The valuation of licensed premises
| Date | 01 May 2007 |
| DOI | https://doi.org/10.1108/14635780710746948 |
| Pages | 306-321 |
| Published date | 01 May 2007 |
| Author | Howard Day,Rupert Kelton |
| Subject Matter | Property management & built environment |
PRACTICE BRIEFING
The valuation of licensed
premises
Howard Day and Rupert Kelton
Howard Day Associates, London, UK
Abstract
Purpose – The purpose of this paper is to explain the rationale and methodology applied to the rental
valuation of wet led (i.e. pub or bar) retail leisure outlets. The paper does not cover the valuation of
other leisure property (e.g. restaurants, hotels).
Design/methodology/approach – The paper opens with a brief outline of the factors and
legislative changes which have shaped the public house market over the past 15 years. This is
followed by a explanation of the rental valuation methods in use in the pub and bar sector and
examination of the impact of some current issues – in particular the impact of the full implementation
of the Licensing Act 2003 along with other legislative and regulatory changes. Finally the paper
comments on some of the issues relevant to freehold investment purchases of public houses and bars.
Findings – As a consequence of the nature of the industry, profits based valuations continue to
dominate the market and this raises difficult questions of method and interpretation particularly, as
the market is further complicated by legislative and regulatory changes introducing greater
uncertainty. With regard to public house and bar freehold investment changes in the structure of the
market have had a significant impact on perceptions of the investment quality of the leisure sector
with consequences both for flows of capital and the structure of yields in the market place.
Practical implications – Valuers need to be aware that freehold investment values in this sector
have potentially peaked and that investment decisions in the sector should be based upon sustainable
rent.
Originality/value – The paper is of use to all valuers in this niche market and provides a practical
understanding of the profits test method of valuation from which a sustainable rent may be derived.
Keywords Asset valuation,Leisure facilities, Profit, Investments, United Kingdom
Paper type Technical paper
Introduction
There are approximately 60,000 public houses and bars in the UK and the total value of
the properties in the sector is estimated at over £15 billion.
The main purpose of this paper is to explain the rationale and methodology that is
applied to the rental valuation of wet led (i.e. pub or bar) retail leisure outlets. It does
not cover the valuation of other leisure property (e.g. restaurants, hotels).
The paper opens with a brief outline of the factors and legislative changes that have
shaped the public house market over the past 15 years. This is followed by a discussion
of the rental valuation methods in use in the pub and bar sector. The outcome, due to
the nature of the industry, is that profits-based valuations continue to dominate the
market and this raises difficult questions of method and interpretation.
After explaining the rental valuation methodology, the paper examines some of the
current issues facing properties in the sector – in particular the impact of the full
implementation of the Licensing Act 2003. This, along with other legislative and
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
JPIF
25,3
306
Journal of Property Investment &
Finance
Vol. 25 No. 3, 2007
pp. 306-321
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780710746948
regulatory changes, introduces greater uncertainty into the market and, hence, into the
valuation process.
Finally, the paper comments on some of the issues relevant to freehold investment
purchases of public houses and bars. The changes in the structure of the market have
had a significant impact on perceptions of the investment quality of the leisure sector
with consequences both for flows of capital and the structure of yields in the market
place.
Recent history
Before the Government intervened in the brewery industry in 1989, most pubs and bars
were owned directly by breweries running them as managed houses. This vertical
(wholesale and retail) integration was seen as detrimental to competition by the
Monopolies and Mergers Commission Report (1989): The Supply of Beer, presented in
March 1989. As a result of this report, the Secretary of State for Industry introduced
two “Beer Orders”: The Supply of Beer (Loan Ties, Licensed Premises an d Wholesale
Prices) Order 1989 and The Supply of Beer (Tied Estate) Order 1989. Each brew ery
owning more than 2,000 pubs was ordered to release half the excess over 2,000
establishments from tie by sale or to let by 1 November 1992. Tied premises had to be
given the right to buy one cask ale from another supplier and be free to buy non-beer
products from elsewhere. Consequently pub ownership and brewing was split and new
specialist property companies emerged.
These new property owning companies offered 20-30 year leases. The leases were of
interest to potential tenants due to the prospect of assigning these leases in the future
and also the comfort of knowing that tenants of licensed premises had been given
security of tenure under the Landlord & Tenant Act. For the majority, these new leases
were “tied” with the property companies nominating the brewery – which had
previously run the outlet as a managed house – as the suppliers of the beer under the
tie.
A “tie” is an obligation to purchase supplies from a nominated supplier. That
nominated supplier does not usually pass on all the wholesale discounts they enjoy to
the retailer (in this case the publican). They might pass on some of the discounts, but
often the retailer cannot buy beer for the same price as retailers who are free of tie or
“free houses”. In theory, rents of tied houses should be less than free houses to
compensate tenants for this competitive disadvantage.
The leasehold market is dominated by tied leases offered by the PubCos. Following
mergers and takeovers, Enterprise and Punch control approximately 30 per cent of
pubs in the UK. Several estates have been securitised. Securitisation is effectively the
forward sale of income streams and this binds properties into a medium term strategy.
Securitisation is a subject area which we do intend to cover here and could be covered
by a separate paper.
Tenants wishing to have a free of tie lease, with lower wholesale beer prices, are
reliant on estate owners and property investment companies who do not have the
desire or management structure to act as landlords of a tied estate.
There is some credence for the argument that tied leases are attractive because, in
theory, the rents are lower, reflecting the lower gross margin that the tenant can
achieve. A prospective tenant is unlikely to choose a tied lease in preference to a free of
tie lease, except on the issue of rent and premium paid. New entrants to the business do
Valuation of
licensed
premises
307
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