2020/NO.03 - Yes, we really do think that will be the case. Honest non-landlord client-led rent review advice is as rare as hen’s teeth at the moment. The continuing pandemic, lockdowns, social distancing will all have a dramatic downwards pressure on future rent levels. That is a certainty. Much as the Pub Cos and major Brewers would like to hide from that inevitability, reality must be faced sooner rather than later.
First, the boring technical bits to put matters in perspective.
All Rent Assessment Proposals (RAP) MUST be signed off by a Chartered Surveyor and prepared in accordance with RICS guidance notes [Pub Code regulation 20 (3)]. So lets look at what the regulation requires of the person signing off the RAP. The relevant guidance is found in The RICS Valuation-Global Standards 2017 and subsection VPGA 4. Under the heading 'Fair Maintainable Operating Profit' (FMOP) which is paragraph 2.4 on page 103, it states….
”This is the level, of profit, stated prior to depreciation and finance costs relating to the asset itself (and rent if leasehold) that the reasonably efficient operator (REO) would expect to derive from Fair maintainable Turnover based on the market’s perception of the potential earnings of the property. It should reflect all costs and outgoings of the REO as well as an appropriate allowance for periodic expenditure, such as decoration, refurbishment and renewal of the trade inventory”.
No good looking backward at pre Virus trade, the valuer, in accordance with the mandatory RICS guidance must look forward and predict the market . As an aside, one of our Directors David Morgan was emailed last week by a Licensed Trade valuer from a certain regulated pub company concerning an ongoing case and to quote…
”As I am sure you are aware we received an Independent Assessor Determination which appeared to prematurely ‘set the market’. We have appealed this determination to the PCA”.
Erm, an interesting take on the Independent Assessor (whoever he was) following the same RICS guidance as above. Chances of success? You form your own view on that one! But it will further delay the pub concerned going free of tie.
If your rent review was at a date before say 15th March 2020 when the lockdowns began you cannot use the Virus Reality (VR) in your rent calculations. Evidence post rent review date is legally not allowed to affect the mindset of the willing tenant, more of that later. Harsh as it may seem but as your rent review may not yet be settled, the law is very specific on this point. However, our friends at the Pubs Advisory Service launched a service earlier this week for tenants and lessees of the regulated Pub Cos. There is a good chance, any tenant or lessee who has received a Rent Assessment Proposal (RAP), deemed non-compliant, could re-trigger their rent review. This would then allow the Virus Reality to be factored into the valuation and subsequent rent review discussions. Other rent reviews that are set to fall AFTER March 15th 2020 can use VR. After 30th June, or whenever the Pubs Code Adjudicator (PCA) office releases the moratorium on ‘no rent negotiations’ the then RAPs must look forwards and of necessity, predict the market. The Pub Cos and major Breweries are dreading a solid dose of rent reality which in our opinion could see rent levels plummet from pre virus levels. Why?
A recent YouGov piece of research echoed our views that people will just not feel comfortable returning to Pubs and Bars. YouGov found at 63%.. They also found that 57% of restaurant customers are uncertain about dining out again. Add to that the almost inevitable requirement for social distancing. The heady days of a crowded pub full of ‘vertical drinkers’ or a restaurant of closely packed full tables are well and truly gone for the foreseeable future. Even beer gardens will look strange if social distancing is strictly observed. Future trade levels will fall dramatically. The question is how much ?
The assumption for rent review is that of a willing landlord and a willing tenant. Not necessarily the captive tenant in occupation. That willing tenant would be very cautious indeed about even creating any bottom line profit with all of the constraints and social fears that will then be rife. To tempt that willing tenant, one of the inevitable fixed costs will have to be very tempting and the only fixed cast that is capable of variation is rent. We estimate that in the first year post VR trading operations would struggle to make any profit. Second year, if you are lucky, a return to say 30% of pre VR profit. Then in years 3-5 normal profits. Best guess is that the initial rent level could be 30%-40% lower than compared to pre VR levels. OK so we are speculating, but off a very solid and practical base linked with the Virus Reality which will if anything get worse before it gets better.