Christie & Co's 2023 outlook holds hope for hospitality

Restaurants

The restaurant industry faces a challenging year, with ongoing cost pressures impacting the ability to trade, but Christie & Co said this could also be a time of opportunity for many brands.

Restaurant insolvencies were up by 60% at the end of 2022 and the report predicts there could be more casualties in the casual dining sector this year as businesses which were propped up by government support during and after the pandemic begin to struggle as it falls away.

Simon Chaplin, senior director of pubs, restaurants and franchise at Christie & Co, said the recent sale of the Byron restaurant chain for just £856,000, 10 years after it changed hands for £100m, could be the first of several similar deals to come this year.

"In the first 25 days of the year we've had numerous calls from administrators because operators know the worst is coming down the line and are bringing sites to market," he said.

There are a lot of benefits to the franchise model

However, Chaplin said the reduction in size of "zombie brands" could be an opportunity for others. Christie & Co has seen a rise in demand for sites for quick-service restaurants (QSR) or franchise operators looking to capitalise in a boom in demand for well-priced and reliable brands amid the rising cost of living.

The report pointed to a recent survey which suggested 63% of people were continuing to spend the same or more on QSR dining compared to a drop in spending on other dining experiences.

Chaplin said: "There are a lot of benefits to the franchise model [for operators]. You get a brand name people recognise so you don't live or die by TripAdvisor, you get support in times of trouble and the banks will lend to you, which won't happen with a lot of restaurants at the moment. You can also get better sites as landlords see you as reliable."

Many new entrants breaking into the world of restaurants are looking for familiarity and over half of purchasers live within 20 miles of the business they buy. Chaplin said the price and demand for drive-through locations was going "through the roof", with fewer people going into city centres for dining experiences.

But he said there were still many good deals to be had on sites with landlords offering rent reductions or concessions.

"I'm interested in what's going to happen this year. I think innovation is going to come through because [operators] are not having to pay the prices they did five years ago to get into some good sites where they've got a chance."

Hotels

Carine Bonnejean, managing director of hotels at Christie & Co, said the sector's recovery from Covid-19 had been faster and "a lot better than everybody anticipated", with numerous hotels, especially those located in regional UK markets such as Edinburgh, Birmingham and Liverpool reporting revenue per available room (revpar) "well ahead" of 2019 figures.

She has seen an appetite for investment across the board, not only in countryside and seaside towns – a trend that arose straight out of the pandemic – but also in capital cities. London, for example, "is back" following the return of corporate travel and the boom in American tourists.

However, she stressed that macro-economic challenges, including mass redundancies and inflationary pressures, will continue to determine the overall performance of the hotel sector.

When GDP starts to slow down, revpar starts to slow down

She explained: "Looking at historic data, you can see that hotel revpar is fully correlated to GDP. That has been proven again and again. When GDP starts to slow down, revpar starts to slow down [because in a] recession environment, household income is squeezed."

In fact, the proportion of hotels that have been sold by Christie & Co as closed units has "increased a lot", with figures at 34% in 2022 compared to 19% in 2021. The number of distressed transactions was also at 12% in 2022 as opposed to just 1% in 2019. Some of that uncertainty is reflected in hotel investment volumes dropping from over £4m in 2021 to just under £3m in 2022.

Bonnejean commented: "The war in Ukraine and petrol inflation during the summer really slowed down [transactions]. The market took a turn that people said was probably even worse than Covid. This year, the second half should be a lot better, so it's probably going to be a bit of a reverse as to what we saw in 2022. Instead of a strong H1 and slow H2, we could see a slow H1 followed by strong H2."

Christie & Co's Business Outlook report also warned of a "mid-market squeeze" as cash-strapped customers seek to cut costs. Bonnejean suggested that hotels that fall under this category should consider aligning themselves with the budget offering as "people are not willing to pay a lot higher just for a mid-market product".

She added that properties that have favourable environmental, social and governance credentials and cost-effective energy systems are likely to attract investors now more than ever.

Pubs

Challenging conditions created caution in the transactional market in the second half of 2022, but the pub sector has once again shown itself resilient and Christie & Co is predicting increased investment and transactions in 2023.

Economic and operational uncertainty saw the sales of several portfolios stalled as investors decided not to deploy capital and owners waited for more favourable conditions in which to sell. Increased interest rates and difficulties pricing debt have also dampened the mergers and acquisitions market, but this is expected to pick up in 2023, particularly as groups look to alleviate cost pressures through scale.

However, quality independent businesses and smaller portfolios continued to generate attention throughout 2022, particularly at the premium and value ends of the market.

Freehold assets have remained most attractive to buyers, but good demand has been seen for free-of-tie premises in prime sites.

Stephen Owens, managing director of pubs and restaurants at Christie & Co, said: "As we've moved into this year, we're seeing more people come into the market. So hopefully there's a slight levelling up in terms of increasing stock.

"We seem to be seeing some of the inflationary pressures begin to ease a little bit and lenders are probably more amenable to doing deals than perhaps they were last year.

He added: "I think we're finding the market has been pretty resilient. There are plenty of buyers out there for the right kind of quality product."

Predicted levels of distress in the sector failed to materialise,with distressed businesses making up just 5% of Christie & Co's 2022 sales and 87% of the pubs sold by Christie & Co purchased for continued use as a pub. However, with energy support to be reduced in April and a prolonged period of recession predicted the sector is not out of the woods.

Owens added: "What we don't know is what the impact of energy costs is going to be on individual businesses and whether that's going to be the tipping point, which leads to distress. When hospitality reopened we saw a pretty positive response in terms of overall headline turnover and I think the challenge at the moment for operators is maintaining profit margin against the background of increasing costs and staffing issues."