The majority of the pubs that have been sold were poorly located, outdated, under invested and faced too much competition. As a result we are now left with an industry which is leaner, fitter and more sustainable.
There continues to be plenty of private equity interest in the sector targeting small multiple groups to either bolt on to existing portfolios or use as a platform for future acquisitions. The freehouse market has steadily grown over the last few years as pubcos released assets back into the market to pay down debt. There are now more pubs in private ownership than ever before and the freehouse sector - which currently stands at around 21,000 pubs - is likely to grow and has overtaken the number of tenanted and leased pubs.
Managed houses continue to be in demand and in short supply, prompting pubcos to transfer suitably large assets from their leased and tenanted estates. This process will perhaps be accelerated by the new legislation (Market Rent Only option “MRO”).
We have already seen ahead of the legislative changes, the large pubcos taking actions to mitigate any adverse implications by transferring pubs into managed or franchised formats; setting up managed house divisions where they do not exist and granting shorter term agreements.
It is difficult at this stage to predict the ultimate impact on the sector once the legislation comes into force other than it seems inevitable that more pubs will be converted into managed or franchised formats. The free of tie / freehouse sector will grow and perhaps an unintended consequence is that investment in tied pubs will contract, certainly in the short term.
Our analysis of transactions during 2015 reveals that pub prices rose 10.1% during the year. This continued the rising trajectory of the market in 2014, when prices rose 8.6%. Overall, there is renewed confidence in the marketplace and a slightly improved appetite amongst the major lenders to lend into the pub sector, be it for individual assets or groups.
Whilst pub closure programmes do continue, this tends to be at the bottom end of the market in unviable locations and the rate of pub closures is flattening out; we are now reaching a more sustainable number of pubs in the market. The pubs sold by Christie & Co marked as distressed has halved in 2015, a clear sign that the pubs sector is showing recovery, supported by overall economic improvement in the UK.
One of the last sizeable managed house portfolios, Tattershall Castle Group (TCG), was sold by Christie & Co in October 2015 and further diminishes the availability of managed house stock in the market. Demand for these types of assets will continue in 2016, ultimately leading to a further increase in values and a shift in interest from pubcos, investors and private equity players towards the acquisition of single sites or smaller multiple operators who have significantly increased in numbers over the past five years. As there are now fewer managed house portfolios the new influx of buyers to the market have a smaller pond to fish in which will also push up prices.
This shift in the market provides a real opportunity for small multiples operators, of which there are over 300 in the UK, to take advantage and command higher multiples for their businesses. In 2016 we predict an increase in sub £20m pub group deals or mergers and acquisitions by multi site owners who see an overall objective in exiting at a future date, attracting competition from existing managed house pubcos and investors to drive up price.
Positively, 84% of freehold pubs sold by Christie & Co in 2015 were to buyers retaining the pub for continued licensed use, a further increase of 4% on the previous year and 17% on 2013,and the highest recorded percentage in five years. As total pub numbers in the UK have reduced what remains are more viable, sustainable trading entities. Only 8% of total number of pubs sold by Christie & Co were for residential use or development, and only 3% of pubs sold were for conversion to retail convenience store use.
Over half of the pubs not sold for continued pub use still provide a local amenity and employment opportunities while a staggering 92% of total freehold pubs sold by Christie & Co remain as businesses providing support to the local community.