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Welcome to Fleurets annual statistics and analysis of the sale price of public houses for the year to September 2013. Last year the public house property sector involved many of the same
dominant market forces as the previous four years. At the bottom end a continued strong supply of Pub Co sales from the big six tenanted pub operators was supplemented by an increase in administration sales. Finance continued to be restricted and economic uncertainty was the underlying trend. However, as the rationalisation of the Pub Co estates entered its fifth year, residential values were increasing in some areas and with improved like for like sales figures being published by several multiple operators, there were signs that things could be starting to change.
NB - Please consider the basis of these statistics along with the explanation of the three categories of Pub sales we have analysed, as set out at the end of this report.
Overview - Bottom End Freeholds
This type of bottom end freehold transaction, i.e. without accounts and invariably sold in a forced sale situation, has continued to dominate market activity. The overall volume of sales was up 33% nationally. Bottom End Pub sales accounted for 64% of all public house transactions, 60% of which were undertaken in the north (58%).
The average sale price has been maintained from last year at £217,403 with only small variations in the north at -1.5% and the south at +2.8%. This overview, however, tends to hide the variations across the regions, where different market activity has resulted in different end results, for different reasons. For example in the north west the average sale price dropped -15% as several Pub Cos and regional brewers sold off some of the worst bottom end pubs, that had not sold in previous years, thereby bringing down the average sale price. Whereas in the north an increase of +18% in the average sale price resulted from a small number of higher
value sites being sold out of administration combined with fewer of the worst bottom end sales.
In the south there was a decrease in the average sale price in London and East Anglia regions as the average quality of properties being sold reduced, whereas a 10% increase in the west resulted from the three highest value sales being for alternative use. The south had an increase in average sale price, largely as a result of higher quality pubs being sold.
Overall we have seen a polarisation in the quality of bottom end pubs being sold, with some 'deadwood' being sold to clear the decks for the year ahead and better quality bottom end pubs coming to the market, including both viable pub operations and alternative use opportunities.
The number of pubs being sold out of the trade continues at much the same rate as it has for the last four years, with 50% of Bottom End Freehold pubs being sold for alternative use compared to 48% last year, 54% in 2011 and 50% in 2010. This compares with 74% of freehouse operations being sold for continued pub use. The most common alternative use is residential conversion/development at 58% of pubs sold out of the trade.
Buyers of these properties have largely been individuals but there are a number of sites being sold to regional brewers and regional/local multiples.
The year ahead
We anticipate that many of the Tenanted Pub Companies are nearing the end of their mass sales programme. Fewer numbers will be sold on an individual basis in the year ahead. This may leave the door open for Banks who are holding positions in some Pub Companies to push bottom end pubs onto the market and crystallise their position. Pub Cos may need to sell packages of tenanted pubs, let on secure agreements, as opposed to individual sales with vacant possession, if they are going to meet their on-going disposal objectives.
The Cerberus/Admiral deal at the start of the year led the way, and the Marstons/REIT deal just last month suggests there may be more to follow. We are certainly seeing increased interest in package deals from private equity investors. Many vendors, however, may not yet be willing to accept what purchasers are ready to pay.
The average sale price of individual pubs is likely to continue to increase as supply slows and the average quality of the properties coming to the market improves.
We anticipate that the number of properties being sold for alternative use will decline as the viability of operations coming to the market increases.
Overview - Leaseholds
The leasehold assignment, subletting and lettings market has continued to be difficult. An increase in the total number of transactions of 11.8% suggests slightly improved market conditions and the reduced number of sub-lettings with reverse premiums or extended rent free periods would support this.
The 3.7% increase in the average sale price disguises a wide variation between the north at +59% and the south at -11%. The north reflects a small number of high value leasehold deals which has distorted the average. In reality we have still seen very limited market activity, particularly in respect of assignment deals. The mere fact that six figure leasehold deals have been concluded in the north is, however, a reason for optimism.
In the south the decline in the average sale price reflects the increase in letting activity with 66% of transactions comprising letting or sub-letting deals, up from 51%, as opposed to a decline in value.
The small decline in the sale price as a multiple of FMT on a national basis, might reflect an increase in optimism and a higher view of trading potential. It might also reflect an improvement in the quality of sites coming to the market To Let.
Leasehold transactions in the south were no more prevalent than the previous year, despite stronger overall market conditions. Two significant high value leasehold assignments were once again achieved in London and the total number of leasehold sales in excess of £100,000 doubled from the previous year.
Tied leasehold assignments increased last year, with 78% of these transactions being in the south. The leasehold market in the north, once again, mainly comprised of sub-lettings at nil premium and new lettings, with the occasional one off premium operation deal.
The year ahead
Increased flexibility, transparency and better quality operations being made available on lease and tenancy terms, both tied and free of tie, will result in increased demand in most areas, as the supply of low cost freehold pubs reduces. This will be most prevalent in the south where
freehold pub supply is at its lowest and economic activity and confidence stronger. This will lead to a rise in leasehold activity and the best operations will see an increase in premiums.
In the north, the continued supply of low cost freeholds and letting opportunities will delay the re-emergence of the assignment market, for all but the best operations. Attractive pubs in countryside areas and economically strong regions where there is no historic over supply of pubs, will lead the way.
Overview - Freehouses
The freehouse market sprung into life last year with Fleurets selling significantly more freehouse businesses than the previous year (+138%). The north concluded over three times as many and the south doubled the number of freehouse deals. The major increase came from multiple operators seeking to churn their estates, selling off weaker sites in order to invest in better units with greater growth potential. Other deals included a number of high value sites sold with medium term development plans, including sites across the country but particularly in central London.
Private owners of operational and viable public house businesses, in the main, continued to retain their operations as opposed to sell. In many cases this is because the equity they release from the sale will be insufficient to raise finance for another operational purchase.
Sales in the year to September 2013 reflected a -12% decrease in the average sale price. This is mainly as a result of an increased proportion of sales, at lower value, being in the north (40% up from 29%), but also in part due to reduced numbers of freehouses being sold for alternative use (26% down from 35%). In the south last year, the average sale price saw a
small increase of +2%. The number of high value deals (£1m+) in central London and other premium locations in the south doubled, although it remained in the same proportion of total sales to the previous year. The higher number of premium property deals to purchasers with medium term alternative use proposals, resulted in an increase in the multiple of FMT up
The year ahead
We expect to see a steady increase in the volume of freehouse transactions, as multiple operators continue to manage their estates and trickle individual sites onto the market. This might result in small package deals, however, purchaser appetite continues to be very selective and small groups are invariably too mixed in style, location and tenure to appeal. Private vendor activity will increase, being led by the south, as residential property values
rise and confidence in trading potential increases.
We anticipate that administrators and banks holding on to distressed assets will increasingly seek to realise their positions and push properties on to the market in a proactively managed sales process (as apposed to forced sale situations). Values are expected to rise, although the average sale price might not due to a reduced number of premium deals, particularly for alternative use.
Basis of Statistics
This is a review of the deals actually concluded by Fleurets in the twelve month period to the 30th September 2013. It is not an analysis of the movement in market value for a fixed set of properties, as the property transactions included are different every year. It partly provides
an indication of the movement in value but also reflects the quantity and quality of properties that have been transacted in the year.
The commentary provided on the market activity in each of the three sub-sectors should be considered in context to fully understand and interpret the statistics provided.
The breakdown of data includes a split on a north/south basis where 'North' includes deals from our Leeds, Manchester and Birmingham offices and 'South' includes deals from our London, Brighton, Bristol and Sudbury offices.
Our Analysis is divided into the following three categories:
Bottom End Freeholds
Properties generally sold without accounts, sometimes closed or
vandalised or, if operational, under a temporary tenancy/management
arrangement. These are primarily pub company sales but also include
administration sales and occasional private sales. Invariably they reflect
some form of forced sale situation.
This group covers a wide spectrum of properties including high street bars,
community locals and destination food houses. The transactions include
free of tie and tied deals, on assignment, letting and underletting. Some
deals reflect a negative value due to reverse premiums being paid or
sub-lettings at a lower rent than the passing rent.
These are generally better quality pubs sold with the benefit of accounts
with an unrestricted marketing period. They are operational and typically
viable businesses, usually sold by private individuals but also by managed
house operators and not in a distressed situation.
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Further information or queries about the contents of this survey should be directed to
Simon Hall, Director and Head of Pubs