Leisure property seated at top table

Forget retail, buy leisure. Good advice? For most of the past 36 months this is what London property investors have been quietly telling each other. As the word has spread, so the heat has been turned up to boiling point on the leisure property scene. The funnelling effect of a weak pound has upped the temperature even further as a rush of overseas investors fan the flames. You don’t need to look far for evidence: a portfolio of Soho bars and restaurants reputedly sells for double its asking price while a 13-property Fitzrovia portfolio sells to vacuum cleaner king James Dyson for £130m – a sub-3% yield; the iconic Ivy restaurant in Covent Garden (pictured) changes hands at a yield of 3.5%; the Grosvenor Victoria Casino sells for an eye-watering £70m and Grosvenor House Hotel for as much as £570m. And there’s more, much more, as UK funds and overseas investors fight to buy long-dated, and often index-linked, London leisure income. Long-dated income is the key. With its management agreements of 20 or 40 years, it’s something London leisure can offer that London retail just can’t. The promise of income security has pushed the annual volume of UK hotel sales above £3bn, considerably above the long-term trend, according to Savills data. Most of this spending is in London and, unsurprisingly, the mood is breathless. Rob Stapleton, director at Savills, says: “Revenue per available room in London hotels was up by 9% in the first half of 2017, and we’re now seeing hotel values that are comparable with residential on some sites. We’re talking £1,100-£1,300 per sq ft in some central locations – and that is a level at which leisure can compete.” “In this market there is almost nothing that won’t sell. The sweet size is £20m-£40m for boutique hotels, perhaps up to £100m otherwise.” Whitbread’s Premier Inn has provided some of the most appealingly packaged long-dated investment opportunities in the capital. Deals like the £84.5m sale-and-leaseback to Legal & General of the new 389-bedroom hotel at King’s Cross, N1, make the point nicely: the yield was a shade under 4% on a 25-year lease. The rent is £3.5m a year and most Premier Inns are on five-yearly inflation-linked rent reviews. For income-hunters, this is mesmerising. 20,000-bedroom target The hotel group is adding between 2,000 and 2,500 London hotel rooms a year as it edges towards its target of 20,000 London bedrooms (today Whitbread has 12,500). Whitbread’s head of London acquisitions, Derek Griffin, says: “Sub-4% yields are as keen as they’ve ever been, and it is for exactly the kind of long-term index product the funds are looking for. This is long-dated, indexed income and relative to gilts we’re at a good margin, with not a lot more risk.” There will be more London Premier Inn packages coming to the market in this financial year. Typical buyers are UK funds such as Aviva and M&G. But Griffin says: “Low exchange rates have brought overseas investors into our market, which has rather surprised us.” Aberdeen Standard Life is among the active buyers, recently picking up the home of the cherished Ivy restaurant at West Street, WC2. The £40m deal with operator Caprice Holdings reflected a yield of 3.5%. Simon Kinnie, Standard Life’s head of real estate forecasting, preferred to remain tight-lipped about the Ivy deal, but confesses his fund managers like London leisure. “Income is king in a market such as today’s where returns will be lower than they have been earlier in the cycle. The fundamentals of leisure are attractive – longer leases, low vacancy, no issues of oversupply. We overweight on leisure, and London ticks a lot of our boxes.” Don’t expect much more movement on yields, Kinnie warns. “We’ve come through the period of elevated returns,” he says. “That said, yields of 4% compare well with bond yields just above 1%, but we do not anticipate much more capital growth. We expect yields to stay at relatively low levels but they won’t get much lower.” Kinnie’s view is widely shared. John Griffin, head of investment at Lunson Mitchenall, says yields could harden further in the hotel sector. “The past 12-24 months have seen yields come in by 0.5% to 4%, or sub 4%. It could get keener, if something really good comes on to the market, but I suspect for most properties we’ve reached a ceiling,” he says. Vacant hotels sought Vacant hotels unencumbered by branding are at a particular premium, agents advise. Lawrence Telford, director at Coffer Corporate Leisure, says there is still scope for rental growth – particularly in the bar sector. Simultaneously, buyers are sometimes behaving “emotionally”. Combine the two and the potential for further yield compression is hard to discount. Yields of 3.5% are not uncommon – see the sale to a private UK-based investor of the Pizza Express on Greek Street, W1, for £4.7m, a yield of 3.5% net. But yields can go lower, warns Telford. “Emotional buyers – who want a trophy asset – and buyers who’ve underbid on two or three other transactions and so are determined not to under-price and miss another, are pushing the market,” he says. The (perhaps remarkable) consensus is that, for now, there’s nothing that can hold leisure back. “We’ve had the shock of the Brexit vote, we’ve had terrorism, and neither have affected investment. A rise in interest rates with an impact on sterling exchange rates could take a bit of heat out of the market, but it won’t kill it,” says Telford. The reason: it’s hard to find more productive places to put money (although some investors are selling in London at 3% yields, and buying in Manchester and the other big regional cities at 5% yields). London leisure is this season’s hot property. With no sign of waning investor appetite, it will provide rich pickings for some time to come. Case study: The Ivy The £40m sale-and-leaseback of the Ivy restaurant, 5 West Street, WC2, tempted Aberdeen Standard Life to buy the iconic eatery. The yield was 3.5%. The sale-and-leaseback by Richard Caring, who has owned the building since 2005, involved a 25-year indexed lease and approaches to a few select investors. The deal took just four weeks from expressions of interest to completion. CBRE advised Standard Life; Coffer Corporate Leisure represented Richard Caring. Tips for investors Branded residences Branded residences will be the next big hotel investment trend, says Linklater’s hotel partner Simon Price. “This is about apartments with hotel branding which can enhance values by 15% to 20%. This isn’t going to be a high-volume sector but deals are already happening – perhaps £500m worth are in progress,” he says. Bars “We’re hearing of double-digit trading growth in the West End, yet bars still trade at a discount to restaurants,” says Ross Kirton, Colliers International’s head of leisure. Many tip Fitzrovia, where Charlotte Street, W1, has seen about 20% rental growth in the restaurant/bar sector in the past two years, according to Coffer Corporate Leisure. “Fitzrovia has been growing as people are priced out of Soho,” says the firm’s Lawrence Telford. New locations “There are still opportunities for affordable luxury hotels around the main transport hubs. Think Paddington Basin, think King’s Cross, even Stratford is starting to develop momentum and in growing locations like Shoreditch there are still opportunities,” says Jon Hubbard, head of hotels at Cushman & Wakefield. Trophy hunters The public sale to a US investor of the five-star Grosvenor House Hotel, Park Lane, W1, turns the light on a super-discreet high-end hotel market dominated by trophy hunters. Sold by administrators, with potential buyers rumoured to include the Sultan of Brunei, an investment arm of the Qatari royal family and an Indian billionaire, the hotel’s 37-year operating agreement with Marriott makes it the crown jewel of long-dated leisure income. US investor Ashkenazy is reputed to be the new owner, paying a figure rumoured variously to be £470m, £500m or £570m. The 124-room Old War Office, W1, will be the next test: the operator will be Raffles.