Predictions for the Leisure Sector in 2017
January 3, 2017
Davis Coffer Lyons & Coffer Corporate Leisure predictions for the leisure property sector in 2017
- Market Growth: People are still eating out regularly, but growth by some of the UKs biggest F&B chains is starting to slow. Managed pub and restaurant groups saw sales slip in October, with collective like-for-like sales down 1.0% on the same month last year, according to the Coffer Peach Business Tracker. It proves that the bulk of growth in this part of the sector coming from new openings, leading to intense competition.
- Business Rates – The impact of new rates will be keenly felt in the leisure sector in Southern England especially in the Central London core to burden all tenants, albeit to varying degrees. This will force landlords and tenants to be more creative in the deals they structure in order to keep the leisure sector thriving.
- The Economy – The pound will be a key source of disruption for leisure and hospitality businesses. To maintain margins while keeping prices low for hard-pressed consumers will be very tough. London must keep stressing that it remains open for talent and business from the rest of the world. A weak pound will continue to see some foreign investors piling in to London and uncertainly will mean others sell assets.
- Investment yields It is anticipated that investment yields in the prime positions could get even lower as the demand for prime property increases especially from overseas funds. Very low yields remaining on the very best assets but some softening in the secondary stock is possible especially if inflation increases as expected.
- Finance – Secondary finance will continue to be the main source for start-up and embryonic companies. Liquidity to entrepreneurs has improved since the financial crash, and according to Barclays, its increasingly a borrowers market rather than a lenders one.
- Transaction Volumes – 2017 may see a record year for transactions as political uncertainty gives both buyers and vendors a reason to sell.
- Volatility in pricing as we see swings between demand and supply.
- More sale and leasebacks in the pubs and other alternative sectors as indexed leases become ever more valuable with higher inflation
As a result, leisure will be recognised as an asset class in its own right by many institutional investors.
- Gastro Halls & Food Markets – The emergence and strengthening of the food market, largely driven by demand from consumers. There has been an explosion in food markets, delivered in the main by London Union headed up by Henry Dimbleby and Jonathan Downey, with the likes of Dinerama, Hawker House and Model Market, and most recently Timeout Market from Lisbon has announced their new outlet in Shoreditch. We see this to be a big growth market with more concepts to come; the best will be those at the cutting edge having access to all of the latest up and coming operators.
- Small is beautiful. Landlords helping more leisure operators onto the scene offering smaller restaurant trading formats: More affordable overheads and reduced capex is giving rise to a more eclectic line up of operators.
- Increased developer focus on leisure to cater for the demographic power shift in terms of spend the Millennials and Generation Zs and increase focus on place-making
- Landlords expected to create more incubator-style environments, providing more support to operators from business planning to marketing and offering all-inclusive rents.
- Landscape, gardens and sustainability are driving higher up the business agenda, complementing the operator movement towards zero waste initiatives.
- Delivery is a big deal Deliveroo and others including Uber Eats and Amazon are not going away! Central kitchens for these companies are already being sought, restaurants need to manage this relationship very carefully to ensure that customer experience and brand identity are not comprised, as well as the damage to earnings through delivery company share of profits and loss of sales through beverages and tips. We might see a number of the larger chains setting up delivery options of their own taking back control of their quality control which the give away with a third party operative. This will also have a knock on effect on property requirements.
- Unit sizes – There has been a real move throughout 2016 to much smaller restaurant trading formats and we see this to continue aggressively into 2017. More affordable overheads and reduced capex is giving rise to a more eclectic line up of operators; you just have to look at the success of Kingly Court as a prime example.
- Retail & Leisure: Blurred Lines – So many more retailers are looking at hosting F&B concepts in store to create that USP and increase dwell time. We see this becoming more commonplace, but the brand values of both Retail and F&B need to be very closely aligned for it to be a marriage made in heaven. Jigsaw with Fernandez and Wells and Burberry with Thomas’ Café are two most recent examples.
- Rents and Values: Slower rental growth due to the pressure of food costs, wages and rates. Premiums holding for landmark, high footfall, and key leisure pitches. The improved quality of operations in key suburban high streets as London has become expensive for occupiers; brand rollout may move heavily into regions and into important provincial centres, rents and premiums will increase within those locations accordingly.
- Hot Spots: As the fight for sites continues in Central London, we expect to see an in-fill of A3 sites in fringe locations; new central areas to watch out for Vauxhall, Waterloo, Southwark, and Aldgate. Whilst Camden has long been an important cultural and leisure destination for London, we expect to see continued investment which will really put it on the map as a respected foodie location. Similar areas with huge investment and development will also experience this such as Elephant & Castle, Earls Court.
Pubs and Bars:
- Rents and Values: Premiums will start to come down in many cases for tied-lease assignments, but rents will stay robust. Tied leaseholds with short terms left will be difficult to sell, but prices will remain for leaseholds with longer durations of 10-20 years. Free of tie lease values will continue to increase and freehold pubs will remain in high demand.
- We will see the larger commercially operated chains continue to be the performance stars in this sub-sector; smaller late-night operators will be increasingly enticed by management-style operation agreements in Central London due to less risk and overheads.
- Competitive Socialising was a major trend in 2016. In 2017 we expect to see more of this especially the likes of themed bars.
- The new MRO legislation will cause a lot of confusion within the leasehold market. The newly introduced Pubs Code was designed to put pubco tenants in a much stronger position to obtain a fair deal from their landlords, including for some an option to request a Market Rent Only tenancy. However, there are still many concerns around implementation of the Code and how it will work in practice.
- Larger pubcos will continue to develop managed houses and we may see a few tactical investment sales to smaller pub companies.