The Leisure Revolution

With its sheer diversity and business resilience, the leisure sector is providing plenty of rich pickings for canny property investors, says Mark Sheehan, managing director of Coffer Corporate Leisure.

There’s a revolution in leisure property investment at present. For operators the environment may be challenging in many parts of the market, however, for property investors the leisure sector is very much in vogue.

There are a number of reasons for this and they are not necessarily related. Firstly, the institutional property and pension funds have traditionally invested in commercial property (retail, office and industrial). In particular, they have been very big buyers of retail property in London and the regions, both single assets and shopping centres. More recently, the funds have been hit by retailers struggling in the recession and they are increasingly nervous about the attack on our retail high streets from the internet.

Conversely, good pub and restaurant operators generally benefit from the internet, they don’t compete with it, and, as a consequence, increasingly funds are looking at leisure as an alternative place to invest money.

Many funds take specialist advice and have a very good understanding of the leisure sector, which is populated by many diverse operations such as restaurants, pubs, bars, cinemas, bowling centres, health & fitness clubs, hotels and casinos. Funds that have invested in the leisure sector recently include Legal & General, AEW Capital Management, Land Securities, OLIM Investment Managers, CBRE Global Investors, LaSalle Asset Management, Hermes, Ignis Asset Management and many others.

These funds are turning to leisure as an alternative and resilient asset class in its own right.

Funds often have to spend their money as it pours in from investors, which means they are aggressively looking for opportunities. They are under pressure to acquire when money flows in, even if there are limited opportunities to invest in, which can push prices up. Conversely, some funds are forced to sell at the wrong time in the cycle as money flows out via redemptions. Leisure assets are increasingly being seen as liquid assets, which has again increased their appeal in this respect.

On behalf of funds, we have transacted more than £100m of property in the pub and restaurant sectors during the past 12 months and expect the next 12 months to be busier. Foreign investors with deep pockets and cash resources are also buying leisure property for unprecedented prices, surpassing even 2008 highs. We have transacted with an influx of wealthy foreign investors acquiring leisure property.

A number of Russian, Malaysian and Chinese investors desire trophy assets in internationally renowned London locations and, moreover, are willing to pay the lofty premiums necessary for such acquisitions. For example, a ‘gold brick’ property currently for sale and attracting a great deal of attention is Les Ambassadeurs Club in Mayfair, which is being marketed at a 4.25% yield.

These foreign investors are acquiring pubs, hotels and restaurants in central London, as well as trophy locations in key regional locations. They like Monopoly board-style locations, as well as Soho, Mayfair, Knightsbridge and other prosperous areas. We recently acquired Koko, formerly the Camden Palace, for a foreign buyer who inspected within an hour of being alerted to the opportunity and offered the asking price during the inspection. We sold a pub investment on a sale and leaseback (S&LB) in Whitehall to a Malaysian investor who was attracted to the property because of the location and was prepared to offer a big price to secure it quickly.

However, the investment fervour cannot be solely attributed to property/pension funds and foreign buyers alone. We are currently observing a large number of leisure investment deals and it is no coincidence that savvy veterans of the industry are behind a number of them. Seasoned investors such as Land Securities, Max Property Group, Mansford, the Reuben Brothers and the Livingstone brothers are active in the market and realising the profitable returns.

Finally, leisure is enjoying its new standing as an anchor. It is leisure that we are relying on to keep drawing a high footfall into town centres, high streets and shopping centres. This phenomenon cements leisure property’s appeal as an attractive investment opportunity.

Sale and leasebacks return

Although in the past we have seen many S&LBs occurring in the market, they are particularly fashionable at the moment. Many companies see S&LBs as an ideal means of unlocking property value to fund further growth of their business. Their rising popularity is partially due to the current market being an optimal climate for facilitating such a deal. Compared to recent years we are observing much lower rents, less bullish rent reviews and significantly higher rent covers. Over the past few years, for instance, Enterprise Inns has exploited an S&LB process to restructure its business and finance debt.

That said, negotiating a successful S&LB demands a level of expertise. A delicate balance is essential to protect the sustainability of the future tenant business, while ensuring the property investment remains an attractive proposition to the investor. The rent must be affordable, yet substantial; there must be structured uplifts that are attractive, but not crippling; and, overall, the capital value must add up.

In the past few months we have overseen a whole variety of property investments, including a number of S&LBs. Luminar’s Oceana Kingston, one of the UK’s best performing nightclubs, was acquired by AEW Capital Management and subsequently leased back to Luminar.

Geographical disparity

Geographically there is a great disparity between leisure properties located in London, the south-east and those elsewhere. Properties in central London remain as sought after and competitive as they have ever been and are attracting a wealth of foreign investors.

Outside London there is yet further disparity between leisure properties in primary high-street locations and those in secondary ones. Properties in desirable primary locations often have the benefit of strong covenants, drawn to the property/location by the guarantee of a high footfall.

Clearly, there are opportunities outside London, in fact a great deal of them. We have completed single-asset and portfolio investment transactions in more than 30 regional locations in the past year alone. Most recently (as we go to press), last week we observed Land Securities’ acquisition of the Printworks leisure scheme in Manchester for £93.9m.

Mark Sheehan, managing director at Coffer Corporate Leisure, is a mergers & acquisitions advisor and a property investment expert specialising in the leisure and hospitality sector