Demand outstrips supply of hospitality properties

The property market for pub, restaurant and hotel businesses remained buoyant in 2004, with demand outstripping supply throughout the UK and across all sectors, according to Christie & Co.

Speaking at the launch of the company's Business Outlook 2005 report on Friday (14 January), the property agent's managing director, Chris Day, said the only thing holding the market back in terms of transactions was the lack of supply.

"The key issue for operators of successful businesses is why they should sell when they are getting good returns," said Day. "Generally speaking, people are holding on to properties longer than we have experienced in the past."

Despite the cooling in the residential property market seen towards the end of 2004, the ability of independent operators to finance ventures using equity from their homes was a key factor driving hospitality property values last year and looks set to continue.

With Christie & Co predicting increased investment activity in 2005, and the stable economic conditions seen in 2004 also set to continue, Day said to expect "healthy" growth in values in all sectors this year.

"We won't see a crash in the market; more of a stabilisation," he said, adding: "It's going to be an exciting and very busy year ahead."

Restaurants The volatility of the restaurant market was reflected in the smallest rise in property values of the three sectors during 2004. However, prices still rose by 3.3% (2003: 2.6%), buoyed by strong demand from private operators and considerable corporate merger and acquisition activity.

Christie & Co pointed to the rapid growth of new players such as Urban Dining and Clapham House Group as a sign of continued corporate confidence in the sector.

Predictions for 2005:

• The large corporates will continue to expand aggressively, backed by the free availability of venture capital and funding from banks.
• The supply situation will ease as the large corporates "churn" their portfolios to dispose of weak sites acquired through portfolio purchases.
• Gastropubs and alfresco dining will flourish.
• More outlets will cater for children.

Hotels The past 12 months were also good for hotel deals, as the major operators moved away from ownership and towards operating. There was also healthy investor interest in hotel property, with a revitalised demand for London hotels. All of this helped drive a 10.9% rise in hotel values for the year (2003: 11.6%).

Christie & Co director Jeremy Hill said there was plenty of opportunity for growth in the budget sector and forecast an uplift in activity in the midmarket area, led by operators De Vere Group and Jurys Doyle Hotels.

"It will be a busy market no doubt - there's a lot to play for," said Hill.

Predictions for 2005:

• Healthy growth in values to continue in 2005, fuelled by increased investor interest and continued private demand for lifestyle businesses.
• Further consolidation in the three- and four-star markets.
• More growth in the boutique and budget sectors.
• Demand still likely to exceed supply.
• Sale-and-manage-back deals will become more popular and gain credibility following the successful completion of InterContinental Hotel Group's sale-and-manage-back of more than 70 of its hotels.
• Improved trading conditions for operators will make them less inclined to sell up, despite rising values.

Pubs According to Christie & Co's figures, pub prices rose by 9.2% in 2004, up from the 6.2% growth seen in 2003. The rise in values was stoked by a shortage of good freehold properties, which in turn led to rapid development in the leasehold market.

Last year also saw a notable fall in the level of competition in the sector as consolidation took a firm hold, and the big two, Punch Taverns and Enterprise Inns, got even bigger. With Punch looking to grow to up to 12,000 properties, Day forecast some "interesting discussions" between the major pub companies and the Government, which may look to put a ceiling on the size that they can grow to.

Predictions for 2005:

• Continued growth in property values.
• Shortage of freehold properties.
• Further consolidation on the high street, with an oversupply of businesses leading to rationalisation.
• Increasing number of property players entering the market amid strong corporate and private demand.
• Further strengthening of the leasehold pubs market.
• More pubs being lost to alternative use, such as residential.
• Smoking, binge-drinking and licensing changes will not have a major impact on pub prices, but the new licensing regime could result in a backlog of applications and increased bureaucracy.

Annual Increase in average sale prices