Pubs & Restaurants Mid-Year Review
The Pubs & Restaurants Mid-Year Review reflects on activity, trends and challenges in the first half of 2021 and shares the results of the latest sentiment survey for an outlook on the sector and business operations in the second half of 2021.
PUB MARKET OVERVIEW
For the UK pub sector, the first few months of 2021 offered no respite from the turbulent year that 2020 turned out to be, with businesses forced to endure another round of closures, as a second wave of the virus took hold and pushed us into a third national lockdown. Yet, against this challenging backdrop, the transactional market has remained buoyant over the past six months and investors continue to be attracted to the sector, with many keeping a positive, long-term view towards opportunities.
A renewed sense of confidence was injected in the market off the back of the government’s Lockdown Exit Roadmap and Budget announcements during Q1, along with the successful vaccination rollout programme. Pubs were finally allowed to reopen on 12 April, albeit for outside trading only. Encouragingly, operators saw a positive response from consumers following this date, despite some challenging weather conditions, which translated to improving like-for-like trading performance and suggests the bounce-back for the sector will be strong. During June and July, the UEFA Euro 2020 Championship also provided a great boost in sales, especially in light of ‘Freedom Day’ being pushed back from 21 June to 19 July.
As part of the Chancellor’s Budget announcement in March 2021, the Government extended its extensive support measures, including furlough, CBILs loans and the moratorium on commercial forfeiture, which was subsequently extended to March 2022, meaning the wave of distress that we anticipated for Q2 has not yet materialised. Many businesses remain in a state of ‘hibernation’, having accessed the range of support measures made available to them, yet increased distress activity seems inevitable once this is curtailed from Q3 onwards. In our recent Sentiment Survey, the maturing of CBILS loans was a key challenge identified for the second half of 2021, with 54% of respondents who took out a loan saying they expect repayments to impact their business. This may drive more operators to sell.
There was an uptick in corporate activity during Q1 as buyers were attracted back to the sector and some operators began to divest their portfolios. Christie & Co announced the first transaction of the year, with the portfolio sale of ten managed pub restaurants owned by Red Mist Leisure Ltd to private equity backed Red Lion Holdings for an undisclosed sum. Red Oak Taverns continued with their pub estate expansion plans by acquiring ten pubs from Wells & Co, with Christie & Co acting on behalf of the sellers. Between March and May there were three sales, with Stonegate selling 42 former Ei Group properties to RedCat, the new investment company of Rooney Annand, followed by the acquisition of nine bars by Nightcap Group from Adventure Bars and the sale of six public houses by the Administrators of Seafood Holdings Ltd to Oakman Inns, which was handled by Christie & Co.
The Wellington Arms - acquired by Red Lion Holdings
This activity should increase further from Q3, once the sector gets back up and running, as pubco’s will begin to re-evaluate their estate, after reflecting on trading results since reopening. This has been evidenced by the recent news of Young’s selling majority of their 56-strong tenanted estate to Punch Pubs for a reported £53 million. Christie & Co are currently advising on a number of portfolio transactions which we hope to announce over the coming weeks and months.
Throughout H1, investors were eager to acquire good quality properties in attractive asset classes, with freehold opportunities in rural and coastal tourist-led locations drawing the most interest ahead of Freedom Day in July. However, the volume of opportunities coming to market has remained limited to date and has been unable to satisfy the demand, which has led to competitive bidding in some cases. For the most part though, prices have held up relatively well.
The lack of stock is likely due to operators being focussed on reopening and wanting to take advantage of pent-up demand when consumers could return to the pub. Feedback from our network of business owners also suggests many operators are hoping to capitalise on the anticipated summer boom, delaying plans to sell as a result. Although we expect this to shift from Q3 onwards, as increased revenues over summer should give people more confidence to obtain a valuation and test the market.
Limited stock has been frustrating for private equity investors. Over the past six months, our team has received increased enquiries from this investor type however, the lack of opportunities of scale and perceived value has restricted their ability to grow at the rate they anticipated.
Challenges also remain for certain areas of the market, particularly city centres, as the third lockdown period has prolonged people staying at home, along with working and studying remotely however, we have begun to see some early positive signs that this is shifting. Increasing numbers of workers have slowly started to return to the office part-time and we expect to see a real shift from Autumn onwards.
RESTAURANT MARKET OVERVIEW
Like all hospitality businesses, the last six months was a very tough period for restaurants across the UK, particularly as the sector was already struggling prior to the onset of the pandemic in 2020.
The value of the eating out market declined by £10 billion last year, as continual lockdowns placed huge restrictions on trading and many restaurants were forced to close for good. This drop in value was expected to reverse in 2021 but recovery was severely disrupted by the third national lockdown at the beginning of the year, and it is now likely to be the end of 2022 before the sector experiences a full revival. During this time, we expect to see more operators entering into CVAs or administration.
Once lockdown restrictions were lifted to allow outdoor trading on 12 April, restaurants with limited outdoor seating space found themselves at a disadvantage, and trading continued to suffer until they were allowed to reopen indoors. Operators were also caught off guard by the shortage of staff returning to the workforce since reopening, largely due to Brexit but also as many furloughed workers have left their jobs for alternative work.
Generally, consumer support for independent, community-focussed operations remained strong and is expected to continue, so investor interest persisted for restaurant assets outside of city-centres, in particular regional tourist hotspots which capture trade from staycations. City venues are still experiencing declines in footfall due to many people staying closer to home for work, study and other leisure activities.
There has been a continued move to more simplified menus to mitigate these costly impacts of the pandemic. Technology has also played a huge role in helping businesses adapt with more cost-effective service models or to tap into the food delivery market, which continues to thrive.
The explosion in the take away and delivery sector since 2020 has led Christie & Co to some exciting work in the world of franchising. During Q1 this year, the team secured Starboard Hotels as the new franchisee partner for 27 Pizza Hut Delivery stores across the Midlands and North West, operated by YUM!. a Fortune 1000 company which owns a multitude of international fast-food outlets including Pizza Hut. This highlights the fundamental attractiveness of the franchise sector, particularly to operators looking to diversify.
This exciting result has led to further work with YUM!. During September, the team kicked off a second project, which has tasked them with identifying ambitious entrepreneurs who wish to become a part of the household Pizza Hut brand, by converting existing owner-operated sites to a franchise store. The company is initially seeking 125 new sites to expand its delivery and takeaway offerings throughout the UK. It is looking for either new partners who will are willing to convert their store and take on the Pizza Hut brand, the product and its customers, or to work with experienced and proven operators who are committed to company growth and who are willing to invest over the short, medium, and long term in all aspects of the business.
PUBS & RESTAURANTS UPDATE ACROSS THE REGIONS
The market in the South was very busy over the last six months. On average the Christie & Co team sold two businesses per week, a total of 54 hospitality exchanges to date. The region has always been popular with holiday makers, however ongoing international travel restrictions triggered a significant surge in demand for hospitality assets in ‘hotspot’ tourist destinations, likely due to investors looking to tap into the current staycation market and domestic travel boom expected for summer.
Throughout the first half of 2021, the most in-demand assets were rural freehold pubs with rooms and/or extensive external areas with development potential for guest accommodation such as glamping and shepherds’ huts, as these businesses offer the security of multiple income streams.
Frustratingly, the number of businesses coming to the market remained limited, as operators have been focussed on trading since reopening and the lead up to the busy summer months. However, our team is currently involved in several conversations with owners which may lead to loosening of the supply in Q3. Staffing shortages also remain a concern and will be something to watch during H2, as this may lead to more opportunities coming to the market.
The Sheppey Inn - Glastonbury, Somerset
The Three Crowns - Wisborough Green, West Sussex
North East & Midlands
We saw some great activity across the North East market during the first half of 2021, and the team achieved a total of 23 hospitality exchanges. Notably, there was an uptick in first-time buyers, predominantly local entrepreneurs with other businesses in the area looking to make a purchase of a licensed premise, or lifestyle buyers making the move to the coast or country, particularly in tourist hotspots such as North Yorkshire and the Peak District. We also observed a number of private equity-backed companies aggressively expanding their acquisition programmes.
Some vendors looked to take advantage of the current demand and good prices being paid for quality assets by very acquisitive buyers in the market, however supply was mostly suppressed, and we are seeing a split market in terms of pricing. Higher-end opportunities experienced definite increases and competitive bidding processes due to demand, whereas prices for lower-end businesses often fell flat.
The Haynes Arms - Nr Northallerton, North Yorkshire
The General Tarleton - Ferrensby, North Yorkshire
North West & Scotland
During H1, the North West and Scottish markets experienced good demand for freehold pubs and restaurants in city locations that could be converted to short term leases, with a view to acquiring the freehold in a few years. There was also strong demand for the quality end of the freehold pub market, particularly businesses with outside trading areas. The team exchanged on a total of 29 hospitality businesses. However, the region faced similar challenges to the rest of the UK, regarding the number of opportunities coming to market to satisfy buyer demand.
Vendors have been focussed on reopening rather than selling, and many operators are still benefitting from government support measures such as the furlough scheme, rates relief and the VAT discount so there is no urgency to sell. In addition, some vendors are concerned about the price they may be able to achieve until trading improves. Unfortunately for Scotland, this will be at a slower rate than the UK, as businesses face restrictions until August.
There is a general sentiment that we will see an uptick in the level of distressed assets coming to market once the support mechanisms are withdrawn, although this might not be as drastic as we first imagined. Funding in the market place also continues to be a concern and the majority of transactions are being done from cash reserves, whilst high street lenders keep a cautious approach to lending.
White Lion Inn - Weston, Cheshire
Harveys - Pwllheli, Gwynedd
LOOKING AHEAD IN 2021 FOR PUBS & RESTAURANTS
The number of businesses reporting a strong return to trading since reopening in April 2021 has demonstrated the significance that British people place on visiting pubs and restaurants. As such, we can be relatively positive that the bounce-back over summer will be strong, boosted by the ongoing vaccination programme and the domestic staycation market.
This is supported by the results of our recent Sentiment Survey, which surveyed hospitality operators to gain an outlook for the sector and business operations for the rest of the year. The results indicate a sense of cautious optimism has begun to filter through the market since our last survey in January 2021.
48% of respondents feel trade has been better than expected since reopening, reflecting the significant pent-up demand from consumers to return to hospitality venues
67% of respondents said they feel positive about seeing some recovery in the second half of 2021, following ‘Freedom Day’ on 19 July going ahead as planned and seeing all coronavirus restrictions lifted to allow viable operation.
49% also feel there is potential opportunity in the second half of 2021.
The key opportunities highlighted are:
- People receiving their vaccinations and being more comfortable going out
- Easing of restrictions
- Opportunities to expand (distressed / vacant)
Encouragingly, 83% feel it will take less than 3 years for the sector to return to pre-covid levels.
Buyer demand for hospitality assets will continue to outstrip supply in the second half of 2021, which is positive for sellers and may lead to more competitive bidding and dynamic pricing. The challenge will be bringing sufficient levels of assets to the market.
Sentiment around pricing has improved significantly since January 2021.
68% of people think pricing will stay the same or increase, likely off the back of the strong return to trading since reopening. Following a further boost over summer, this may encourage more operators to test the market.
Respondents also identified a number of challenges which could threaten the sector’s rate of recovery over the next six months. Key headwinds include the staffing crisis facing the industry, rising costs and price inflation, which may deter consumers from spending on eating and drinking out.
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