2008 - challenging, tough, cautious, or a time of opportunity?

Graeme Bunn Executive Director, Fleurets London

2008 has brought an uncertain outlook for the leisure and hospitality industry. Most of the large managed public house operators have reported declining like for like sales growth, particularly in the fourth quarter of 2007. Adjectives such as "challenging", "cautious" and "tough" have been evident within trading statements released by the publicly listed operators. Even the usually buoyant and continually acquisitive branded restaurant sector has experienced difficulties, not least Clapham House who warned in December that profits for the year to March 2008 will be "significantly below original expectations".

Given these market conditions, what impact will such circumstances have on value? Unquestionably certain sectors will be detrimentally affected. The lower end, wet driven tenanted houses, without an implemented smoking ban solution, will suffer, particularly as the residential market weakens. The residential housing market has driven growth in this sub-sector via development opportunities. Falling residential prices will impact on the demand for such properties from developers. The remaining freehold public house sector, particularly managed houses, will remain healthy. Supply of such properties has been limited in recent years, with numerous strong, well financed potential purchasers remaining acquisitive. 2008 is likely to bring increased supply, but this is unlikely to be sufficient to satisfy the appetite of purchasers. Growth, albeit modest, will not be unexpected.

Anticipating the impact of weakening consumer confidence within the branded restaurant sector is more difficult. In order to justify the hefty purchase prices shown in recent transactions, in particular La Tasca and Strada, growth in unit numbers is fundamental and thus demand for new sites will remain. However, funding for the fit-out of these largely leasehold units is likely to become increasingly difficult to obtain and a more cautious approach is anticipated. Good sites, as ever, will achieve strong purchaser competition. Secondary sites, which may not match the corporate requirement criteria, are likely to be vulnerable, with a decline in rental values a possibility.

The tied leasehold pub market is now a well established and significant sector. Trading conditions, particularly within wet driven venues, are difficult and increased vacancy rates within such pubs are likely to increase. This will in turn deflate values of properties in this sector as a number of nil premium opportunities rise. Food turnover has certainly enabled trading levels to be maintained in numerous pubs throughout the country. However, pub food is becoming an increasingly competitive market both in price and quality. This impacts on gross margin and the consequence is reduced net profit. Food is unlikely to be the saviour on its own. Differentiation and innovation within this sector is needed. Gastro pubs rarely achieve the heights claimed, leaving many consumers wondering the difference between a gastro pub and a Harvester.

2008 is unlikely to be a year of record growth, either in turnover or values. But good opportunities will always attract buyers and thus such properties should see stable values unless the economy worsens or negative sentiment overtakes cautious resilience.