19 April 2013

The London pub market is bucking trends by James Grimes

My firm AG&G founded some 13 years ago have been deeply involved in London pub deals in recent years. Indeed, during the last three years alone we have brokered over 110 London freehold deals where the value of the pub has exceeded £1m; hardly recessionary statistics and ones that we are justifiably proud of.

London is a very special place in the world stage right now. The Olympics last year, thankfully, went off extremely well, which only enhanced the appeal of our capital as being “THE” place to be. Whilst the global economic downturn continues, London has most definitely bucked the trend of most of its western world rivals. International investment is attracted by the perceived stability of the country, the weakness of Sterling, the time zone position of the UK and the risk and lack of opportunity elsewhere. The effect this has had on the pub sector has been twofold: in line with bricks and mortar values across central London, the demand and thus values of freehold pubs has increased; and the business undertaken within the said buildings has also bucked the national trend – takings within central London pubs are generally booming. During the heady days of the last economic boom, pubs were fairly regularly coming to the market individually or in small groups with many sold off for alternative use. In the main these pubs were sold by large pub companies and deemed surplus to requirements, especially in comparison with their alternative use value. But whilst such pubs still offer development opportunities, the returns they are making for their current owners are high also. The result is that fewer and fewer of the large companies wish to sell their central London stock, further pushing up prices.

The ripple effect that this increased freehold demand and reduced supply has had on leasehold values is noticeable also. Whereas the market for leasehold pubs throughout the majority of the rest of the country has been exceptionally poor, prices exceeding £500,000 have recently been achieved for tied leases within the area bordered by the Circle tube line. This not only reflects the secure business in the capital but also the shortage of availability and the requirement to pay a significant premium to achieve a sought after site in Central London.

A few trends in recent months are worthy of note. Strong bidding for pubs we are openly marketing has led to boom type situations arising such as gazumping, prices exceeding asking prices and incredibly speedy legal conveyancing following acceptance of offers. I sold two London freehold pubs this year where it took a matter of a few hours from legal packs being sent out by vendor’s solicitors to contracts being exchanged. In both cases the asking prices were vastly exceeded. We do not believe we initially priced these pubs too low, but there is nothing better than extreme levels of interest to competitively drive up prices paid, not dissimilar to the principal auction theory.

Those operators, particularly the small guys, less able to match the central London pub prices are being forced to look to pastures new. One current hot-spot is the East End. This area once saw pubs on virtually every street corner. But changing social and economic trends in the area, over the latter part of the last century, led to many of these pubs being sold off and converted or developed. It could be argued that there is now a real shortage in supply of pubs in the area. This in turn has led to a few former pubs being converted back into their original use – unheard of in most of the rest of the UK.

Meanwhile a pub operator recently purchased the Railway, Forest Gate through AG&G having outbid developers and other retail users. The pub has survived not for restrictive planning reasons but market reasons - because the buyer recognised the long term trading potential of being located opposite a future Crossrail station.

Planners did, however, intervene on another pub, the Phene in Chelsea, a pub we sold over ten years ago to a private investor. Having been refused planning to convert the pub into residential accommodation, the owner decided to sell and we very recently acted for the fast growing City Pub Company in securing its swift purchase for just over £4m.

The thing I love most about my job is being involved with is the constant change in the sector and the way in which the market reacts. Despite such strong demand and hefty prices paid, new concepts and operators continue to emerge with the current vogue being for craft beer. With such strong competition, only the best can survive which, for the London customer means that quality of product and service has to result.

This article is taken from Propel Newsletter dated 12th April 2013

AG&G are chartered surveyors specialising in the licensed leisure industry, with the skill and experience needed to value, assess or promote a property not simply as bricks and mortar but as a business. If it involves the price of a licensed premises, its profitability, rental value, investment prospects or value in a dispute, AG&G can help.

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