2020/NO.09 - The rental valuation of both pubs and restaurants involves a number of practical and professionally skilled disciplines. Comparable evidence is but one of the tools in the box of tricks. Let’s examine the reality of both the Restaurant and Pub market for what we like to refer to as ‘Other rental transactions’ rather than ‘Comparable’. The latter, certainly when it comes to pubs, implies that there is a direct link when often none exists.
Rental valuation is closely linked with the traditional method of retail rental valuation being zoning on an equated sq ft or sq m basis with large units being valued on an overall basis. Plenty of un-emotive market evidence usually published in agents letting details and readily available. In special circumstances the profits method can apply. Location determines desirability and account must be taken of lease user clauses/flexibility plus fitting out costs and break clauses (if any). Other rental transactions should if possible be on a “like for like” basis.
The profits test generally is only applicable if there is no other direct evidence. For instance, in an isolated country setting or dependent on a specific location. Local to our head office is the “AV8 Restaurant” situated in the centre of Cotswold International Airfield at Kemble. This could be taken as a classic example of the theory of the application of a profits test rental valuation. Ironically the profits test is the almost universal method used by all operators in the assessment of their rental take on a property-how much will I earn in profits? Returning to either the zoning or overall methods, the evidence is clear, in a simple easy to understand format and can be cross checked. There is usually plenty of it to assist the calculations.
The standard method of rental valuation is that of the profits test. Zoning and the overall rate per sq ft or sq m have been played with but found wanting. Neither are used nor recommended. Guidance is found in the RICS Valuation-Global Standards 2017, specifically VPGA 4. Paragraph 6.4 states as follows…
“The actual trading performance should be compared with similar types of trade related property and styles of operation. To do so the valuer needs a proper understanding of the profit potential of those property types and how they compare with one another. A trade related property valuer should test, by reference to market transactions and similar trade related properties, whether the present trade represents the Fair Maintainable Trade in current market conditions. When available the actual accounts of the subject property and similar properties may need adjusting to reflect the circumstances of the Reasonably Efficient Operator”
All well and good but Paragraph 6.4 is totally dependent on accounts and trading data. Otherwise it is impossible to accurately judge “profit potential” of any of the related properties without making monumental guesses. Trade accounts and those of other properties are personal and confidential to the tenants and shielded by the Data Protection Act . POBs will not even release barrelage figures to assist. No accounts mean that paragraph 6.4 sinks without trace. Reliance on physical factors alone can be both misleading and unreliable. In the round POBs are very coy about releasing comparable data which is invariably cherry picked to suit their case. The tenant’s valuer has no means of forcing all relevant data out into the open. Attempted Orders for Disclosure are nearly always refused on the grounds of a “fishing trip”. Draconian confidentiality agreements are offered which completely stifle any further investigation into the ‘evidence’ offered. We never sign any of them. The irony is if the case goes to Third Party then all the background previously withheld information has to be released and full investigation can be undertaken.
What the tenant’s valuer is never told is amongst other things the following essential information….
(1) Were there any tenants works of alteration to be disregarded.
(2) What are the level of tied trade discounts.
(3) Who owns the trade inventory.
(4) Has the landlord undertaken works that have been rentalised.
(5) How was the rent deal struck and was it linked to any other properties in the same tenant’s operation.
The only undisputed fact that is easy to confirm is the Rateable Value.
In the absence of accounts and the five points listed above being told, for example, that the Dog and Duck has been let for say £40,000 is virtually meaningless. The problem is that valuers who are uneasy/unfamiliar with calculating the profits method assessment place total reliance on other rental transactions. In the real world and the mind-set of the ‘Willing Tenant’, which is what the valuer is after all attempting to replicate, that individual could not give a monkeys for comparable rental transactions. All he cares about, and in great detail, is the level of direct competition and the actual trading success of the subject property. Comparable rents are of no relevance. Slavish reliance on so called comparables does nobody any favours. Time and time again it is used to cloud what is often a massive over exaggeration of future trade prospects. This then goes back to VPGA 4 and paragraph 2.13 (Trading Potential)…
“This is the future profit in the context of the valuation of the property that a Reasonably Efficient Operator would be expected to be able to realise from occupation of the property. This could be above or below the recent trading history of the property. It reflects a range of factors such as the location, design and character, level of adaption and trading history of the property within the market conditions prevailing that are inherent to the property asset”
Note “above or below” as quoted. POB valuers NEVER cast trade potential below the current levels. Why? Simple, because personal goodwill to them just does not exist, ever! Back to basics. The profits method of pub rent valuation is the Profits Test. Due to the inevitable lack of accounts and the five items listed above, ‘other rental transactions’ are of little if any assistance and slavish reliance on same is an illusion to be avoided.