Steady rather than spectacular transactional activity has typified a first half of 2012 where hospitality, leisure, retail and care markets have learned to operate in a ‘new normal’, according to Christie + Co’s Business Outlook Summer 2012 publication.
Commenting in the publication, Christie + Co’s first-ever interim report on its markets, UK Managing Director of Christie + Co, Simon Hughes says: “The ongoing crisis in the eurozone and the fears of a double-dip recession in the UK didn’t inspire great confidence as the year took shape. However, while transactional activity has been of the steady variety, we are buoyed somewhat by indications of a possible return of debt funding.
“One thing that is clear is that the market is still functioning as operators have learned to adapt to what is a ‘new normal’.”
Christie + Co has witnessed a strong start to 2012 in terms of the number of instructions, valuation and advisory projects it has undertaken, indicating that the market mechanism is still working, albeit that distress remains an inevitable factor.
Hughes adds: “Potential investors have been boosted by the availability of a number of lending vehicles — both returning and new. The Government’s National Loan Guarantee Scheme should stimulate the wholesale money market, improve liquidity and ease some of the capital allocation issues the banks have been facing. Meanwhile, there have been some encouraging recent signs that some of our lending institutions, including those that remain part-state-owned, are coming back to the sectors in which we operate.”
A further indication of this saw Christie + Co’s sister company Christie Finance, the specialist commercial finance broker, announce a £70 million tranche of available funding for the healthcare, hospitality and retail sectors.
From a valuation perspective, Christie + Co has seen over the last four years that valuations are now more weighted towards past and current trading performance, as opposed to trading potential, with most lenders wanting to see a proven trading track record.
Darren Bond, Director and Head of Valuations for Christie + Co, adds: “We anticipate that the second half of 2012 will continue to see the main UK lenders revisiting their existing loan books. Whilst there was both a reticence and little merit in revisiting valuations when most businesses were technically in default during 2009 and 2010, we are beginning to see banks and operators more proactive with their strategy for restructuring outstanding loans.
“In addition, following a period where net investment into business property has been at an all time low, banks are also accepting that, without ongoing capital expenditure, operators may struggle to sustain what are already thought to be weak trading levels.”
Christie + Co has also witnessed a clear increase in private equity backing for the sectors in which it operates, and it expects this to continue in the remainder of 2012.
Andreas Scriven, Director and Head of Consultancy at Christie + Co, says: “On the operational side we have witnessed a separation in performance between well invested and located assets in comparison to assets that offer a non-cohesive and inconsistent product or service offering. Competent owners and operators will have driven significant cost out of their business, but now need to be careful to not compromise asset or service quality which can lead to significant reputational risk.
“The trading outlook remains opaque in the short-term, but in many sectors and markets a degree of stabilisation is clearly visible.”
Sector highlights
The hotels sector has witnessed reasonable activity as banks come to terms with their positioning and exposure in the sector and assets that have come to market have been more pragmatically priced. Christie + Co’s prediction earlier this year that cash buyers would dominate in a debt-scarce sector has been proven, not least in Topland Group’s acquisition of the jewel in the von Essen Hotels crown Cliveden House in March.
The refreshment of estates by some of the UK’s major pub companies has led to a lively transactional environment, with an array of good quality pubs being brought to the market in the early months of 2012. Encouragingly, the appetite for acquisition in the sector has more than kept pace with the volume of disposals.
While like-for-like sales in the restaurant sector largely fell in the first quarter, there were many examples of that trend being bucked. The Restaurant Group was one that reported improved annual sales and turnover. Meanwhile, an array of restaurant groups, like La Tasca and Las Iguanas announced plans to return to the acquisition trail.
In leisure, the forthcoming Olympics have given a boost to the health and fitness sector with some major transactions and a host of budget operators revealing expansion plans. The only negative news appears in the continuing doubts about the future of Fitness First. Sadly, the nightclub sector resumed 2012 in continued distress but Christie + Co remains convinced that well-invested nightclubs in strategic locations can be valid businesses for experienced operators.
The acquisition of the UK’s largest care home operator, Four Seasons Health Care, by Terra Firma has encouraged other major hitters, like Bupa and Priory Group to continue to review their estates. More old stock will come to the market as a result although care home values still remain somewhat short of their peak.
In childcare, levels of activity for the first part of 2012 have been reminiscent of activity and sentiment prior to the economic downturn, with clear evidence that the brokering environment is changing. Some major deals, such as Busy Bees acquisition of Early Years Childcare, have provided momentum which should be sustained during the remainder of the year.
Convenience retail has demonstrated a continuing resilience against the difficult economic environment. Relatively few convenience stores are showing falls in sales while many continue to find a safe haven in migrating to symbol brands. The Post Office sector is also one to watch as network transformation is likely to lead to substantial opportunities for convenience retail operators in terms of delivering Post Office counter-type services in the future.
The pharmacy market remains buoyant as pharmacists continue to adjust to the constantly changing methods by which they are remunerated, and adapt to an evolving legislative landscape. In April, Christie + Co acquired Orridge Business Sales, making it the UK’s largest specialist pharmacy agency and advisory practice.
