Fleurets - Bottom-end freehold pubs dominate market activity in 2012: Bottom-end freehold pubs – pubs without accounts and invariably in a ‘forced sale’ scenario - have continued to dominate market activity in 2012, property agent Fleurets has reported. Overall volume is down by a third compared to 2011 but these sales still account for two-thirds of all public house transactions with a larger proportion (58 per cent) being undertaken in the north (down from 66 per cent in 2011).

The average sale price has increased by 16 per cent nationally, split +18 per cent in the north and +8 per cent in the south. This reflects the improved quality of operations coming to the market (particularly in the north). This is demonstrated by the higher level of fair maintainable trade (FMT), which is up 11.3 per cent on last year as a result of pub companies having largely sold off the worst of their estates over the last three years or so. The average sale price is slightly reduced from the average for just pub company sales, due to the effect of lower quality sites coming to the market through administration situations.

The number of pubs being sold out of the trade continues, but at a slower rate, with 48 per cent of bottom end freehold pubs being sold for alternative use compared to 54 per cent last year and 50 per cent in 2010. The most common alternative use is residential conversion, with 52 per cent of pubs sold out of the trade being for residential use, 14 per cent for restaurant, 14 per cent for retail and four per cent each for convenience stores and offices.

Buyers of these properties have largely been individuals for continued operation, conversion to alternative uses or development. There are a small but notable number of sites being sold to regional brewers and regional/local multiples, such as Amber Taverns and Bold Pub Company in the north.

A spokesman for Fleurets said: “We anticipate a continuation of the bottom end sales program by the pub companies, albeit at lower numbers. These will be supplemented by disposals via administration situations. Average sale prices are likely to continue to increase as the supply side of the market slows and the average quality of the properties coming to the market increases. We anticipate that the number of properties being sold for alternative use will continue to decline as the operations coming to the market increase in their viability for continued pub operation.”

Fleurets reported that the leasehold assignment, subletting and lettings market has continued to experience difficult conditions. The average sale price has declined by –15 per cent nationally and this is split –18 per cent in the north and –five per cent in the south. These transactions have been made up of a wide range of operations including tied and free of tie lettings, tied and free of tie assignments and free of tie underlettings. The results are therefore, a reflection of the wider transactional market for leasehold public houses as opposed to providing any specific indication about a change in value of any particular element of the market.

Fleurets added: “It should be noted that the transactional evidence excludes a package deal of 15 free of tie leasehold properties and a significant reverse premium transaction in the north of England, as these were considered to be non-representative of market activity in general. Leasehold transactions in the south, despite showing a five per cent decline in the average sale price, probably reflect stronger market conditions than last year as the 2011 comparables included two significant high value leasehold assignments in London, which have not been repeated in 2012. This is confirmed by volume numbers, which demonstrate that the transactions in the south accounted for 61 per cent of overall leasehold public house deals. The leasehold market in the north has mainly comprised of subletting at nil premiums and new lettings. Assignment premiums do happen but they have been few and far between.”

Fleurets reported that there continues to be significant availability of new leases on the market, both on a tied and free of tie basis. It added: “The majority of new lettings from the pub companies appear to be on a tenancy arrangement as opposed to a longer term lease. However, the flexibility now provided by many of these agreements, with more affordable ingoings and rents, are satisfying a good proportion of the demand. Premiums will therefore continue to be under pressure and apart from the best properties in the best locations, significant premiums are unlikely to be seen on a regular basis. Attractive pubs in countryside areas and economically strong regions where there is no historic over supply of pubs, such as the south east, will lead the way and will see any increase in value that is likely to occur. Average sale prices in the north will continue to represent little more than fixtures and fittings value.”

The freehouse market has continued to be relatively inactive, reported Fleurets. Owners of operational and viable public house businesses, whether corporate or private, have invariably elected to continue to own/operate the business rather than sell. The relatively low sale prices achievable are partly a result of the difficulty in arranging finance and particularly the level of cash investment required by potential purchasers.

Fleurets stated: “Sales in the year to September 2012 reflected a 17 per cent increase in the average sale price mainly generated by an increase in the multiple of fair maintainable trade (FMT) as apposed to an increase in the estimated trading potential of the business. This suggests that it is not a case of better quality operations coming to the market but it is more a case of an increase in the value attributable to a site by purchasers. There is a significant north/south movement in the sales statistics. In the north the average sale price has fallen –9 per cent although this is largely correcting the anomaly in 2011 brought about by a select few high value sales last year. In the south there has been a significant increase in the average sale price (+47 per cent) although this is exaggerated by a number of high value sales for alternative use in the London area. The movement is therefore slightly exaggerated but the trend is supported by a wider base of transactions. The south of England has seen a significant increase in the volume of activity with two-thirds of freehouse sales being achieved in the southern half of the country. Overall, transactions have doubled in volume terms over the last 12 months, albeit from a low base. We anticipate seeing a continued increase in the volume of transactions being led by the south of England as confidence in trading potential and acceptance of values by vendors becomes more prevalent. Transactions will be driven by private vendors who have increased in number over the last three years due to the pub company sell off. We are however, already seeing signs that corporate operators are considering the time to be right for the disposal of managed house operations and we anticipate that administrators and banks holding on to distressed assets as operational entities will start to realise their positions and push properties on to the market in open market sales (as opposed to forced sale situations).”