‘How to Manipulate an Industry’
First of all a group of City Whizz Kids get together, they decide to deal in property, but not just any property just pubs, there is no regulation the whole industry is fragmented, it is in fact wide open to manipulation.
The Monopolies and Mergers Commission have brought in the Beer Orders, no brewer can own more than a specific number of pubs, so a stack of pubs will be sold off at rock bottom prices, lots of land, buildings, tenants with leases and ties on supply. It’s a licence to print money.
They buy their tranches of pubs, they screw the suppliers for three months credit, put all their lessees on fourteen days direct debit, they have immediately generated stacks of cash, in fact millions before the first bill has to be paid. Banks think they are wonderful, being City Guys they know where to get the money to expand. They hoover up all the small Pub Co’s at good prices, this raises their estate value and impresses the banks.
How do they raise the rents without incurring a lot of legal come back, get their own and supportive surveyors to draw up a Valuation Paper under the Professional Institute banner hence this Valuation Paper is born, chaired by one of the Pub Co’s Chief Surveyor with other Surveyors who are possibly dependent on Pub Co’s for business.
To be fair to the Institute this would be the apparently obvious thing to do, it is very easy to baffle anyone who does not fully understand the vagaries of the pub tied industry that the direction taken by this committee was not the correct one. They would appear to have completely overlooked having a surveyor on the committee to represent lessees and tenants or anyone that had the foresight to realise the future implications for lessees and tenants.
This document professionally legalizes rent increases on a basis of future trading or an alternative use, none are specifically definable or can be calculated, in most cases on the middle to lower end of the estates existing turnovers are ignored and a rough bricks and mortar valuation is used, totally over valuing the trading ability of the property and creating unsustainable rent levels. High turnover property is valued on trading ability, if the bricks and mortar valuation produces a lower notional value, this is why high turnover pubs are not having the same problems as the middle and lower end pubs, their rents are still high as part of the aim for high estate values.
By constantly pushing up rents this in turn revalues their whole estate, further impressing the banks and shareholders. At the same time they have been buying up all available good freehouses and depending on the turnover or the bricks and mortar valuation to achieve the highest rent and ultimate valuation.
(One major Pub Co bought a high turnover destination pub for just over one million pounds and set the rent at £75K, which was possible with a good operator, both lessees struggled, the second is in serious trouble, the property itself without the level of business would barely fetch £550K. The second pub bought for £465K with a turnover of £220K and given a rent of £34K, based on the bricks and mortar valuation, all three lessees have been in trouble, the first vanished overnight, the second sold it with unaudited accounts owing money everywhere, the current one is hoping to sell as soon as possible before his credit runs out, the turnover is just below or the same as the original at purchase six years ago, all were and are experienced operators.)
A newcomer to the industry took over a pub in South Devon the Turnover was £120K the rent £32K, the Pub Co involved accepted his business plan, he was delighted. To service the rent and overheads he needed to increase the turnover by 300% to break even. The term Caveat Emptor is conveniently used by all these Surveyors, Pub Co’s and business agents, this to my mind is totally unacceptable and has to be stopped.
A major factor in the Valuation Document that has been totally ignored is the available market share. Every licensee is well aware that the market share is finite, the smoking policy and recession etc. has further reduced the available market and individual pubs market share.
The Valuation Document was obviously prepared by supposedly professional surveyors who have never ever run pubs and certainly not in the present climate, because it is obvious to all licensees that the market is shrinking rapidly, this fact is totally ignored.
Existing turnover is to be ignored, this is in fact the true market share of the pub being valued at that moment of time and the only true indication of viability.
These surveyors assume, by ignoring existing turnover that the available business is infinite and immediate and make their valuations accordingly.
Any growth to the business is at the expense of another pub or pubs and would normally take two to three years to achieve, if possible. In addition any experienced licensee knows that the existing business can vanish out of the door within two or three weeks.
A method called Comparables is used by these surveyors. At a presentation at BII Rent Road Show recently by one of the so called top valuers. He said that he will visit the pub to be valued and have a look at it, current turnover is to be discounted. Interestingly in the original Red Book by the RICS on Valuation, turnover was to be used, since valuing without considering turnover made the Comparables method unreliable, to say the least.
He would then visit four or five pubs within a ten mile radius, discount the worst or the best, ask the landlords how much rent they were paying, if he did not already know from his records and set a Comparable rent.
If the lessee objected, he would tell them that they could go to Arbitration, but his costs were so much and the Arbitration costs would be so much, could the lessee afford to lose for the increased rental valuation, the lessee normally withdrew.
This is not justice this is intimidation, in addition by withdrawing it ensures that the Comparables valuation get higher and higher and totally ignore viability.
They have not released any pubs back into the open market as freehouses as the old brewers used to do to stabilize the freehouse market, in stead they have sold them on to other Pub Co’s at high prices because of the rental levels. This in turn creates a scarcity of freehouses and ensure that prices will always remain high, safeguarding their securitization against loans. Pubs are only released into the open market individually with covenants restricting any future use as a pub, they are for alternative use.
By virtue of this massive estate value and the cash flow creates the illusion of a very safe company, provided a recession does not come along.
Having created these massive estates of pubs, they put all their aspiring lessees through very rudimentary training, very few being capable of reaching the dizzy business heights to service the rent and tie combined, they last roughly eighteen months purely because of the problems disposing of an over rented lease, to be replaced by another aspiring naïve lessee.
The rents are supposedly established for a competent operator at the greatest stretch of the imagination these newcomers will never achieve that status without a number of years of profitable trading.
Business agents could be construed as misrepresenting the pubs that they sell, since they are all aware of the competent operator standard relating to rent levels, they again hide behind Caveat Emptor.
They have various rescue packages which usually takes the form of cash with order which substantially improves the Pub Co’s cash flow and means the lessees future is strictly limited without a major cash injection, often very hard to do. Their other rescue packages are short term expedients, temporary rent reductions which are repayable on selling the lease.
On assignment of the lease the out going lessee is responsible for any defaults by his successor, a kick over from the Privity of Contract banned in 1997, the option to get out of that is a payment of a percentage of the sale figure, usually £7K plus or the greater by percentage.
Having created these monster Pub Co’s far in excess of the Beer Orders requirements, since they do not brew beer they can legally own these vast amounts of pubs. They now have a dominant position in the market and effectively exert control over various organisations, professional bodies and endless suppliers, they can now dictate the market, they have a cavalier disregard for their lessees who are failing constantly and losing their hard earned money and being made bankrupt, evicted and homeless or just might manage to sell their lease to another sucker.
They decline at all times to disclose the failure rate and how many lessees are totally disenchanted with their trading conditions, their Web Sites promise everything and give very little apart from an ability to extract cash at every opportunity.
The whole thing is a brilliant con in achieving this power and sadly this power is being abused. The rents are unsustainable the tie and lack of discounts makes lessees uncompetitive, even if the tie was removed it would not make the bulk of these pubs viable because of the rent levels, which have been pushed to the crazy heights to raise the estate values to raise more money.
The myth that leases could be sold at a profit, which the Pub Co’s have always pushed, applies to high volume pubs up to a point, but all the others the high rental levels are making them uneconomic and extremely difficult to sell even with minimal value, certainly not the expectations promoted to newcomers to the industry, which these Pub Co’s feed off.
The levels quoted for the average value of their pubs is far in excess of normal freehouse valuations, since normal freehouses are based on turnover figures and not inflated rental values. In fact in my opinion the true values are up to 50% less than quoted, which puts these companies into negative equity, which would be fine as long as the market is expanding, but since it is falling as well as property values, the cash flow is dropping, pubs are boarded up and even more people are failing since banks are very reluctant to loan money to overstretched lessees. It raises the spectre of a very inflated bubble about to burst with the recession biting.
Very few companies are in a position to take over these mega companies especially with unsustainable rents that are not linked to turnover and profitability, the key source of their income is stretched to the extreme and falling.
They cannot sell pubs back into the open market as individual premises because the true valuation of their estates would be exposed, something has to give.
The suppliers across the board have been sucked in by these companies to provide them with up to six months credit with minimum of profit on their products, they in turn are owed thousands of pounds and cannot afford to let them collapse, in a number of cases it could create a domino effect with disastrous consequences, similar to the early sixties in the building industry with a number of large companies using the same tactics.
Sadly all the other pub owning companies have followed suit in rent levels following this seriously flawed RICS document, which is in mine and a number of others opinion the key to all the lessees problems. It was set up by people with a vested interest in raising all the values of rent and freeholds across the industry with no concern for the tenants, it may have been unintentional initially but when the enormity of it’s effect was understood, it has been utilized without any consideration of business viability to achieve the maximum value by very aggressive companies to the maximum effect.
The result is expendable, ill trained lessees, the Licensed Trade Charity is inundated with hardship cases of new and vastly experienced, long term licensees who are being evicted from their pubs and homes by the avaricious greed of these companies.
If they had not been so greedy, they could have had sustainable rents linked to existing turnovers, which may not have given them the massive capital growth, they could have given up to £200.00 a barrel incentive based discounts on beers etc at today’s values and 28 days credit. Which would have made virtually all their pubs viable, their tenants would have remained longer, the administration costs and lack of continuity of these changes would be vastly reduced. They could have sold all their failing pubs back into the open market individually, which would keep the freehouse market active, they could have had a condition that they had first option to buy these pubs back at current values if successful, they could have agreed to supply all beers at say up to £200.00 a barrel, which would have given them an enormous discount coming back for no work at all. Their natural growth would not have been so rapid, but their assets would have been well consolidated and they would not have failing lessees and public opinion against them.
It would be nice to put the clock back, but this cannot happen and a lot of blood letting will and has occured. Licensees are not an expendable commodity, but an essential commodity in this operation. The major Pub Co’s and a lot of small ones could be between a “Rock and a Hard Place”, I just hope that they have the sense to realise by having expendable lessees, tenants that they are killing their money makers, vacant pubs do not make money, they cost money.
They are now closing pubs after removing the lessees and paying companies to run them, in many cases very badly. They claim that every pub failure or lessee removal costs them £30K, the real concessions that could be made to a long term good operator for £30K who is struggling could be life saving.
They sadly ignore common sense and continue headlong into financial mayhem for their lessees and tenants.
Before the recession one major Pub Co had 5,800 enforced closures in two and a half years, the majority described as Retailer Failure, the majority of these people were good honest people who invested their redundancies, life savings into a false dream, many to lose it all.
I have been dealing with these people for a number of years, the only way that it will stop, will be if naive or uninformed people do not go to these companies, sadly their publicity convinces far too many to invest.
The industry used to be a great industry when I bought my first pub, it is now very questionable, there are good companies, but anyone taking a pub tenancy or pub lease needs to get good advice and do their research well.