We have always subscribed to the basic truism that in life you rarely, if ever, achieve 100%. This could never be more relevant in the relationships between Pubcos / Brewers and their lessees. The healthy attitude of a little give-and-take, is the bedrock of a successful business partnership between lessor and lessee. A quotation from a senior Pubco employee, albeit a few years ago, seemed to sum up the attitude from one side of the fence: “tenants, they’re all the same. On the make, on the take and robbing us blind”. When mutual trust disappears, so do sound business relationships, particularly with slightly less successful trading operations.
1. Admirable Admiral
We are grateful to the M&C Report, February 2014, number 169, for an article that you may not have had the chance of studying, concerning an interview with Jonathan Paveley who has only recently stepped down as Executive Chairman of Admiral Taverns, but of course remains Chairman of the successful regional Brewer, Hook Norton. Two particular quotations caught our eye as follows:
“You have to trust the person in front of the customer – if you can’t trust them, don’t employ them. In my first six months we dismantled the bureaucracy that existed, saving millions and empowering the front line to take decisions without Head Office interference……poor decision-makers left and the good ones thrived and recruited their equally talented colleagues from other companies by telling them how much job satisfaction they were now getting. Furthermore, licensees liked it because their BRM was now empowered to help them on-the-spot and we were increasingly accepted as being on their side. Distrust waned and trust grew”.
This highlights our opening remarks concerning genuine levels of give-and-take and to get the optimum out of a given situation. This is backed up by the second quotation:
“Try to ensure that deals you agree with licensees are fair and will be motivational for them. I can remember quite a few occasions when a deal agreed with a licensee came to me for formal approval and I sent it back with a lower rent, or other income reduction for Admiral and only one or two went the other way. We both need to make a good living together over the long term”.
We really could not have put it any better!
2. Purchase the Freehold?
We have had a number of cases recently where clients have sought our advice over the amount that they should offer in the hope of buying the freehold interest. Time and again, they are encouraged to ‘make an offer and see if it will tempt us’. Unfortunately – on the basis of this encouragement – there have been a number of occasions where external valuations have been paid for (not through us) and then subsequently rejected out of hand.
Please remember that every single freehold asset has a book value to the Pubco which acts as a benchmark as the minimum price to which they would aspire. The book value is made up of total site income to the Pubco which is in two parts, namely: rent and what is known as ‘wholesale contribution’. The latter is the income from the discount that the Pubco retains acting as middle man in the supply of draught and other products. As a very rough-and-ready guide, if you take the Moving Annual Total (MAT) barrelage and multiply that by approximately £220, you will have a general idea of the wholesale contribution. That should be added to the rent that you pay and then, depending upon circumstance, multiplied by anything between 9 and 12 to produce the resultant book value. It is far from an exact science, but does give you a general idea of the zone of relevant values.
Then we turn to the issue of whether or not there is any desire to sell in the first place. You should always ask well in advance of paying for any external valuations: “is the pub in your core estate?”. If the answer is ‘yes’, then it is highly unlikely that an offer for the freehold from the tenant will meet with success. Also, you have to consider the reality of open market freehold value, set against book value. It is a common occurrence that the realistic open market freehold value of your pub is sometimes under half that which is ascribed to the book value.
The exception to the rule – as highlighted in last month’s Newsletter – is if the property is being purchased for a use other than a public house which may or may not require planning approval for such change of use.
If your pub is not in the core estate of your Pubco, then certainly it is worth considering a freehold bid with current interest rates being so consistently low. As a point of reference, in Enterprise Inns’ last financial year, it has been recorded that they either completed or exchanged on 84x pubs for disposal, generating proceeds of £31m with the telling observation of “a healthy premium to book value”. Despite the fact that of the 84x pubs sold, the average sale price was £390,047, there were some fairly spectacular sales at levels considerably higher than the average, mainly on the back of change of use considerations.
3. London Values
Beyond any doubt, London freehold and leasehold values are completely out of sync with the rest of the UK. Our Director, Simon Clarke, who lives in Battersea, remarked that with terraced houses in his immediate area well exceeding £1m, it is hardly surprising that freehold pubs are generating some fairly spectacular prices. Similarly, the gentrification of areas that otherwise were seen as being not very desirable, has also pushed up rents, particularly for restaurants, either permanent or pop-up, that are now exploiting what were previously perceived as low rental, suburban areas.
A recent survey in the Zagat Restaurant Guide, confirms that the average Londoner now eats out 3.7x per week which is the underlying feature as to why so many new restaurants have been opened in areas that previously were deemed as unattractive. The net result is that restaurant rents are rapidly rising in these areas, which will have an effect of levelling-out the number of new future restaurant establishments.
We have been saying for quite some time – albeit wrongly – that the restaurant rent bubble in Central London is sure to burst at some time. We were wrong. The market still marches on with increases on increases, some restaurant rents being well over £500,000 and some site premiums in specific ‘hot spots’ being over a million pounds. For sure, the bubble will inevitably burst, but it’s anyone’s guess as to when. Scary!
4. Fair Maintainable Trade and Reality
One of our clients, who was interested in general terms in taking on a regional Brewer’s leasehold, took the trouble to do some research of the other pubs listed on the regional Brewer’s website and compared actual stated turnovers ex VAT with Fair Maintainable Trade estimates. Fourteen public houses were covered, with the total confirmed ex VAT turnovers being £4,351,287 with an average total sales of £310,806 per property. However, the interesting point was the declared Fair Maintainable Estimate, which of the same 14, totalled £5,524,050 with an average Fair Maintainable Trade of £294,575. That made a difference between the actual average turnover and the regional Brewer’s view of Fair Maintainable Trade, of £83,769 per property, or an increase of 21.23%. There were a large number of the sample properties in generally the same area. So where does this extra trade come from? No answer, but it is assumed in every case.
Our client is still in discussion over the pub of interest, but on the basis that the current turnover of £202,000 is absolutely maximum with the Fair Maintainable Trade estimate of £286,000 (on which the rent has been based), as being completely unreasonable. Negotiations continue.
5. The Cost of PIRRS
Acting for a lessee outside of the M25, in a recent Pubco rent dispute, third party determination was sought by the Pubco who elected to have an Independent Expert form judgement via an application to the RICS. The RICS appointed a London-based Chartered Surveyor – whose account has now been received – for a staggering recorded 30.5 hours at £275 per hour, with a resultant bill of £8,387.50 split evenly between the parties. Each side has now paid £4,193.75 plus VAT.
This same Chartered Surveyor is also a PIRRS Panel Independent Expert and would have undertaken precisely the same instruction with identical surveyors acting for landlord and tenant, with identical statements of case. The total cost under PIRRS (for the same Expert), would have been £3,000 as the passing rent under discussion, is over £25,000.
We asked for and received a brief time sheet from the Independent Expert to justify the hours that formed the basis of the total account. Suffice it to say that there was a degree of wonderment as to how the time spent was allocated.
Our client’s question (which we could not answer) was – is the PIRRS fixed fee a genuine reflection of the true fees that should be charged in any event, or were the actual fees that were charged, fair and reasonable? To quote an old ‘Peter, Paul and Mary’ song…. “the answer my friend is blowing in the wind”.
6. And Finally
“I’ve stopped drinking – but only when I am asleep” (George Best)
“What is on a drunken man’s lips, is on a sober man’s mind” (Danish Proverb)
Best wishes from the Team at M & C
Phone: 01285 719292