Is the market about to see an influx of pubs for sale?

Developments within the House of Commons could result in an influx of distressed pubs and premises for sale in 2015 as MPs look to scrap Britain's 'tied' pub system.

As things stand, pub tenants are currently roped into a 400-year-old system, which ties them into buying supplies from the companies from which they rent their premises. But on 18 November the House of Commons voted to allow pub tenants the option to buy beer from any supplier through the amendment of the Small Business Bill, potentially transforming the future of the British pub industry.

The House of Commons vote followed a previous defeat of the motion in Government, which meant that the latest decision to scrap the tied system came as something of a surprise to many in the industry. It's worth noting that the Government could still try to defeat the decision in the House of Lords so the change, while it's looking likely, is not yet set in stone.

But assuming the House of Lords fails to overturn the decision, then come 2015 we can expect to see interesting developments within the pub industry.

A New Approach to the Pub Sector

The change to the tied pub approach has been hotly contested by beer producers, landlords, tenanted pub groups, the Government and, of course, customers looking to enjoy a well-priced pint in their local. But the upshot from within the industry is generally that the change will provide smaller operators with more of a fighting chance within the market.

Pubs that would previously have struggled to turn a profit due to high set costs for beer could end up with more business options open to them if they have a choice of supplier. At the moment, pubs that are tied face prices for beer kegs that are up to 77 per cent higher than the wholesale price. But this amendment to the bill will not only offer the opportunity to lower costs, but it could also help diversify clientele and increase an establishment's patronage.

The upshot of this is a new set of business opportunities. An improvement in margins and an increased level of flexibility for landlords could well tempt many to buy into the pub industry in 2015, while smaller landlords who were finding themselves close to being pushed out of business could find new avenues of profit.

A Wealth of Distressed Assets Ripe for Development

While these changes are likely to bring positive results for landlords, the situation looks quite different from the other side of the fence.

The country's biggest pub groups (namely Punch Taverns, Enterprise Inns and Greene King) are all looking at substantial declines in revenue should the amendment go ahead. The changes would lose them the secure income that they are currently able to bank on from their tenants buying their beer. Losing this is likely to force them to adjust their disposal plans and industry analysts are forecasting an influx of distressed pub sales.

The day after the Commons' announcement, Enterprise Inns saw its shares fall by 15 per cent, while Punch Taverns' dropped close to 11 per cent and Greene King fell around five per cent. It's clear that the value of these businesses is heavily affected by their projected safe income from their tenants.

So, bad news it seems for those who own tenanted pubs, as Enterprise Inns' chief executive Simon Townsend confirmed to the Financial Times: “Independent economic research, commissioned by the government, found that a 'market rent only' option would lead to widespread pub closures, significant job losses and reduced investment in the sector.”

He added that the company will be “assessing all options” ahead of the potential change in regulations. However, one thing seems clear, should the House of Lords vote yes, businesses like Enterprise will be taking a serious look at their public house ownership and leasing strategies. There can be little doubt that the upshot will be an influx of pubs coming onto the market.

Whether these pubs will offer viable business plans for smaller landlords and entrepreneurs looking to buy a lifestyle business or will offer development opportunities for those involved in property will depend on the individual pubs for sale, but it's certainly worth keeping a close eye on developments to see what opportunities may arise in 2015.

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