Christie & Co – pubs rose in value more than restaurants last year: Pubs rose in value more than restaurants last year, Christie & Co has revealed in its 2016 Business Outlook. Pubs saw an increase in value of 10.1%, compared to 9.9% in restaurants, according to the property agent. The report said there was a 33% increase in restaurant mandates in 2015 and there are currently 210 restaurants for sale. Christie & Co advised on £6bn of pub assets in 2015, more than £2bn up on the previous year. 84% of pubs sold through the company were retained as licensed premises. In the report it predicted sub £20m pub group deals or mergers and acquisitions in 2016 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. It also said demand for managed house stock will continue this year and 2,000-3,000 pubs will be sold over the next three years but, until pending legislation on the Market Rent Only option is clearer, affected pub companies will hold off on making any decisions. It added pubs will continue their fight back and win their share of the casual dining market. Coffee shop numbers, including independents, will swell. It also predicted while there are threats to growth, such as the impact of the National Living Wage and a risk on margins, it expects restaurant numbers to continue to grow by about 10% a year. The distressed assets as a percentage of all assets instructed for disposal was 5%, compared to 24% in 2011. Of that 5%, pubs made up 49% of the disposals with restaurants just 4%.

Simon Chaplin, head of pubs and restaurants – London said: “2015 brought a wider variety of new restaurant concepts to the market, characterised by the innovative and inspired. As consumers continue to demand more choice, better quality and good service, restaurants numbers will continue to swell. The rise of the street food phenomenon was a big factor in 2015, and, as a result, the fast casual sector is the fastest growing at 7-8% a year. Established brands are now trying to replicate this success as they realise customers want something different and to be challenged. Next year we will continue to see entrepreneurs expand new brands from around the globe. The section of the consumer market having the biggest impact is the ‘millennials’, who are eating out more but spending less each time. They don’t eat at traditional times, so we will see more all day dining offers coming to the market. Those brands that are best at social media are doing particularly well as they are speaking directly to their target market, while innovations such as online and delivery order apps are helping smaller independents to target a wider market and trade beyond the limits of their own four walls. We are seeing continued impact from private equity entrants that are all seeking the next big opportunity. Their target is restaurant chains that reach over ten outlets and private equity funding is increasingly replacing traditional bank lending for entrepreneurs. There is an increase in both angel investment and crowdfunding. Most of the top ten operators with more than 100 sites have changed hands in the last 18 months, which means that groups with 20-80 sites are now on investors’ radars. Competition for single sites is now high, particularly in London, which is pushing values up. Around 70% of restaurants remain independently operated and 80% of Christie & Co sales are on behalf of individual owners. As costs rise there will be a greater push from occupiers for turnover rents to redress the balance between rent and trade. The growth of the restaurant sector in northern cities such as Manchester and Leeds is now spreading to other cities, and pressure on space means smaller market towns are seeing branded restaurants coming into the area. We are also seeing London-centred brands heading into the regions. One threat for regional cities, however, is that rates and rent increases are coming through. The London market is overheating, some sites are becoming unviable, and some brands need to expand 20% a year to keep investors happy, but they may not find the opportunities in the regions that existed three years ago – there have been examples of £75/square foot rent outside London.”

Neil Morgan, managing director – pubs and restaurants said: “2015 was a positive year for the pubs team and we transacted or advised on more than £6bn of assets, £2bn up on the previous year. We have seen more confidence in the sector, which is driving growing private equity interest in new and exciting brands. While 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 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 multiple operators, of which there are about 300 in the UK, to take advantage and command higher multiples for their businesses. In 2016 we predict 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. Reassuringly, 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, 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 all 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. As the Market Rent Only Option continues to be debated in Parliament, there is some continued underlying uncertainty in the market. Once a decision is reached, we predict that 2,000-3,000 pubs will be sold over the next three years but until then, affected pub companies will hold off making any decisions. There are uncertainties affecting the 2016 outlook, such as the introduction of the National Living Wage. This will have an impact on the bottom line and pubs may have to put up prices, which is tough in a competitive market that competes with the casual dining sector. Other factors include auto-enrolment pensions, business rates reviews and continued supermarket discounting. However, the continued interest from private equity investors, the growth of the freehouse market fuelled by entrepreneurs and the continuing increase in multiple operators suggest there is a strong year ahead.”