Catering Scotland

Pete Seymour

Having been asked by clients, buyers and stakeholders about the effect the current shutdown has had on the hospitality business sales market in Scotland, Pete Seymour provides his view on where the sector currently stands and what the future holds…

Market recap

Since 2017, we have seen funding for hotel and leisure assets improve, with the majority of lenders supporting and lending against market value rather than the assumed closed value, which itself had held the market back following the crash of 2008/09. Increased funding translated into increased completion of high value transactions. In turn this improved confidence in the market, and the Graham + Sibbald Hotel & Leisure Team were expecting to achieve asset sales and acquisitions of around £10m in the sector in Q1 of this year. As a direct result of the shutdown, we managed to complete just over £4m in sales and acquisitions within the quarter, with the shortfall postponed until more certain times.

Ongoing deals

As a team, we had several deals under offer and due to complete in, or just after, March 2020 and none of these have fallen through or been subject to renegotiation. Entry dates have, of course, been postponed, but that is only to be expected given the current uncertainty across the marketplace.

Life’s a beach: Buyers of rural hotels and guesthouses traditionally take a longer-term view on the return of capital

Buyers and new interest

Encouragingly, we are still seeing interest in a wide variety of businesses and locations, from rural hotels and guesthouses/B&Bs, to national chains and UK brands requiring city centre class 3 units.

Now, more than ever, ex-pats are returning to the UK and others are looking to relocate from the south, all seeking a change in lifestyle. Such buyers tend to be couples using a redundancy payout to purchase their business. Unfortunately, buyers in this category were lacking from 2008 to 2019, perhaps because of a rise in the number of employers who successfully retained staff for a variety of reasons.

During previous downturns, hotels, licensed properties and leisure businesses have been sold to owner/operators who are new to the trade. These types of buyers take a longer-term view on the return of capital, partly because they’re buying a lifestyle rather than adding to an expanding group. Consequently, the multipliers they paid were perhaps larger than what we are seeing at the moment.

I understand the BBC believes there are around one million workers in the UK who are furloughed but have not yet been made redundant. This could be a significant pool of prospective purchasers for the trade in Scotland. I am also in dialogue with several overseas purchasers – investors who still see the UK as a safe haven and would consider investment in hotels as a good way of protecting their wealth.

Similarly, we are also seeing real interest in the food and drink sector, where we have a number of businesses available. I am in discussions with several small-to-medium- size UK groups who are looking at opportunities to grow their market share, and there have also been requests from UK brands who are keen to expand and snap up opportunities while many of their competitors are struggling.

We have a wide range of contacts within the branded restaurant/public house market who are all showing interest in sites across the whole of Scotland, with a particular focus in Edinburgh and Glasgow.

Funding

It is also encouraging to hear that finance brokers and buyers are reporting the availability of funding. The majority of high street lenders are very much focused on supporting their existing client base, with CIBLS loans/overdrafts and other debt to ensure viable businesses survive. I understand from my contacts that, whilst decisions by the mainstream banks are perhaps being deferred until some certainty returns, many secondary and tertiary lenders are still willing to offer funds at this time.

The Future

Whilst the short-term future for hotels and leisure remains uncertain, I have seen enough evidence to say for sure that there will be a future for these assets beyond the pandemic. Perhaps initially, interest will be more UK-focused but within a few years, international travel will return to Scotland. We have several unique and world-beating assets, from whisky and golf to heritage, history, hospitality and scenery. People will always want the experience of taking in a round of golf in St Andrews, visiting the new whisky experience at Macallan’s distillery or the Johnny Walker visitor centre in Edinburgh, or simply enjoying the fresh air and peaceful surroundings of the Highlands and Islands.

As it stands, it is my opinion that the current crisis will inspire buyers to seek more rural and remote lifestyles. Buying a business now may seem crazy, but I would counter that for those who do buy now, or in the near future, it is highly likely that the worst of the current situation will be over within three to six months (in other words, by the time the legal and due diligence checks are complete).

Vroom with a View: COVID-19 may have handed Scotland a golden goose in the form of increased domestic tourists seeking world-class attractions in 2020, including the North Coast 500

Once complete, buyers will own businesses with only mortgage debt to service, making it more profitable than those who are forced to borrow money to keep their operations afloat. Given that the loss in profits is going to be short-term (and that hotels and other leisure assets sell on the basis of future profits), buyers will be in a strong position to benefit from the future profits that our industry will generate.

Naturally there will be risks to mitigate and hurdles to overcome, but hospitality businesses tend to offer owners better returns (20-55%) from the turnover they generate. These margins will not be there this year – and perhaps not even next year – but they will return for those who are prepared to work hard, offer a good product and look after their guests.

Meanwhile, some sectors may end up having a bumper 2021, particularly wedding venues and hotels with function rooms. Indeed, my clients in this market talk with some surprise about the lack of cancellations, with the majority of couples moving their date into next year.  Both The Telegraph and The Times newspapers stated recently that staycations could lead to a significant bounce for the hospitality trade. Until people feel safe, it’s likely many of them will want to travel somewhere secluded, intimate and with stunning scenery to expand their minds, such as the North Coast 500.

So, while the Coronavirus episode has caught the industry, governments and virtually the entire world completely unawares, its impact on the Scottish hotel and leisure market has been significant but not catastrophic. Investors have not been completely scared off and while many deals currently remain on hold, the buyers are still out there – we just need the certainty and confidence to match them together.

Pete Seymour is Head of Licensed Trade and Leisure Agency at Graham & Sibbald. Their team of specialist chartered surveyors work extensively in the Scottish hospitality sector, advising and assisting clients in all aspects of commercial property transactions.

Visit www.g-s.co.uk for more information.