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Licensed Market Offers Mixed Opportunities Says Report

PubOverall, investor appetite for UK Alternatives remains incredibly high, with the licensed sector offering a range of opportunities for investors and operators across pubs, restaurants and coffee shops, according to the latest report on Alternative Investments in the UK by specialist business property adviser, Christie & Co.

The report, UK Alternatives Investment Index: H1 2019, provides an overview of currently achievable yields on prime and secondary investments across various subsectors. The report finds that the average yield on prime investments across UK alternatives as a whole ranged from 3.5% to 7.5%.

Within the pubs market, investments are split into managed houses and leased and tenanted pubs, which differ slightly in their average yields. Managed houses demonstrated yield of 4.5% to 5.5 % for prime and 6.5% to 7.5% for secondary investments while leased pubs were found to have yield of 6% to 7% for prime and a much wider spread of 6.5% to 9% for secondary investment, showing the varying quality of these assets in the market.

Overall, Christie & Co’s report noted that managed houses presented the highest quality pub stock in the UK, shown by the compressed yields and high demand against a short supply. With the sector largely freehold, this presents a challenge for investors, but many operators are embarking on sale and leaseback agreements due to attractive yields which have been seen to be as low as 2.5%. Meanwhile, leased and tenanted pubs are increasingly popular at both ends of the market with a range of investors, including REITs and private equity, seeking strong covenants which are achieving good yields.

Restaurant investments have yields pull back from their peak, Christie & Co highlights, due to recent high-profile causal dining casualties, CVAs and a general downturn on the high street, with the market showing yields of 4.8% to 5.5% for prime and 5.5% to 9% for secondary assets. With plenty of competition in the market, sites with good covenant strength and in desirable trading locations attract strong investor interest and operators with solid concepts still find opportunities to perform and increase value.

Another area of the licensed market touched upon in the report is coffee shops which, while exact yields are not available, demand and revenue trends are continuing to increase, with sales expected to grow 6.8% per year over the next six years.

Simon Chaplin, Senior Director – Corporate Pubs and Restaurants at Christie & Co comments, “Whilst we have seen a fair amount of distress with restaurants in the High Street, well placed sites in major city locations still attract tenants. This was proven by the recent Jamie’s Italian disposals, where we saw interest from existing operators, new emerging brands and those from overseas looking to pick up key sites around the UK. This should give investors’ confidence that the best sites will continue to be occupied and we believe the situation will start to improve throughout 2020.”

Ramzi Qattan, Director at Christie & Co comments, “There are plenty of investment opportunities in the licensed sector, which caters to a broad range of risk appetites – with access to the full spectrum of yields reflective of a variety of lease terms and covenant strengths in primary and secondary locations. Based on recent transactions, we are seeing strong interest in the leased and tenanted sector in particular, from both new entrants and those expanding their existing portfolios.”