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How Do You Discount The COVID Effect?

Updated: Mar 16, 2021

2020/NO.53 - More than ever before the two platforms of rental valuation are being brought under scrutiny, is it a science or is it an art? The “science” part is that of the detailed forensic analysis of accounts and background financial data such as barrelage statistics, micro and macroeconomic information such as inflation and RPI and a host of minor but important other detail. The “art of valuation” is that of opinion, speculation and the considered use of guesswork . Herein lies the problem.

“Science” will lead to a conclusion based on historical data. Solid annual accounts are all pre the pandemic. The interpretation of those accounts into the events of the pandemic, health and safety regulations, Government imposed tier groupings is the “art” of educated guesswork looking to the future. Out of anybody’s hands is the duration of the pandemic. Control through vaccination we hope will stop the spread of the virus but may well not cure the root cause. So how are matters progressing in terms of interpreting a rent valuation.

The standard vehicle for the calculations in the RICS approved Profits Test. Well tried and tested and a robust base of calculation. Four key points have to be established;

  1. The level of fair maintainable trade

  2. The gross profit margins attached to the various facets of income

  3. The expenses of operating the business and

  4. The treatment of the divisible balance and the tenant’s rental bid. We have found that the one major bone of contention is that of the tenant’s rental bid.

In a normal market dealing with a nothing remarkable pub the tenants bid would be 50%. A standard approach. But to reflect current risk and uncertainty the bid has been reduced. Significantly by the tenant’s advisors and hardly at all by the POD’s advisors. Some Independent Assessor (IA) Determinations even as low as sub 30% with a large number being 30%-35%. Another but much less favoured method is to reduce the divisible balance by a small percentage BEFORE applying a standard bid of 50%. This results in an equated bid of between 45% and 48% or rather much greater than the bid levels of 30%-35%.

There is no consistency and no certainty as to how the hypothetical tenant handles ‘risk’. Some may say that you must be well daft to take on any new FOT pub business venture in the teeth of the pandemic. But a very few do just that but at heavily discounted rent bids. Pinning down the true picture of these rare deals is nigh on impossible due to Data Protection Act rules. This makes it impossible to cross reference to any meaningful comparable evidence to underscore what somebody has actually done. New tied pub leases are of no help as the new rent can be manipulated by large trade discounts.

Referral to an (IA) requires a Pubs Code Schedule 3 forecast of trade for the following three years. Some in the POB stable will tell you, as they did during the first lockdown that everything will return to normal in six months. We are much more cautious and have forecasted three years. Some IAs have questioned both approaches and come down somewhere in the middle. Our attitude is that life has changed once and for all. Social scarring or the fear factor will linger for many a year. Even if vaccination does become effective, and we sincerely hope it will, health and safety measures will then be embedded in our pub culture to such an extent that the general tone of pub/restaurant use will never return to pre Covid-19 attitudes or trade receipts levels.

The National return to normality next Spring due to mass vaccination is in our view misplaced when looking at the pub trade. If we do get back to a semblance of normality it will only be after the health and safety regulations have all been dropped. We stand by our three years being a conservative and realistic take on looking to the future.


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