The past few years have seen the restaurant property market reach dizzying heights, with brands all competing for new sites at premium prices across the country. However, this has also meant that independent operators rarely got a look in, having to consider secondary sites away from the main dining circuit and unable to put their ideas into action.
Fast forward to 2018 and we have gone into reverse. Many brands have shut up shop, ceased expansion, and in many cases, are going through painful CVAs in order to exit sites where sales didn’t match the optimism they felt at the time.
Whilst the adjustment is still taking time to work its way through, there are now great opportunities for smaller independent operators to get what they have been vying for – great sites at realistic rents.
So how did we get here? Following a boom in consumer demand for casual dining, some 3,000 restaurants opened rapidly in a three-year period to capitalise on this. Private equity providers could see that consumers were looking to spend money with brands that offered decent food at reasonable prices, and they were eating out more often, so large sums were invested on high octane restaurant expansion programs.
As a result, operators had to compete on sites and therefore rents, giving landlords the opportunity to maximise their return with apparently good covenant operators. With premiums often in excess of £1m in London, competition was so intense that there were cases where operators not only out-bid each other on a premium but also offered the landlord an early rent increase.
Unfortunately, as consumer tastes changed and spending became more pinched, they started to look for new experiences or not go out at all, seeing instead the growth of delivery services like Deliveroo and Just Eat. As restaurant operators’ like for likes started to level off, brands found that they were no longer able to maintain margins in the face of static sales, rising running operating costs and the final nail, rates increase in 2017.
In the midst of the sector shift, landlords started to find it more difficult to fill their newly developed empty space at the expected levels of rent and so the smaller, nimble operators who have remained now have an excellent opportunity to secure sites that previously wouldn’t have come their way. Landlords are also now more relaxed on covenant strength, levels of deposit and rent-free periods.
Additionally, sellers are being realistic in their price expectations – and with sites available through an assignment of a current lease, there is the benefit of having a fully fitted business. When buyers take into account the cost of installing extraction, air-conditioning, toilets and other back of house equipment, it can more than off-set the premium paid.
So, what does the future hold? For the larger players who are exposed on the retail high streets and shopping parks, a few years may be needed to re-balance themselves. For the smaller chains and independents, there should be cautious optimism as there are still deals to be had and some great new concepts to come into force, strengthening the sector again as a whole.