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Distressed hospitality: What investors need to be thinking about

Words by:
Account Manager
July 7, 2020

With high street names such as Café Rouge and Byron Burgers entering administration, investors will be weighing up their options and trying to understand whether there are bargains to be had.

High street restaurant chains were competing in a crowded market before the onset of the Covid crisis, and lockdown has tipped a number of firms into the red as they’ve struggled to access government support schemes. Over the long-term, investors will need to consider the extent to which the public’s appetite for high street casual dining will remain, particularly given the prospect of social distancing measures continuing for many months to come.

More immediately, there are three areas where government decision-making will have a significant impact on hospitality assets, which will need to be factored into commercial decision making by investors.

Commercial rents

Commercial rents continue to be a problem for hospitality assets, with lease agreements no longer reflecting the value properties operating under social distancing conditions. Many businesses have taken advantage on the government’s moratorium on commercial evictions and have been able to defer paying their rent, but this will no longer be a possibility from 1 October 2020 when the moratorium ends. From this date, businesses will either have to renegotiate their tenancies with landlords or start paying again if they don’t want to face eviction or winding-up petitions.

Further government interventions on the issue of commercial rents are likely, and it is one of HM Treasury’s top priorities, with Treasury officials especially concerned about wider contagion to the financial sector should the issue of firms not being able to pay their rent not be resolved. Options for the government include a subsidy scheme proposed by the British Property Federation and the British Retail Consortium. The Furloughed Space Grant Scheme would involve government grants to cover fixed property costs, with the level of subsidy determined by the fall in turnover experienced by a business. Action from the government in this area could be a massive boost to potential investors, as commercial rents are a significant burden for hospitality assets. It will need careful balancing by the government, but any reforms could be enough to put high street restaurants back investors’ menus.

Short-term measures

With Rishi Sunak set to make an economic statement tomorrow, measures to support the hospitality sector are likely to feature heavily in his attempt to kick-start the economy.

The government is increasingly concerned with protecting jobs as the furlough scheme is wound down and will be keen to save as many of the 3.2 million jobs in the hospitality sector as possible. Short-term measures could include a reduced rate of VAT for the hospitality sector as a means of stimulating demand, as well as a possible further extension to the business rates holiday for hospitality firms that is set to run until the end of the financial year in 2021.

Interventions of this kind will certainly be welcomed by the sector, and any reduction in operating costs will help stabilise a number of businesses. However, the big question mark for government is whether they are enough to persuade consumers who are concerned about the virus to venture out of their homes and start spending again. It could be that measures such as a VAT cut only end up helping customers who would have spent anyway, making little difference to overall demand and causing the government to miss out on much-needed tax revenue.

Longer-term support

Beyond the Chancellor’s economic statement, the government will carefully monitor the economic performance of hospitality businesses, and further economic support could be forthcoming in the autumn Budget should it be required.

This additional help could be in the form of reduced employer’s National Insurance Contributions or through wage subsidies for younger workers to help in the battle against unemployment. The government has won plaudits for its commitment to the economy since the start of the crisis, and investors may want to gamble that the Chancellor’s cheque book stays open. Going on the government’s actions so far, this might be a sound bet, but investors will have to judge carefully whether purchasing a hospitality asset is only viable if the government continues to offer the industry financial support.

Investors looking to get a taste of the hospitality sector face an unenviable task. Not only will they have to make a long-term prediction about consumer attitudes towards high street casual dining (during a pandemic), but also consider the extent to which the government will continue supporting the sector.

However, investors who take the plunge could get their just deserts. The market will undergo a long overdue natural thinning over the rest of the year and beyond and firms that can embrace new revenue streams such as online ordering and delivery could stake out a sustainable position on the UK’s high streets.

 

 

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