2018: Capital values down, pub values up

Drinks Industry Ireland takes a look at how the pub property market behaved through the lens of the auctioneers Morrissey’s/Lisney’sin 2018 and previews their outlook for this year.

The volume of pub trade increased again last year but the good times seem to have been limited to prime trading districts around the country according to Morrissey’s/Lisney in their annual report, the Licensed Premises Market Review 2018 & Outlook 2019, published recently.

Despite this, the capital value of the 2018 pub property market took a fall to €23.26 million from the €36.57 million figure in 2017 but on the upside average prices for the pubs that did sell grew to €1.37 million from €1.18 million in that time.


Private Treaty sale

‘Private treaty’, the preferred mode of sale for the past 12 years or so, became the only sales vehicle used last year but with an improving confidence in the trade, auctions could well make their return as the preferred mode of disposal by vendors of any sought-after licenced premises this year, believe the auctioneers.


Dublin pub sales

Sales activity in the Dublin pub property market decreased again for the fourth consecutive year, recording 17 transactions (of these one was leasehold and one an investment interest) compared to 31 in 2017 (and 35 in 2016). This reflects 2.33% of Dublin’s total pub population.

It also indicates “a market that continues to realign with a dramatic reduction in sales fuelled by legacy debt which were an unfortunate characteristic of the property market over the past decade since its collapse in 2008,” according to the report, with a number of properties being sold for alternative use or redevelopment.

Again, the auctioneers report an absence of “prime Dublin City sales in 2018 with operators nominating instead to retain their assets off the back of improved trading performance and profitability”.

The established group operators, for example, remained largely inactive again in 2018, continuing to focus on developing the trade in their existing portfolios, states the report.

The auctioneers also highlight the stark contrast in the number of distressed loans and insolvencies compared to preceding years: “The trend in insolvency-led instructions initially started to yield in 2015 for the first time since the collapse of the market where 64% of sales completed were insolvency-related. This figure then reduced to 54% in 2016 and fell again to 42% in 2017, with a singular insolvency-related transaction being concluded in 2018 being clearly illustrative of the return to a more normal functioning market”.

And with this improvement in trading conditions Dublin publicans have demonstrated a reluctance to sell – for the time being.

“Vendor apprehension in entering the market to offer for sale is now the principle reason behind the lack of supply,” states the report.

Of course with the return to a more lucrative pub trade, the pillar banks have become active too in backing the licensed premises market alongside a wider range of ‘non-traditional’ lenders.


Outside Dublin

Sales activity in rural pubs “was predominantly characterised by low value units in small towns or peripheral rural locations”.

Prevailing market forces witnessed within the Dublin licensed premises property market were generally mirrored throughout the provincial cities and established tourism districts, according to the report.

While there were a number of notable sales in Cork, Galway had no prime licensed premises transacting last year with the market there remaining buoyant through healthy tourism numbers.

By comparison with 2017 the Limerick City market was relatively quiet last year.

And with the exception of one or two high-profile sales there was little activity in either sales, re-openings or extensions in the Kilkenny market.


The market for 7-Day Licences

Once again the off-licence sector prevailed as the dominant stimulus for sales of 7-Day Licences as has been the case for the past decade. Nevertheless, the capital values of these licences remained flat with values in line with those at the close of 2017 at around €50,000.

But the emphasis on purchasing such licences has drifted a little over the last two years from the off-trade back toward renewed demand from the licensed premises and hotel sectors.

“Comments from clients represented by our company confirm that this move from the restaurant trade is in response to loss of custom to the on-trade through continued development of quality food offerings and Gastro Pub environments,” report the auctioneers.

In the absence of currently desirable pubs coming onto the market new licensed premises and new hotels are being created by the extinguishment and transfer of other licences.

But the report explains, “When compared to other commercial uses, creating a new licensed premises is higher risk and more expensive as along with the planning costs there are also additional legal and professional costs in obtaining and transferring a publicans licence and fit-out costs are generally considerably higher than other commercial uses. For these reasons, there has not been a significant number of new licensed units created in recent years”.

However while Morrissey’s/Lisney’s might anticipate a renewed licence demand from such new premises, it does not anticipate it to be sufficient to result in a market uplift in the value of ordinary 7-Day licences “which will remain for the foreseeable future in the order of €50,000 to €55,000”.


CGT sales a possibility this year?

Opportunities may present themselves in the form of the amendment to the Capital Gains Tax Shelter introduced last year, states the report.

This reduced from seven to four the number of years that purchasers benefitting from a CGT exemption must retain ownership of a premises.

“As a result properties acquired within the December 2011-2014 shelter period can now be delivered to the market with the vendor/s enjoying early exemption from the standard rate of CGT at 33%.”


Looking forward

The auctioneer anticipates that as purchasers become priced out of the city centre, demand may start to shift to good suburban locations with family-friendly food and beverage potential or alternative use opportunities.

However the present healthy market for the on-trade may see such sites in short supply in 2019.

The auctioneers point out, “The absence of transactional evidence, be it for prime, suburban or rural properties, makes it difficult for operators to accurately gauge what the market is prepared to pay and in turn many operators are adopting a cautious approach and waiting for other operators to enter the market first. This is likely to result in an increase in off-market approaches being made”.

And the auctioneers’ figures on that seem to bear this out.

“Approximately 13% of sales concluded in 2017 were ‘Off-Market’ and this trend increased throughout 2018 accounting for just over 35% of the market share.”

In the meantime, the insurance- and wage-led increases in operational overheads will erode some of the uplift in turnover, holding back bottom line profit.

And any deleterious effects of Brexit and/or any Sterling devaluation on the growing UK tourism market for Irish pubs remain to be witnessed.

However the report warns that while both turnover and profitability are generally improving the uplift is restricted to key trading districts and closures of non-viable premises will continue.

“Overall, we anticipate 2019 will not see much change from 2018, again characterised predominantly by a lack of availability with an increasing volume of funded purchasers actively seeking opportunities. This will in turn support the recent increase witnessed in off-market sales being completed and may assist in attracting operators considering retirement to enter the market. “Constrained supply and increased demand point to price growth for the right opportunities,” concludes the report.

Just under a year ago, Lisney acquired Morrissey’s which now forms Lisney’s Licensed & Leisure arm, headed up by Tony Morrissey.

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