Leisure & Pubs

Operators across the sub-markets are at various stages of recovery and confidence is growing. There is a wall of capital targeting the sector with a surplus of demand over supply for operational platforms. Visibility of the recovery, and understanding of future performance, will continue to be the key predictor of investment appetite and pricing in each sub sector. Investors able to assess recovery ahead of the curve can benefit from both trading upside and pricing improvements.

Key Takeaways

1. As the sector still holds high attractive inflation protection, urban leisure investment yields should start to stabilise. The delta between prime and secondary assets will increase, with yields anticipated to stabilise by the end of Q1 2023. Yields are unlikely to recover to 2019 levels until the debt markets fully recover.
2. The leisure sector is carrying very high debt levels, whilst finance costs have increased. Cost inflation and pressure on consumer spending will further squeeze operators. We expect operators to review debt positions, and some will take additional debt, or equity, to bridge gaps in their balance sheet.
3. Operational, debt and macroeconomic pressures will see the leisure sector look to access cash locked up in assets. Operators will look to sale and leasebacks, or ground rent transactions to raise capital without losing sites.
4. Recessionary impact on consumer spend will challenge operators’ profitability. Nevertheless, historically leisure has fared well during recessions.

Tight consumer spending will challenge operators’ profitability

We expect the impacts of macroeconomic turmoil to be a dominant factor in 2023 with:

• Pressure on sales, driven by lower consumer spending
• Increased operating costs
• Higher debt costs caused by rising interest rates
• Many operators already carrying increased debt burden from COVID

Health clubs

During the Global Financial Crisis gym membership was rated the third commodity, after holidays and mobile phones, that people were least likely to curtail spending on. Racquets clubs have exceeded their pre-COVID membership levels and are known to be the most resilient to recessionary pressures. The mid-market sector will see further consolidation, as these look for selective site acquisitions from their weaker rivals, which will continue into 2023.

Cinema

Cinema refinancing will continue as operators are still trading below 2019 levels and as such some corporate restructuring will also occur. The impact on attendances means some existing sites are now overrented for current admission numbers. This should ease in 2023 as audience numbers continue to rise on the back of a strong film slate – but it may not be until 2024 when the sector has fully recovered.

Smaller operators such as Everyman, Curzons, The Light and Tivoli will continue to expand, albeit selectively and principally into urban areas with regional operators continuing to expand.

Figure 23: Major holiday park operators

Source: CBRE Forecasts

Holiday parks

The strong performance of the UK holiday park market continued for much of 2022. The sector is well placed for 2023, as it was in the immediate aftermath of the Global Financial Crisis. The wider issues around overheads in other hospitality sectors will create pressure on the ability to retain profit margins. Operators have noted that the ability to drive ADR and AWF growth, as they did in 2021, will be problematic due to the wider economic situation. We forecast foreign travel to ease; however, and therefore, the domestic holiday market will be one of the most resilient sectors. Holiday home sales are also expected to ease in 2023 as more operators look towards fleet and hire units ahead of a busy summer.

Pubs

As costs across the board rise for beer, food, labour and energy, coupled with COVID loan repayments and meeting lending covenants, many operators are no longer looking at getting back to 2019 profits in 2023. This has significant implications for cashflow, and, in some cases, the viability of businesses, and we anticipate more agitated corporate action.

We have already started to see a slight weakening in investment yields, but strong covenants and great locations still count for much and should protect the value of some standing investments. This may even be a route that freehold operators might look to in the months ahead.