The pub market has been markedly polarised over the last two years, and like with most things when evaluating the impact of Covid, there have been some clear winners and losers.
Trade in larger towns and city centres has been particularly sluggish as a large percentage of UK office workers work from home. In addition to this, visitor numbers to the UK plummeted from 40.9 million in 2019 to 11.1 million and 7.7 million for 2020 and 2021 respectively. Community, coastal and rural locations on the other hand have performed much better, particularly those pubs with large external areas, and those which can and have successfully dealt with social distancing guidelines.
The re-emergence of the hospitality industry due to more relaxed Covid restrictions has been a welcome blessing for most of the British public and pub operators. However, uncertainty about the reliability of this long-term still causes concern for some; for instance December is historically the most profitable month of the year for pub operators and this was lost because of Omicron. Since mid-January there are however signs that the trajectory is moving in the right direction.
Workers returned to the commute on 20 January 2022, after guidance to work from home in England was lifted as Plan B measures were phased out. Transport for London (TFL) reported week-on-week increases in public transport and both pub operators Fullers and City Pub Company have announced a “significant increase in trade”. With both operator’s larger weighted portfolios in London and other urban areas, this reinforces the return of the worker.
With the industry experiencing a resurgence of activity since the lifting of trading restrictions, operators and investors are now more confident in the future. While there are still a number of challenges that pubs have to overcome, such as staff shortages, supply chain disruption and rising costs, improved market confidence is resulting in the deployment of much of the capital that has been raised.
From a transactional perspective whilst there has been an uptake in activity in the sector, stock levels remain low with few opportunities being openly marketed.
What can we expect to see next for the pub/restaurant sector? Well in our opinion we believe that town and city centre trade and thus values will continue to improve. There are still question marks on whether they will return fully to pre-Covid levels bearing in mind the working week has ultimately changed for office workers. For example, will Friday trade ever be the same again?! We think not, and instead believe trade for urban pubs will be enhanced mid-week with more sluggish returns reported on Fridays, as many continue to work from home towards the end of the week.
We also believe that by the end of 2022, stock levels will begin to improve, given operators will have fulfilled a sustained period of income/profitability and therefore will hold trading accounts to support this.
We also think cost pressures and the removal of Government support might mean that for those operators that have not been able to adapt will be under pressure to sell, with a likely continued outcome of a sale for alternative use.
Finally, we think there will be increased estate churn from the main pub companies. Large freehold and leasehold multiples will be paid for sites with large outside space, ideally with a view or water close by and where there is proven sustainable trade. With low cost of debt and continued appetite from private equity and foreign investment, competition for sites will be rife and therefore we believe multiples will continue to improve.