The Midlands – a property buyer's market

The Midlands is proving to be a buyer's market for those operators with cash looking at property opportunities. Ben Walker reports.

Despite reports of its demise, manufacturing still makes a significant contribution to the economy of the Midlands. Alongside a host of well-known food and confectionary brands, Rolls Royce, Aga and Armitage Shanks all have significant stakes in the area. On top of that, national hospitality companies Mitchells and Butlers, Enterprise Inns, Punch Taverns and Roadchef all have their headquarters in the region.

Demand for full-service chain hotels, therefore, mostly comes from business travellers. Hotel trading in 2010 has shown an improvement compared to 2009, especially in the West Midlands, and overall performance could be described as steady (see regional performance report box for more details).

"Operations-wise, it's not easy, but we have clients who are trading well in these difficult times. It's down to product, service and quality. People shouldn't be put off. Be selective and take good advice before jumping in," says Paul Newby, an executive director based in the Birmingham office of chartered surveyor Fleurets.

"It's a buyer's market. If you've got some cash it's a very good time to be buying and looking at property opportunities," he adds.

Jonathan Wren, director of Colliers International's hotels department in Birmingham, says there are plenty of buyers interested in going concern hotels or development sites but the problem remains funding. "The banks are starting to lend although the Irish and Scottish banks are not so keen on the leisure sector. HSBC, Santander and Barclays, however, are willing to invest in hotels."

Colliers International is currently inviting offers for the freehold of the 111-bedroom Corus Solihull hotel and marketing the 66-bedroom Chace hotel in Coventry for £2.25m.

There are likely to be more receiverships in the next 12 months which present opportunities for buyers to purchase at reasonable prices, says Wren. Although funding is tough, for those with a large chunk of cash [at least 40% of the purchase price], prices are at possibly their lowest levels.

New hotel development in Birmingham is dominated by limited service and budget new-builds or conversions. The newest Premier Inn in the city, on Waterloo Street, is an office conversion and the Travelodge on Charlotte Street, understood to be one of the chain's best performing hotels, is a new-build.

"A weak property market is a good opportunity for budget hotel operators. In a strong property market an office block owner probably wouldn't be interested in conversion to a hotel," comments Newby.

Construction has started on a new-build 210-bedroom Travelodge adjacent to the Bullring which is expected to be finished in April 2011. The hotel is part of the mixed-use scheme in Upper Dean Street that also includes outline planning consent for a 340-bedroom Maldron conference hotel plus 18,000sq ft of retail, restaurant and bar units.

Travelodge has also exchanged contracts for a 200-bedroom new-build hotel at the NEC.

In terms of notable recent transactions, the freehold of the 120-bedroom Nottingham Belfry was recently acquired by the BP Pension Fund for £14m after the previous owner, Marston Hotels Holdings, went into administration. The Nottingham Belfry continues to be operated by Q Hotels and the annual rent of £1.4m represents an investment yield of 10%.

"An investment sale is quite unusual in the current market and the 10% yield reflects the current perception of the market and this particular covenant," comments Wren who acted for the vendor.

Colliers International also recently sold the 102-bedroom Ramada Nottingham on behalf of Jarvis Hotels off an asking price of £2.75m. The new private owners intend to refurbish and may rebrand the hotel, which is located close to junction 25 of the M1.

In the £2m to £3m price bracket there have been numerous recent transactions of unbranded independent hotels. The 90-bedroom Allesley hotel in Coventry was sold in July by Christie & Co to local operators for a figure near to its guide price of £2m. In September, the 61-bedroom Buckatree hotel in Telford was sold for near to its guide price of £1.65m. The former Swallow hotel was previously owned by investment company Matrix (see case study box).

Gavin Wright, a director based in the Birmingham office of licensed property agent and broker Christie & Co, says: "Both of these properties will need capital expenditure. Now is a good time to acquire but buyers need to also have the capital to meet refurbishment and cash-flow needs."

Activity in the pubs market remains very much corporate-driven, according to Wright. "We are still selling a lot of pubs on behalf of Enterprise Inns, Punch Taverns and Admiral Taverns," he says. "There's a lot of interest in pubs as either going concerns or sales for alternative use. Many pubs are becoming convenience stores since change of use from A4 to A1 is easy to make. Pubs with large car parks are particularly attractive to operators such as Tesco and Sainsbury's."

Pub companies are currently offering incentives in the way of rent-free periods or discounted rents to attract new tenants to take on tied leases. However, the number of freeholds on the market means that only the best quality tied -leaseholds in the right locations are attractive to buyers.

One recent example of new owners who have quickly transformed a failed pub illustrates the importance of spotting potential that may be hidden by an off-putting appearance. Peter Hudson and Craig Chance, the new owners of the Trooper Inn at Wall near Lichfield, are surprised themselves by just how successful they have been since buying the closed and boarded up pub in April 2010 for less than the £350,000 asking price. The pub had had a series of failed tenants under previous owners Punch Taverns, who are understood to have paid £1.1m for it in 2002.

The two entrepreneurs have a number of businesses in the Lichfield area where they have lived most of their lives. At the viewing stage, Hudson says the pub's plus points included nice views from the garden and patio area and proximity to a National Trust Roman Heritage Site and the A5.

After a £150,000 refurbishment, the Trooper Inn re-opened in June 2010 and now has average sales of £18,000 a week and estimated total sales of £120,000 for December 2010.

"The biggest positivity is that it's a free house," argues Hudson. "I don't envy people who are on tied leases to one of the national pub companies. If you're successful, the landlord can move the goalposts and penalise you with rent increases. And the tie means you pay much more for your beer. To do well, you need to buy a free house and have the freedom to choose your suppliers."

Hudson's further advice to new owners is to fully understand your marketplace and your competition. "Lichfield is a good, affluent area with plenty of restaurants and people don't mind driving two miles to eat out," he says.

As the operator, Hudson focuses on service and quality and does not use any forms of discounting. The Trooper Inn, which has Kobi beef steaks at £55 on its menu, put up all of its prices by 15% at the start of November without any negative impact on bookings.

In the restaurant sector, Wright says that there are plenty of available premises in the Midlands at the moment.

"We are acting for more and more landlords who are looking for good quality lessees. Now there is little or no premium to pay, which means buyers have more opportunity to invest in their new business," he says.

"Well-funded corporate restaurant chains are able to take advantage of a soft property market and landlords will be pleased to see them coming and take space that may otherwise be vacant," adds Newby.

In November 2010, a Jamie's Italian with seating for 270 opened in Birmingham's Bullring shopping centre. High street brands such as Strada, Prezzo and Pizza Express are in the process of "churning" their estates - selling off their poorest performing units and acquiring new sites in good locations.

Fleurets is currently marketing prominent restaurant premises in Derby and Leamington Spa. Previously occupied by KFC on Cornmarket, a pedestrianised street in the centre of Derby, the unit is offered freehold for £550,000 or as a Full Repairing and Insuring lease at £60,000 a year. The Leamington Bar and Grill, which occupies the ground floor of a Georgian building in the town centre, is offered at nil premium. The lease expires in 2030 and the passing rent is £100,000 a year.

CASE STUDY

Acting on behalf of investment firm Matrix Group, Christie & Co has sold the freehold of Buckatree Hall hotel near Telford, Shropshire, to Grant Moon off a guide price of £1.65m.

Situated within attractive grounds and gardens, near the village of Wellington, this 62-bedroom hotel features an 80-seat restaurant, a 50-seat bar, a 200-capacity function room and a variety of other, smaller meeting rooms. The business also includes a five-bedroom staff house, which is located at the rear of the site.

The new owner, Grant Moon, and his family have owned a variety of leisure-based businesses for many years. Moon has been looking to buy a hotel since he sold the Crewe Arms, in Cheshire, a few years ago. He and his brother now plan to refurbish Buckatree Hall hotel throughout and add leisure facilities.

UK CHAIN HOTELS REGIONAL PERFORMANCE REPORT

The Ten Months to October 2010

Source: TRI Hospitality Consulting / HotStats According to TRI Hospitality Consulting's regional performance report for the 10 months to October 2010, at 63.8% the East Midlands had the lowest occupancy out of the eleven UK regions, although this represented an improvement on the 2009 value of 61.2%. The West Midlands reported occupancy of 65.1%, up from 62.5% for the 10 months to October 2009. Average room rate (ARR) was down by 3.8% to £59.71 in the East Midlands resulting in rooms yield up slightly year-on-year at £38.09. In the West Midlands ARR dipped 0.6% to £68.68 resulting in rooms yield up 3.4% to £44.68