Restaurant property prices rise strongly but could be set to peak

Restaurant prices rose by over 14% amid strong competition for sites during 2016, but they could be set to peak.

That's according to property agency Christie & Co, which released details of average business property prices across all sectors in its latest Business Outlook 2017.

Restaurants

Restaurant prices were up 14.1% during the year as competition in the sector rose significantly.

Simon Chaplin, head of restaurants at Christie & Co, said: "We saw a 94% increase in restaurants for sale in 2016 on the previous year, but with the pressure of rising costs starting to impact on the casual dining sector, we may be reaching a peak where rents are at a point where they cannot be sustained.

"Established brands are increasingly facing stiff competition from new ‘on trend' operators. Late in 2016 we saw the fall of Ed's Easy Diner and we expect one, maybe even two, other chains to go the same way in 2017. Indeed, the recent news of Jamie's Italian closing six restaurants indicates that established brands are struggling."

Chaplin said that 40% of the average UK individual's leisure spend now goes on eating out, with 31% of the population choosing to eat out at least once a week at any time of the day, and that this would continue. However, if the market becomes tighter and the Brexit effect hits hard, those towns that have been "revived" by restaurant chains could suddenly experience empty patches as operators leave and others fall out.

Hotels

The past year saw an increased interest in UK markets from overseas buyers - particularly those from China and winder parts of Asia - in the hotel and pubs sector in particular. Christie & Co said that this was in part down to the Brexit vote, which led exchange rates to improve for foreign purchases.

Hotel prices rose 6% in 2016, with nervousness around Brexit having some effect on the values achieved on sales.

"While the market slowed in the months approaching the Brexit vote and transactions took longer to complete, price chips were undertaken and investor nervousness was seen in the immediate aftermath, activity picked up again towards the end of the year," said Barrie Williams, managing director - hospitality - and Christie & Co.

"Although the London hotel market has been impacted by global issues, the drivers in the regional UK hotel market remain positive and the market for single asset, regional transactions remain healthy. RevPAR improvements in the regional markets will continue to grow, albeit at lower growth levels, while London is likely to continue to struggle, principally due to increased bed stock.

"In 2016 a number of private equity investors moved their attention to the European markets. In 2017 we expect to see continued interest in the UK regional market and increased overseas inbound investment. Asian investors in particular will grow in importance as buyers of UK hotels, both in London and across the regional markets."

Pubs

Pub prices rose 4.4% during the year although the difficulties faced by the sector caused a drop in the number of pubs coming to market in the year.

"The ALMR Christie & Co Benchmarking Report, released in September 2016 found that the average costs of running a pub are at a seven-year high, with payroll costs accounting for almost 30% of turnover with additional costs coming in due to the increase in National Living Wage next year.

"This, along with Brexit and the introduction of the Pubs Code with the Market Rent Only (MRO) legislation, has subdued the marketplace but with a lot of the uncertainty over by the second half of 2016, momentum picked up and we expect this to continue into 2017. The high interest shown by PE groups may trigger some other Pubcos and multiple operators to review their estates in 2017 and provide further opportunities for consolidation. Therefore, despite general economic uncertainty and pressures on operational costs, confidence in the sector remains. This has been made evident by the announcement of the potential acquisition of Punch by Heineken and Patron Capital and we predict further major M&A to take place in 2017."

David Rugg, chairman at Christie & Co, said: "2016 was a complex series of twists and turns on the economic front and saw operators having to adapt to a raft of new legislation, all of which have taken their toll on businesses across the UK. However, we are pleased to say that the sectors in which Christie & Co deal have longevity, and will remain a focus for operators and investors for the foreseeable future. We will continue to assist with all elements in the lifecycle of business property ownership and operation including funding and business cover through Christie & Co's sister companies including Christie Finance and Christie Insurance and advice through our Consultancy services."