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Time please! A look at the pub property market
Sadly, more and more pubs are closing down every year. According to the British Beer and Pub Association, 52 pubs a week are closing down – that’s 2,377 in the twelve months to July 2009 – and many never reopen as pubs. But a ‘dead’ pub is a property opportunity – and it is interesting to see how former pubs are finding new uses as residential or commercial property. Gavin Sherman, Managing Director at Paramount Investments, says that most of the pubs that Paramount is selling today are for alternative use. “Only 20 per cent of the pubs we sell are for pub use, and probably closer to one in ten,” he says. “90 per cent of what we sell is set for alternative use.” He believes the nature of pubs coming on the market has changed over the past few years. He used to see a lot of boarded-up pubs that had failed to find tenants – it was only once every other avenue had failed that pubs were being sold off. Now, more of the pubs coming to the market with Paramount are still operating.
Gavin Sherman says “We’re seeing a lot more places that are still being run as pubs, but are coming to the end of their economic life – not so many dilapidated, boarded-up pubs. We’re selling some now that have got tenants in, but the brewery isn’t making enough money out of it.” He points out that if a brewery is only making £5,000 a year on a pub worth £200,000, it could make more money putting its cash in the bank – even with current low interest rates. A good pub ought to yield 10 per cent – below that, brewers and pubcos are beginning to weed out their portfolios. The action brewers are taking can be ruthless. “We’ve got 300 pubs on the market from one brewer at the moment,” he says, as the bottom end of the portfolio is churned out. Pubs were selling at high prices two or three years ago – but valuations have fallen. Gavin Sherman believes that, historically, brewers have overvalued their pubs. Many are still on the market at unrealistic prices, he says; in some areas, for instance where a pub originally supplied workers at industrial businesses that have moved away from the area, there just isn’t any value to a pub in its current use. But he says events in the sector in the last year or so, and particularly the pre-pack administration of Admiral Taverns, have pushed prices down. “I’ve seen from 2.5 per cent to 50 per cent price reductions,” he says; “the average is around 20 per cent.”
Neil Morgan, head of pubs at Christie & Co, who sold one pub every week in 2009, says that the pubs market in the last couple of years was stymied by the high prices sellers were demanding. But we are now seeing more cases where, “the expectations of the seller are being being matched by the aspirations of the buyer”.
Indeed, he says, freehold prices for some former pubs are now so cheap that in some cases there’s only a negligible difference between the cost of renting and the cost of acquiring a property. Some freehold pubs are selling for less than £100 a square foot. That makes pub sites attractive to diverse owners – retail operators, car dealers, and even medical centres. High street pubs in particular, he says, “tick all the right boxes” for business. Estate pubs in residential areas are also useful for such uses as doctors’ or dentists’ surgeries and convenience stores, as they are close to their customer base. He says, in particular, that the big pubcos – Enterprise, Punch, and so on – have changed their attitude to the market. “The major pubcos have reversed their position from being the most active buyers of pubs to now being sellers, of both bottom-end and in some cases, better quality assets.” That’s led to far more pubs being available, and more realistic pricing, too. Many pubcos bought properties during the boom years up to 2007, and now face high debt burdens, so they’re keen to sell in order to reduce their balance sheet gearing. Punch, for instance, recently instructed Colliers CRE to sell 68 properties which are all part of its ‘turnaround division’ – all are new to the market. Several of the pubcos are now selling pubs with restrictive covenants forbidding future use as a pub. Jonathan Mail, head of policy and public affairs at the Campaign for Real Ale, says Enterprise Inns used restrictive covenants on 70 per cent of the pubs they sell. Brewers such as Thwaites are also using these covenants to ensure pubs that are sold off can’t later return to compete with other local Thwaites pubs. However, Enterprise and Punch appear to have scrapped the practice, following concerns expressed by the House of Commons Business and Enterprise Select Committee.
Gavin Sherman estimates that less than half of the pubs he sells are going for residential use – most of those in the country, where the village pub is often a stunning building in a central location. About 20 per cent of the pubs Paramount handles end up in restaurant use, while up to a third of all pubs are now going into use as retail operations. “A lot are changing hands for convenience stores, doctors, dentists, or vets,” he says, “and many high street pubs are going to fast food uses such as Domino’s pizza.” The Campaign for Real Ale gives a slightly different split; according to CAMRA, 31 per cent of permanently shut pubs are demolished, with 36 per cent remaining in use as restaurants or cafes, and 33 per cent going to other alternative use – mainly residential. It’s interesting to see how the fall in house prices has led to a dramatic decline in the proportion of pubs being sold for future use as a home. Gavin Sherman says “When we started, 70 to 80 per cent were being changed to residential – now, it’s fallen to only 40 or 50 per cent, whereas fast food outlets are doing very well.” He speculates that the recession has actually helped fast food outlets – people are no longer having a night out at a restaurant, they’re having a night in with a takeaway instead. Fleurets has sold a number of pubs for conversion to new uses. In the case of the Bridge Inn, Clitheroe, the pub had been boarded up for six months, and on the market with another agency, before Fleurets took on the marketing and sold it for conversion to two shops. The Turners Arms, Rotherham, was a brick street- corner pub in an area where it had once served workers at local factories; it was now redundant. Fleurets found potential buyers looking at a number of different uses – affordable housing, a religious retreat house, storage. Even the possibility of demolishing it and erecting light industrial space on the site was considered. The building hasn’t in fact been demolished – but now, in a neat twist, it provides offices for a demolition business. The Beech Tree, Blackburn, also sold by Fleurets, became an Islamic charity’s meeting house. In city centres, quite a few pubs are being converted to churches. Gavin Sherman says he has sold quite a few pubs for conversion to mosques, though he thinks his most interesting deal was the sale of the Three Pigeons, Oswestry, to the local football team, New Saints, which now use it as their club bar for drinking in after the match. There are some problems peculiar to this market. For instance, although planning permission is generally not required to convert a pub to retail or restaurant use, it is needed for other uses, particularly residential. Under the Use Classes Order 1987, pubs and bars are in the A4 class – ‘Drinking Establishments’ – so conversion is permitted to A1 (shops and retail), A2 (financial and professional services) and A3 (restaurants and cafes).
For city centre pubs, conversion to commercial use is generally simple. On the other hand conversion to residential use is often fraught. Councils will generally look for evidence that a pub is not a viable business in its current use before granting planning permission – which may mean that agents have to go through a protracted and futile marketing exercise to sell the pub as a going concern, even though there are buyers queuing up to convert it.
Local branches of the Campaign for Real Ale (CAMRA) often fight a battle against the residential conversion of rural pubs – particularly where it is the last surviving pub in a village – and they have managed to win a number of high profile successes.
However Gavin Sherman says difficulties with planning permission can be usually overcome – and are often overestimated. “Planning is rarely a major issue, particularly in town centres,” he says, “though you do have to prove it’s no longer viable as a business. I’ve never seen a council’s planning policy explicitly against change of use.”
The costs of refurbishment vary widely. However with more still-trading pubs coming on to the market, they’re likely to be lower than with the boarded-up and indeed derelict pubs that used to make up much of the conversion market. Gavin Sherman says “Some people will buy a pub and not spent a penny on it, just live upstairs.” On the other hand, some pubs are knocked down and completely rebuilt, with building costs “between £100 and £200 a square foot.” While rural pubs are often relatively simple to convert, city centre and suburban purpose-built pubs often present a problem. Some are too large for single residential use, and difficult to convert to office or apartment format. For instance the Angler’s Arms, Derby, a Greene King pub, is to be demolished, and a 60 bed care home built on the site. The building, on the outskirts of the city, apparently received no bids for use as a pub – and would not be easy to convert, since the demands of complying with building regulations would probably cost more than a complete new build. Certainly this is a big area for agents. It’s difficult to estimate quite how big, as some agents are still reticent about disclosing the number of pubs they sell for non-pub uses.
Fleurets, on the other hand, states openly on its web site that it currently has 260 properties available where there is an opportunity for redevelopment or alternative use. The number of pubs on other agents’ books must be three or four times that. Gavin Sherman says, “There are real opportunities out there without a doubt. It’s a question of identifying them – and, of course, having the access to cash to make use of them.” Borrowing for pub purchase – as for other property investment or development – remains tight, and few lenders are willing to finance homebuyers wishing to convert a property. Even though the economy appears to be looking up, which might stem the flow of some types of distressed property, it seems likely that the supply of former pubs will continue. While the better managed groups, like Mitchells & Butlers, Greene King, Marstons, and JD Wetherspoon, are beginning to see encouraging signs of sales growth, Punch didn’t impress the city with its recent results, and some smaller pubcos are faring poorly. Besides, banks which have so far held back from crystallising their losses may be less happy to subsidise failing pubs in future – and push for quicker sales. The recent VAT increase will also test pub operators – as will interest rate rises. Neil Morgan certainly believes that there is likely to be a good flow of pubs for conversion. “There is little doubt that the UK still has too many pubs,” he says - “and there will be further closures.”