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Analysis: Gloom lifts off the on-trade

Christies has issued an upbeat assessment of the pub and restaurant sector's prospects for 2011, despite some concerns over the impact of the VAT increase and the government's austerity measures.

Restaurant prices rose 4.6% in 2010, the property agent says, following double-digit declines in the previous two years. Pubs saw a 0.9% fall in sales prices - a performance that looks encouraging in light of the 20.1% collapse in 2009 and the 11.6% decrease the year before.

Simon Chaplin, Christies' director of restaurants, said: "Market conditions showed signs of improvement during the year as consumers - attracted by new offers and the growing use of discount vouchers and promotions - continued to eat out. "Although there was some distress, particularly among the independent operators who struggled to compete with the leading brands' promotional activity, there were fewer casualties than expected during the year."

Christies warns that discretionary spending is under pressure - but adds that operators need to become less reliant on promotions. "We believe there is a need to realign prices and gradually withdraw vouchers and discounts," Chaplin says.
"The latest quarterly QuickBite survey shows that while slightly fewer consumers are eating out, those who continue to do so are eating out more often and spending slightly more when they do.
"As long as the sector offers growth opportunities for operators, investors will continue to enter the market. The long-term outlook for the sector is very positive."

In the pub world, the rate of closures has slowed and there is a clamour for managed freehold sites, according to Neil Morgan, Christies' director of pubs.
"At the bottom end we'll see Punch, Enterprise and Admiral put further levels of stock into the market and there are buyers for them. They have really driven the activity levels. The prices we're getting have stabilised and are quite encouraging now.
"For the right leasehold in the right location with the right lease terms, people will take it and pay good money for it. But there's definitely a preference for freeholds if people can get them. "They're affordable for a lot of people, and as a preference most people would go that route. "There are very clear signs that there will be more assets coming into the market.
"Of the pubs we sell, 60% of them are staying as pubs. Lots of those pubs have got a viable future in the hands of a private operator. We'll see the pub companies continue to meet that demand with disposals."

Morgan said although there were "encouraging signs to suggest that the recovery will continue, the condition of the pub sector is still fragile". But Christies believes pub prices have reached the "bottom of the curve".

Show me the money

It may be an ideal time to pick up pubs, restaurants and shops at rock-bottom prices, but obtaining funding for such deals remains tricky.

Christies says banks were slightly more willing to lend to fund business growth and acquisitions in 2010, as prices and trading conditions stabilised.

Christies sold around 300 former First Quench stores, many to buyers who transformed them into specialist wine shops or who broadened the offer to include delicatessens. But, as in other sectors, finance was often a sticking point.

Director of retail Tony Evans says: "A lot of the multiple operators do seem to have a funding line readily available to them. They've been able to make hay while the sun shines. For the independent retailers, it has been difficult. They're having to provide more security and demonstrate value in their business plans. The business plan is being interrogated to ensure it's viable. There is money out there but it is more of a long haul

"If a bank has had a good experience with somebody and the history is there, as long as they're not being too ambitious, funding is available." The government's Enterprise Finance Guarantee scheme has come to the aid of some buyers, Christies reports.

Chairman David Rugg says: "Although large portfolio transactions were few and far between [in 2010], buyers with robust business plans, who sought individual units and small packages, had a good chance of securing the funding they required.
"Private equity started to re-engage with our sectors last year and we envisage even greater private equity involvement in 2011."

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