The report, ‘Business Outlook 2020: Focus on Business
,’ reflects on the themes, activity and challenges of the previous year and forecasts what 2020 might bring across the regions in which Christie & Co operates, including the North West, with its office in Manchester.
Manchester remains at the epicentre of infrastructure growth in the North West of England and both commercial and residential development looks set to continue unabated. In addition, there is cautious optimism across the wider region regarding political promises of increased infrastructure investment. With pipelines looking strong across our key sectors the foundations for a successful 2020 are already in place.
Demand in the North West is heavily driven by former corporate homes. Purpose built stock and en suite facilities remain popular amongst most buyers, and demand is highest amongst expanding operators who can meet stringent lending and cash flow criteria. Despite this the bulk of the market is composed of converted stock where demand is contingent upon ‘Good’ CQC inspection outcomes, attractive profit levels, and a stable management structure. The proportion of private fee payers remains critical throughout the region therefore assets in mixed income areas with good local infrastructure are generally the most viable. We predict that fee levels will rise at a steady rate, though planned increases to the National Living Wage will exert continued cost pressure on regional operators.
There is the perception that the childcare market is in a strong position, which is encouraging operators to advance their exit plans whilst demand amongst buyers remains robust. We expect this trend to continue through 2020. Growth is a key topic in the North West, particularly amongst younger operators who are keen to develop and further professionalise. This contrasts with older operators who view this buoyancy as a good opportunity to divest. Whilst 30 hours provision continues to challenge some, commercially aware operators have sought to offset this by charging for ancillary services. We expect to see a degree of consolidation in 2020 given the high proportion of independent operators in the market, and the fast pace of growth that the emerging groups are targeting.
The dental sector has performed strongly across the North West in 2019, with attractive assets continuing to garner impressive multiples. Premium prices are achieved when prominently located mixed practices come to the market and we have witnessed a steep increase in demand for private practices, a still developing market across the North of England. We anticipate that the differential in prices paid for NHS and private practices will narrow substantially as operators look to diversify. For those operating mixed practices NHS contract reforms are likely to accelerate their exit strategy. Operators may also seek to add value by branching out into new, complimentary disciplines such as the provision of cosmetic dentistry and beauty treatments. Overall, we would expect operators with private equity backing, both new and existing, to continue to drive the market forwards.
Trading fundamentals for hotels remain strong across the North West, though Manchester remains a bright spot in terms of room supply, occupancy rates, and average room rates. Tourist hotspots such as the Lake District and North Wales are still attractive to operators, but occupancy is more notably affected by seasonality. We expect strong inbound investment in 2020 as overseas investors recognise the longer-term value of well-located bricks and mortar assets, but hotels that haven’t undertaken significant capital investment in recent years risk becoming distressed. A weaker pound could provide a further boost to investment and may serve to increase the attractiveness of staycations.
2019 was notable for high demand and strong sales at both the higher and lower ends of the petrol filling station market across the North West. Both freehold and leasehold opportunities continue to prove attractive but location and the ability to add value remain key. In the convenience retail sector, a lack of freeholds is constraining activity and we have noted reduced premiums for stores at the lower end of the market which we attribute to a combination of oversupply and buyer price sensitivity. As corporate operators shift focus to sites with ever higher turnover, newer regional groups may emerge increasing competition at the regional level. As the National Living Wage increases operators will need to monitor costs closely and decide on where to absorb them and where to pass them on to consumers.
PUBS & RESTAURANTS
2019 was a challenging year for the restaurants sector in the North West with pubs performing more strongly, the changing face of town centres has been a major factor and many buyers have been hesitant to make decisions regarding investment or divestment. Distress is a possibility in 2020 and this may afford some operators the opportunity to acquire prime assets at reduced premiums. Location is critical and we expect demand to persist for sensibly priced freeholds within desirable areas. Conversely, high leasehold premiums and rents appear to be more out of step with the market and may serve to supress demand. The challenge for operators will lay in retaining and developing the staff that they have whilst also managing the increased cost burden of the National Living Wage.
2019 has been pivotal for the North West pharmacy sector. The Community Pharmacy Contractual Framework will shift the focus from dispensing to clinical services and there is concern that providers may have to work harder to maintain their current income levels. This creates opportunities for commercially minded operators to sell services that would have historically been offered at GP surgeries. Corporate operators looking to dispose of assets are fuelling demand from new entrants who recognise the potential that these pharmacies offer maintaining a healthy level of churn. We predict that dispensary income is unlikely to rise any further putting greater pressure on the revenue derived from services. Within the context of the recent funding announcement we are seeing increasing numbers of single site operators, often approaching retirement, who are expediting their exit plans rather than seeking to adapt.
Nick Brown, Regional Director – North West at Christie & Co comments, “2020 is already off to a strong start in the North West, with buyers and sellers alike increasing their activity off the back of a sense of increasing political certainty. Whilst all of the sectors in which we operate face varying challenges in the year to come, we are confident that the opportunities for growth still exist where expectations on price, location, and trading fundaments are met. Overall, we would sound a note of cautious optimism for the North West’s regional prospects in 2020.”
The full North West Business Outlook focus is available HERE