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Industry Update - Public House Sector 2011


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Despite the continuing impact of the economic recession and central Government policy to maintain the beer duty escalator, which has resulted in beer duty rising 26% in 3 years, the public house sector remains a major part of the British economy with over 52,000 pubs and almost 1 million jobs dependent on either the pub industry or brewing.

In simple terms, the public house sector encompasses traditional public houses, bars and pub/restaurants. Increasingly there is a crossover between these formerly distinct subsectors. This trend is evident in the growth of food sales with now 80% of all traditional public houses offering food. This trend has also seen growth in the sales of wines and soft drinks, which has partially offset the decline in beer sales, which fell 7.5% in 2010.

The three sub sectors of the public house market can be broadly identified as predominately wet driven local inns, often run by ownermanagers under a lease or tenancy agreement (traditional public houses); town centre venues, mostly occupying converted shop, office or bank premises and often branded e.g. Yates's (bars) and large destination food venues, again often branded and catering for families e.g. Harvester (pub/restaurants).

The market is further complicated by the operational format with managed, tenanted or leased outlets. Typical traditional public houses occupy largely suburban, village or rural locations. Pub/restaurants in the managed sector tend to occupy the better and more prominent main road or suburban locations or within retail/leisure parks. Some private sector pub restaurants have more remote destination locations and are heavily reliant upon established reputation. Each market and sub sector has demonstrated distinct variations to the effects of recession.

The managed house sector continues to drive the wider pub market. Trading performance and transactional activity have recovered strongly. Trading statements from both National and Regional managed operators show well managed, well invested pubs are generating positive Like-for-Like (LfL) sales growth. Mitchells & Butlers and Fuller Smith & Turner both reported LfL growth of 3% for 2010/11.

2010 demonstrated by the sale of 333 sites by Mitchells & Butlers to the private equity backed Stonegate Pub Company for £373million. Other key deals included the sale of Ha Ha Bar & Grill by the Bay Restaurant Group, again to Mitchells & Butlers, for £19.5m and the purchase of Geronimo Inns (26 sites) by Young & Co for £60m. This activity continued into 2011 with the purchase of Realpubs (14 sites) by Greene King for £53.1m. A regional bias to London and the south of England is however, evident in relation to group transactional activity.

2010 demonstrated by the sale of 333 sites byWhilst the managed sector performs well, the tenanted/leased sector continues to suffer the greatest Industry update Public House Sector June 2011 from the effects of the economic recession, decline in consumer spending and the over supply of "bottom end" traditional public houses. Large tenanted Pub Co's, such as Punch, Enterprise & Admiral, have tackled their large debt levels by the disposal of significant numbers of poorer quality sites, where future trading potential as a public house is seen as limited. The recent economic pressures on the trade have resulted in high volumes of property disposals and recent statements, particularly by Punch, indicate that this trend is likely to continue for the foreseeable future.

As a result of the supply of "bottom end" public house, the alternative use market has remained buoyant with the number of sites sold for alternative use accounting for 50% of freehold properties sold by Fleurets during 2010. Residential development is the dominant alternative use, accounting for 50% of transactions, followed by retail and office developments, which accounted for 14% and 13% respectively. Perhaps the critical statistic to note is that 58% of all bottom end" transactions were beneath £200,000, illustrating the low value of public houses where future trading potential is considered limited.

In the current economic climate a key driver to achievable price and required marketing period, is the availability of funding to prospective purchasers. The likely category of purchaser is of prime importance. The established corporate operators continue to have readily available funds. Contrary to this, privately owned companies and individuals are presently less able to secure financial backing. A number of traditional lenders have become increasingly cautious of the sector and are reluctant to support new ventures or customers. Leasehold interests held on rack rental terms have experienced very significant declines in value and are now considered by many lenders to be unacceptable security for loans.

Whilst freehold properties continue to be traded in mixed market conditions, many transactions relate to distressed assets where sales maybe adversely affected by the absence of trading information, operation under temporary management or restricted timescales. Prospective vendors not obliged to sell, are more inclined to put off sale decisions and await better market conditions. As demonstrated by the market over the last 24 months, we anticipate a steady stream of distressed sale properties rather than a flood, as lenders remain cautious, preferring to assist owners to achieve a managed disposal and thus maximize sale proceeds.

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