Dealing with debt
Ireland has attracted record levels of commercial property development over the last few months – some €6 billion-worth of sales – according to John Ryan, Director of the Hotels & Licensed Property Division at CBRE.
One of the guest speakers at the LVA’s recent seminar on ‘Dealing with debt’ at the Radisson Blu in Dublin’s Golden Lane, his presentation, The Market for Dublin Pubs, indicates that the volume of spend in the first nine months was well up even compared to the pre-crash years of 2006 and 2007 before pub sales “fell over a cliff” in 2008.
He pointed out that some 28 Dublin pubs had changed hands already this year with a combined value of €27 million, indicating a growing confidence in the economy.
Indeed, the incidence of publicans’ accounts showing a dramatic fall in turnover has begun to abate and the office/retail market shows signs of an improvement that, he says, will filter through to the pub trade with the growth in employment.
Of the 28 pubs sold, 18 or 64% went for up to €1 million (eg Smithfield’s The Belfry) while six pubs (21%) went for between €1 million and €2 million. Three pubs (11%) hit between €2 million and €3 million (eg Thomas Reads on Dame Street). The remaining pub, Foley’s of Merrion Row, went for between €3 million and €4 million.
Currently 17 pubs await ‘closing’ having signed contracts and John forecasts that the number of pubs sold by the end of the year will rise to 40 with a combined value of around €42 million.
The key factors driving the decision-making here have been the coming to an end of Capital Gains Tax relief at the end of this year, the low stamp duty and competitively-priced sales offering value-for-money.
Apart from the end of CGT, the market has also been stimulated by a rise in cash buyers coupled with the increasing prominence of private equity funding.
This private international finance has gone into partnership with experienced local operators in a number of new pub ventures.
John Ryan predicts that the capital value of pub sales will have more than doubled in 2014.
Emerging trends in the Dublin pub market
John Ryan noted that increasing pub sales/“Strengthening Transactional Activity” had begun to filter out to the suburbs but it was not as strong as once it had been.
What’s more, stabilised trading conditions have led to more competition for assets in the trade, thus increasing values in certain areas.
The ‘Best Bids’ process has also become more prominent as a means of dealing with offers, he added.
John profiled today’s ‘new publican’ as someone who’s very well-up on what’s needed in today’s licensed trade.
“These young people are shining a light on the licensed trade and indeed, giving a light to other publicans,” he suggested.
Approach to valuations
Valuations towards trading entities are now carried out at CBRE using the Income Capitalisation Method: the current – as well as the budgetary – trading figures are sought alongside historic trading figures taking a three-year view. The condition, location, management structure and performance of the pub is assessed over the years and this can lead to multiples of between four and 9.8 times earnings, he explained.
“The way we sell pubs is changing too,” he pointed out, alluding to the current practice of institutions having access to ‘data rooms’ which these days contain much more detailed data on a prospective premises for purchase.
“Financial institutions require a high level of detail before purchase and the Alternative Use Value is also re-emerging in licensed premises.”
In all, he predicts that the capital value of pub sales will have more than doubled in 2014.
Later, John gave his best estimate for the 2015-16 period where he envisaged that the number of pubs coming to the market will be sustained.
“The last time 40 pubs changed hands was in 2004 and that was exceptional,” he said, “We normally might see 4% of stock coming to the market.”
He pointed out that, in total, 61 pubs have been advertised or marketed this year in some shape or form, representing 8% of the pub stock as deleveraging continues apace.
“In terms of value, we’re coming from a low base too, well away from the steamy heights of 2006-2007 when a lot of pubs sold on their development potential.”
He advised that property should be viewed as a 10-year cycle, “… and we’re only moving off the block at this stage as the economy’s growing again”.
Some in the audience wondered how long we could expect to continue to see distressed sales to which John responded that there was a lot of ‘distress’ out there, “But if the capital value of the market continues to grow, I can see that nuclear button being pushed sooner rather than later,” he explained alluding to the time when banks will put stock onto the open market rather than accept their clients’ best offers for settlement.
Lending & the banks
Michael Murnane, Financial Services Director at BDO Corporate Services, spoke at the seminar about current practice in the financing and restructuring of debt in Refinancing – The Options.
Banks are lending again to a value of 70% to 75% of the purchase price (with a 1% ‘arrangement fee’ on the loan amount), he stated.
The cost for this runs at about 3% over the cost of these funds to the bank and banks are now prepared to cap personal guarantees – in one such case it was less than 30% of the value of the loan.
Michael Murnane – “Banks are lending again to a value of 70% to 75% of the purchase price”.
Alternative lenders are out there but they’re expensive, often working off margins of 10%-plus, he warned. Anyway, these companies were more suited to property portfolios than individual trading entities.
Michael emphasised that the sales process was a slow one and vendors and buyers should be prepared for a six-month transaction period.
Later, some in the audience wondered if a publican might not consider leasing out the premises for three to five years, thus holding onto their property until the market improved.
However Michael felt that the banks were unlikely to play along as markets can go down as well as up.
Anyway, he added, the downside of the lease is that if it goes badly the owner has not only lost rent but goodwill too.
Restructuring Debt – Key Points
Anne O’Dwyer, Managing Director at Duff & Phelps (formerly the Restructuring & Insolvency Division of RSM Farrell Grant Sparks) spoke about dealing with debt and restructuring.
She pointed out that corporate insolvencies had fallen by 8% between January and June this year.
Improving economic conditions have made the sale of a business more attractive than it would have been 12 to 18 months ago.
But it’s critical for the borrower to retain control of the sale, she stressed, pointing out that there are three types of borrower:
* Those working out an existing deal with a ‘business as usual’ attitude
* Those restructuring in the absence of the borrower – essentially receiverships
* Those restructuring with the borrower
Anne O’Dwyer – It’s critical for the borrower to retain control of the sale.
Later, in answer to questions, she explained that obtaining a significant debt right-off might mean that you’d take a hit on your pension fund as part of this as the banks would certainly take such ‘assets’ into account (including the family home). After all, the banks want to see some level of contribution to the write-off.
In summing up the seminar, LVA Chief Executive Dónall O’Keeffe mused that it seemed to be that “the stronger you are financially, the weaker the deal you get from the banks.
“Now is the time to transfer businesses intra-family as values are so low vis-à-vis CGT,” he concluded.
