From mysterious investment to sought after asset class
Pub operators have been paying rents to their landlords for centuries, but they were traditionally seen as a niche and somewhat mysterious type of investment. In the 1990s a financier called Guy Hands had the revolutionary idea of securitising the income that a pubco received from its tenants. This contributed to a series of events which culminated in the whole pub sector becoming a sought after and recognisable asset class, appealing to an ever wider spectrum of investors.
A return to major transactions
In January 2019, Ei Group sold a portfolio of 370 free of tied pubs to US Private Equity firm Davidson Kempner – a fantastic illustration of how far the sector has come when viewed from the perspective of a commercial property investor.
The significance of the transaction is not just its size, although at £348 million it was the pub sector’s biggest deal for two years. The fact that the leases are all free of tie, and that 90 per cent of the assets are let to private operators or small multiple operators, as opposed to the major plc covenants, is the highly significant feature.
This is the aspect that sets the deal apart from other transactions, and confirms the pub sector’s place alongside hotels and healthcare as an attractive Alternative Market investment asset class.
In the last 2 months there have been two even larger deals; the £3bn sale of Ei Group to Stonegate, and the takeover of Greene King by a Hong Kong based investor, CKAH, in a £4.6bn deal which, if approved by shareholders, will dwarf any previous transaction. However these are both sales to parties who might be regarded as experienced pub owners and are of complex full businesses rather than being directly comparable to investment sales in other, more traditional, property classes.
Pub portfolio opportunities
Pub portfolios are characterised by having a large number of (relatively) low value individual assets, all let on separate contracts, which gives the freeholder the opportunity to develop a proactive management strategy to enhance the assets. This may involve some selective disposals or acquisitions, targeted capital investment to increase income (benefiting both landlord and tenant), or the re-gearing and restructuring of leases to increase the investment value and give tenants improved security of tenure.
Investors in tied pub estates have been aware of these opportunities for years, and the tied lease model remains the backbone of the UK tenanted pub sector, but the owner of a tied estate requires infrastructure, systems and staff to manage their business. The owner of a free of tie estate, on the other hand, has much less involvement in their tenant’s day to day running of the pub, and consequently a much lower cost of running the portfolio. All of this makes a free of tie portfolio much more analogous to a traditional commercial property portfolio.
Tip of the iceberg
While deals such as the Ei Group disposal and British Land’s sale of its remaining pub investments to Aprirose make headlines, they are the tip of the iceberg. Under the surface there is a growing steady flow of smaller and individual transactions taking place. Buyers range from private individuals through to some of the UK’s biggest pension funds and global Private Equity investors.
Inevitably as demand increases yields have tightened, and the circa 7.6 per cent Net Initial Yield achieved by Ei Group is comparable to a number of other sales. However, given the very low yields achieved for industrial and office property, and the volatility and risk attached to the retail sector, it is easy to see why investors are still drawn to the pub sector. Indeed, the sheer volume of enquiries Colliers has received over the last 12 months suggests pub investments really have achieved the recognition they deserve.
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