The pub game has got itself into an awful pickle since the onset of the financial crisis. I mean just look at the stock charts below for two of the biggest UK pub landlords, Enterprise Inns and Punch Taverns…
Devastating!
And this weekend I was shocked to read that 60% of pub company licensees now earn less than ten grand a year. That's less than the minimum wage!
Today I'll show you why I think this has happened. But probably more interesting, I will explain why I think residential landlords could soon suffer the same fate.
Enterprise Inns and Punch Taverns share price charts
Let's start by looking at the three major reasons why the pubs ended up in this mess…
The landlords got the investment principle wrong
If you pay too much for an investment, you're likely onto a loser from the start. That's especially true if it's a long-term investment - value will always out in the end. And the real reason so many pub groups got into trouble is that they overpaid for their pubs.
You see, when you're buying business premises, you can value it in one of two ways. Valuations can be based on revenue generation or the property can be valued as a 'tangible asset' - in and of itself.
To value a pub on revenue, you do some profit projections and calculate what the future revenue is worth to the business owner today. There's a standard procedure… and it's usually carried out on a professional basis.
But the thing is, during the good times, pubs started selling for more than could be explained from pure revenue generation…
That's where the second type of valuation comes in. In the light of a rising property market, pubs were being appraised on some sort of mix of the pub's business value, and its value as a property asset in itself. How do you arrive at that valuation? Well, it's just the going market rate - it may have nothing to do with profit projections at all.
The moment the pub groups forgot all about fundamental valuation and just paid the going rate was the moment they sowed the seeds of their own destruction.
It lasted for a while… then pub revenues started falling.
Demand takes a dive
The pub game has been in decline for decades. But in many ways, recently the decline has been accelerating. The reasons are many-fold… from punters increasingly 'cocooning' at home with all their digital entertainment, to smoking bans, alcohol health issues, economic issues and possibly even a fear of venturing out onto dangerous streets.
Of course, it's society's prerogative to change. And let's not forget that there are some pub groups that have prospered; among them is one of my favourites, Shepherd Neame… and at the budget end, JD Wetherspoon which has been growing consistently throughout.
But habits do change; not least because the central planners stick their big oar in…
Meet the meddlers
The pub industry has suffered more than its fair share of grief at the hand of the meddlers.
Rising taxes on labour, business rates and VAT isn't helping any business on the high street. But when it comes to alcohol, the meddlers have gotten increasingly heavy-handed in meting out tax.
Not only have the local meddlers been on the case, but a Europe-wide smoking ban has devastated many a local.
What can residential landlords learn from pub landlords?
First, let's tackle the biggie… valuation. Just about every study on house prices suggests that prices are overvalued. I've seen figures anywhere from 20% to 70% over the top. In the same way that pub prices were bid up, so have house prices. The business valuation often doesn't make any sense…
It took the financial crisis of 2008 to shine a light on the over-leveraged pub groups. The damning charts I showed you tell the story.
As for most over-leveraged residential landlords, they've had a reprieve. The meddlers didn't want to see a housing crash, so they did everything (and are doing everything) in their power to reflate the market.
But I'm a firm believer that value will out in the end. As and when interest rates rise, it'll shine a light on the over-leveraged buy-to-letters; just as it did for the pubs in 2008.
For these landlords, there's a delicate relationship between the interest on their mortgage and the rental income. If inflation continues to gain traction, then at some point interest rates will have to go up.
And if interest rates go up (to counter inflation) you could get skewered. Your costs could rise very quickly, and there's no guarantee that rents will follow.
Now, unlike the pubs, demand for residential lets is doing rather well. Not least because purchasing their own home remains out of reach for many members of society - so, instead, they rent.
But society does change. Usually in a very unpredictable way - I mean, when the pub groups were busy overpaying for their pubs, they didn't have a clue about what was about to hit them.
Maybe the surge in migrant workers that has driven so much demand for rented accommodation will slow? The politicians certainly seem to be making noises to that effect. Maybe it'll even reverse!
This government (let alone the shadow government) are also getting increasingly vocal about not shelling out benefits that end up enriching private landlords. Already they've introduced a benefit cap which is bound to affect many a landlord's take-home. As austerity bites, things will likely get worse.
And as the squeeze on government finance continues, it's not inconceivable that there'll be taxes to come. If not a straight tax, then it could well be through stealth. Maybe they'll limit the amount of mortgage interest that can be offset against rental income? That would be an absolute disaster for over-leveraged landlords.
We've also seen rent controls in the past… who knows, maybe again? Especially if inflation starts to bite. Politicians will look after voters before they worry too much about rich landlords.
Remember, much of the damage wreaked upon the pubs came from the planners - be it expressly so, or inadvertently. And it's left many pub groups and landlords on the breadline.
Private landlords with too much debt on their books have had a reprieve. How long before some of these business models are tested?
Devastating!
And this weekend I was shocked to read that 60% of pub company licensees now earn less than ten grand a year. That's less than the minimum wage!
Today I'll show you why I think this has happened. But probably more interesting, I will explain why I think residential landlords could soon suffer the same fate.
Enterprise Inns and Punch Taverns share price charts
Let's start by looking at the three major reasons why the pubs ended up in this mess…
The landlords got the investment principle wrong
If you pay too much for an investment, you're likely onto a loser from the start. That's especially true if it's a long-term investment - value will always out in the end. And the real reason so many pub groups got into trouble is that they overpaid for their pubs.
You see, when you're buying business premises, you can value it in one of two ways. Valuations can be based on revenue generation or the property can be valued as a 'tangible asset' - in and of itself.
To value a pub on revenue, you do some profit projections and calculate what the future revenue is worth to the business owner today. There's a standard procedure… and it's usually carried out on a professional basis.
But the thing is, during the good times, pubs started selling for more than could be explained from pure revenue generation…
That's where the second type of valuation comes in. In the light of a rising property market, pubs were being appraised on some sort of mix of the pub's business value, and its value as a property asset in itself. How do you arrive at that valuation? Well, it's just the going market rate - it may have nothing to do with profit projections at all.
The moment the pub groups forgot all about fundamental valuation and just paid the going rate was the moment they sowed the seeds of their own destruction.
It lasted for a while… then pub revenues started falling.
Demand takes a dive
The pub game has been in decline for decades. But in many ways, recently the decline has been accelerating. The reasons are many-fold… from punters increasingly 'cocooning' at home with all their digital entertainment, to smoking bans, alcohol health issues, economic issues and possibly even a fear of venturing out onto dangerous streets.
Of course, it's society's prerogative to change. And let's not forget that there are some pub groups that have prospered; among them is one of my favourites, Shepherd Neame… and at the budget end, JD Wetherspoon which has been growing consistently throughout.
But habits do change; not least because the central planners stick their big oar in…
Meet the meddlers
The pub industry has suffered more than its fair share of grief at the hand of the meddlers.
Rising taxes on labour, business rates and VAT isn't helping any business on the high street. But when it comes to alcohol, the meddlers have gotten increasingly heavy-handed in meting out tax.
Not only have the local meddlers been on the case, but a Europe-wide smoking ban has devastated many a local.
What can residential landlords learn from pub landlords?
First, let's tackle the biggie… valuation. Just about every study on house prices suggests that prices are overvalued. I've seen figures anywhere from 20% to 70% over the top. In the same way that pub prices were bid up, so have house prices. The business valuation often doesn't make any sense…
It took the financial crisis of 2008 to shine a light on the over-leveraged pub groups. The damning charts I showed you tell the story.
As for most over-leveraged residential landlords, they've had a reprieve. The meddlers didn't want to see a housing crash, so they did everything (and are doing everything) in their power to reflate the market.
But I'm a firm believer that value will out in the end. As and when interest rates rise, it'll shine a light on the over-leveraged buy-to-letters; just as it did for the pubs in 2008.
For these landlords, there's a delicate relationship between the interest on their mortgage and the rental income. If inflation continues to gain traction, then at some point interest rates will have to go up.
And if interest rates go up (to counter inflation) you could get skewered. Your costs could rise very quickly, and there's no guarantee that rents will follow.
Now, unlike the pubs, demand for residential lets is doing rather well. Not least because purchasing their own home remains out of reach for many members of society - so, instead, they rent.
But society does change. Usually in a very unpredictable way - I mean, when the pub groups were busy overpaying for their pubs, they didn't have a clue about what was about to hit them.
Maybe the surge in migrant workers that has driven so much demand for rented accommodation will slow? The politicians certainly seem to be making noises to that effect. Maybe it'll even reverse!
This government (let alone the shadow government) are also getting increasingly vocal about not shelling out benefits that end up enriching private landlords. Already they've introduced a benefit cap which is bound to affect many a landlord's take-home. As austerity bites, things will likely get worse.
And as the squeeze on government finance continues, it's not inconceivable that there'll be taxes to come. If not a straight tax, then it could well be through stealth. Maybe they'll limit the amount of mortgage interest that can be offset against rental income? That would be an absolute disaster for over-leveraged landlords.
We've also seen rent controls in the past… who knows, maybe again? Especially if inflation starts to bite. Politicians will look after voters before they worry too much about rich landlords.
Remember, much of the damage wreaked upon the pubs came from the planners - be it expressly so, or inadvertently. And it's left many pub groups and landlords on the breadline.
Private landlords with too much debt on their books have had a reprieve. How long before some of these business models are tested?
Tel 08002425255 
renttoownproperties@consultant.com
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