchase their premises are likely to be either on fixed rate or variable rate mortgages. Many took advantage of low level interest rates choosing variable rate mortgages.

Those who have opted for fixed rates will be unaffected by the move until their mortgage is up for renewal.

Rise should not create problem

Christie Finance director Craig Dickson, says the message is “let’s not panic” as the rise should not be a “deal breaker”.

He argues that the rate rise is small and should not have been unexpected for operators.

“If the 0.25% increase was going to have an impact on businesses then I think these businesses have wider issues,” he argues.

“If someone was borrowing £250,000 on commercial terms they will now be paying roughly £30 a month more. It is not that much.”

He cites other challenges and pressures for licensees such as labour costs, food inflation and business rates as having a bigger impact. And he suggests the interest rate rise should not have any dramatic effect on pub businesses.

“I would suggest the majority or a large percentage of business customers will be on a variable rate mortgages and the banks will pass that on. But it is such a small rise,” Dickson says.

“Banks are still lending money and I don’t see this putting them off lending to the sector. The banks do a stress test when assessing deals. They will apply a stress rate to the loan that would be around 5% to 6%.”

But he has warned businesses to be prepared for changes in the future.

“Businesses should take into account the ‘what if’ scenario. They should factor this into their longer-term plans,” he argues.

“The concern could be if consumers cut back their spending in pubs – that may have
an impact.”

Bottom end will be affected more

Acorn Finance owner Paul Thompson feels that the mortgage aspect is almost “negligible”.

“On a £500,000 mortgage, over 15 years, the difference is £62. It is not a huge amount,”
he says.

He argues that the “psychological effects” are more likely to have a major impact on consumers as pubs are a discretionary spend.

“My personal feeling, based on speaking to thousands of publicans over the years, is that it will hit the bottom end more than it will hit the top end,” he warns.

He says he would be surprised if rates ever went back up to the levels of the 1980s of around 5%.

“I do think it will go up a bit more. The rate going up is a sign that there is confidence in the economy. We seem to be riding the Brexit wave now and it has not been as catastrophic as everyone thought,” he says.

But he warns licensees with a lot of unsecured debt to look into their finances.

“People who should start worrying are those with a lot of unsecured debt such as cards or shorter business or personal loans,” he says.

“A lot of people in leases are in that situation where they bought their pub using credit cards because they thought they could not get any other funding. They should be looking at ways to protect themselves.”

He says that despite this, many licensees could be in a stronger position than they think. Refinancing could be an option to get them into a stronger position for the future. 

“If they have been trading for a few years and they are doing everything right they should be able to look at better funding avenues such as fixed rates,” he says. “This will protect them against credit cards going up.”

Thompson also suggests that any licensees with variable rate mortgages should look to fix their rate.

“There are some good fixed rates around and if their business is doing well, it has probably gone up in value,” he maintains.

He also argues that an interest rate rise is not all bad news.

“If you run a country pub and your biggest trade is the old ladies that come out on a Wednesday lunchtime, they are going to have a little more money in their pockets,” he says.

Protection plans for future

Fleurets director and head of pubs Simon Hall echoes the same sentiments, believing that the increase in interest rates should not have a major impact.

“A quarter percent increase in interest rates isn’t expected to have any material effect on the sale or value of public houses,” Hall predicts.

“This is because rates are still extremely low and, therefore, mortgages that have been in place for a long time remain affordable.”

The majority of recent pub mortgages have been either cash, or a very large percentage in cash, he argues so the owners are not as exposed to interest rate changes as they were pre-recession.

He says the more “likely threat” from increased interest rates is expected to come from the effect it has on disposable income.

While the interest rate rise was greeted with concern, it is not a situation that should put licensees in any degree of financial distress.

However, continuing costs on the sector overall are taking their toll and pubs need to ensure they are prepared for what is to come. Licensees should take some practical steps to protect themselves and reassess their finances to plan for the future.   

To find out more about pubs for sale, lease and tenancy visit our property site. http://property.morningadvertiser.co.uk/​