Savills - London,

Date: 09 Feb 2010

Buyers have appetite for pub and restaurant assets.

Buyers have shown increased appetite for pub and restaurant assets largely driven by the continued restriction of debt availability, as their smaller lot sizes make them easier to finance. According to international property advisor Savills, the licensed retail sector has seen income returns averaging 6.8% pa, over the past three years, exceeding the 6.0% achieved for All Property.

Savills reports that the well publicised difficulties in the tenanted pub sector has resulted in a divergence in pub and restaurant yields. Prime yields are now at 6.5% for pubs and 6% for restaurants with Central London pub investments achieving between 5% and 6%. The firm forecasts a further 50 basis point hardening in both areas over the next six months. Pub properties like JD Wetherspoon have been traded at between 6.25% and 7.5% which represents a 125 basis point spread on macro locations.

Enterprise Inns maximised sale and leaseback value with the sale of some of some of its London pubs at auction in the last quarter of this year achieving an average yield of 5.79%. These were subject to 35-year leases granted back to Enterprise with sale prices averaging £1.96m.

Andrew McGregor, Director of Savills Leisure Investment says: "As with all property transactions, the strength of covenant is highly influential, but in many cases underlying residual value or occupier demand creates the yield premium. Desire to rationalise vast pub estates and pay down huge debt mountains coupled with hardening yields means the PubCos will continue to sell a range of assets."

Savills reports that the continued competition between operators for the best sites has mitigated any dramatic fall in rents as have the rent free periods offered by landlords to attract tenants. The length of rent free periods obtainable appears to have topped out suggesting that we may have hit the bottom. Top rents in prime retail locations reached at £45-50 per sq ft in London and ranges through the major regional cities at between £28 to £40 per sq ft. Once rent free periods are taken into account the net effective rent paid will be below these levels.

Kevin Marsh, Director of Savills Leisure adds: "Operator confidence may be fragile but expansion plans are still in place, suggesting that there will be demand for quality space in good locations over the next year. This, combined with enhanced returns and smaller lot sizes typical to the sector, should continue to attract investors. The real turning point for the market will be the return of consumer confidence, which is key to driving demand for new space."

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