With many businesses locked into upwards-only rent reviews, what will happen in the UK leisure property market?
Some of us are old enough to remember, in the 1970’s, when you couldn’t give freehold pubs away. They simply weren’t in fashion. The investment market for leisure properties was equally unattractive. A prime restaurant offering 15% yield had no takers. What a contrast to the last twenty-five years when yields on freehold bars and restaurants have attracted 3% - 4%, sometimes even better. No change there.
It was relatively easy in the 70’s to conclude that the leisure industry would expand enormously. Even the most optimistic are surprised at just how hot it has become.
What caused this and where exactly is it all going? Well a feel-good factor helped by house price inflation in urban areas and the inexorable rise of working women in high paying positions. Women whose mothers may have been the first generation to enter the workforce, as gender equality rebalances the workplace.
But perhaps a general increase in prosperity with the aspirational middle and working classes taking their position in a less deferential society, with their ability to fly off to exotic locations on a small budget. Eating out was no longer for rich it became accessible to everyone. In addition, deregulation of property offered investment opportunities hitherto not available.
Whatever the reasons some divisions of the leisure industry have clearly reached saturation, as evidenced by the recent malaise in the casual dining sector. Like all things, we are seeing a correction. No change there.
What will that correction be, and how will it affect the property market. Whilst saturation may have been reached, the greed of the property industry has not been sated. The extent of the press comment on expansion of leisure facilities has not been lost on the property tycoons. They want their ‘pound of flesh’. Combine this with an over optimistic trading view by leisure operators, making them pay crazy rents, and add on the ‘prestige buyers’; the process got out of hand. Alice went through the ‘looking glass’.
The operators must be determined to resist excessive rents. No operator no rent. Like the post financial meltdown in ‘07/’08 the ‘gravy train’ trundles onwards. Did anyone really learn a lesson. Who knows but we're not convinced.
In the short-term rents may come off a little, but it will be a temporary occurrence. Things will revert to normal. No change there.