Tenants benefit from increased pubco focus
DEMAND for pub tenancies continues to be pretty stable, but a rise in the number of leases on the market has not helped their value.
There are two areas of the market to consider – firstly the issue of demand for vacant accommodation to let and, secondly, the demand for and value of tenants’ leasehold interests in established, mature public house businesses.
In the past couple of years, as the pubco model has found itself under parliamentary scrutiny at UK level, landlords have started to show more flexibility in respect of the lease offering, not only in terms of rent but also discount arrangements, lease length and other lease terms.
Lenders continue to show little appetite for lending to consumer facing businesses.
There is arguably now more focus on identifying suitable, experienced ingoing pub tenant operators, and there is evidence of growing co-operation in the partnership between landlords and tenants to maximise the benefit for both parties.
Despite the economic challenges of recent years, tenancy opportunities are still available for new start businesses at a low cost entry level, with no requirement for significant capital outlay.
But what has been affected is the value of mature, established public house leases, which an outgoing tenant might look to assign or sub-let.
Principally, this has been due to the policy of mainstream commercial lenders, who no longer consider a tenant’s leasehold interest to be suitable security for commercial lending purposes.
That is not to say there have been no transactions in the leasehold sector which have attracted a sizeable leasehold premium in recent years. These transactions are, however, increasingly uncommon, and do not typically involve a level of bank funding.
Lenders continue to show a very weak appetite towards any business which is consumer facing and which relies on what is identified as consumers’ discretionary spend. Almost without exception, the mainstream lenders have put pubs into this category.
The virtual absence of funding from the mainstream lenders for mature, profitable leasehold businesses has had a significant adverse impact on their value, with leasehold premiums now being a very unusual feature of the market.
A further element to consider is the health of the properties in question.
While the landlord and tenant have each extracted their share of the revenue generated from the business, the property itself has, in many cases, been forgotten and suffered neglect.
Of course, the neglect of maintenance over a protracted period inevitably has an adverse impact on the trading potential of a property, but thankfully many pub landlords now recognise the need to re-invest in their estates.
Several are now also seeking to reduce the size of their estates in measured disposal programmes, and there is evidence that this is happening in conjunction with a programme of selective refurbishment throughout the remainder of their estates.
There has also been a recognition of the need to develop pubs as businesses.
This is recognised by an increased focus on training, not only in the process of obtaining a personal licence, but also training offered by many brewers for their customers, in terms of wider pub management issues.
Our overall experience has been that the notoriously fractious landlord tenant relationship in the pub sector is perhaps now slightly less prevalent.
Challenging market conditions, above all other factors, have been the main catalyst for improvement in the landlord/tenant relationship, insofar as landlords have in many cases been compelled to reconsider the leasing arrangements and offer more favourable terms for their tenants.
• Alan Gordon is a partner in the Glasgow office of chartered surveyor DM Hall.