There is potential for a rise in merger and acquisition (M&A) activity, once the effects of various price rises from April come into force, according to Christie & Co managing director of pubs and restaurants Stephen Owens.
He said: “In the 12 months following the pandemic, as the sector reopened and responded positively with strong trading performances, we saw a strong bounce-back in M&A activity, much of which related to deals struck before Covid that were simply postponed.
“Since then, as the sector has contended with numerous challenges and headwinds, the M&A market has been relatively subdued with the odd exception.
“M&A activity tends to be fuelled by rising markets or distress, which has not occurred to date to any sizeable degree.
“This may change as a direct consequence of last year’s autumn Budget as we see the impact in increasing labour and other costs, alongside the expectation that interest rates are on a downward trajectory.
“This may give confidence to investors who see value in otherwise solid businesses with growth potential and consequently lead to an increase in M&A activity.”
Fleurets director and head of national agency James Davies looked back at the activity in 2024, highlighting how bigger businesses were driving acquisitions and also cited last year’s autumn Budget as having an impact on the market.
He said: “Last year, there were 21 separate group deals in the pub sector with a total of 431 pubs sold. This activity was mainly driven by the larger regional and national pub companies.
“The trend is likely to remain in 2025, although we may see a lag in group M&A while the market adjusts to the increased labour costs and higher business rates looming in April.”
Food-led pubs are likely to feel the sharper end of cost hikes around raw materials, energy and staffing, particularly the latter as a result of last year’s Budget, according to CBRE senior director of operational real estate Simon Johnson.
He added: ”Menu pricing is now at levels that, if increased further, could drive away customers, which is a delicate balancing act. While wet-led pubs are faring slightly better, margin pressure remains a threat to profitability.”
Furthermore, polarisation is not a new term but it appears it is a trend that isn’t going away, according to the property experts.
Owens added: “Those businesses that are labour-intensive and are unable to find operational efficiencies or pass on costs to consumers are going to see margins come under increasing pressure.
“Likewise, we continue to see consumers prioritise spending in those establishments that provide and offer experiences, quality and value, which doesn’t necessarily mean cheap.
“Customers may be going out less, but they are increasingly discerning on when and where they decide to spend their disposable income. The market continues to remain polarised.”
Similarly, Fleurets’ Davies also predicted the continuation of polarisation with pubgoers remaining focused on value for money.
Polarisation here to stay
“Consumer spending is increasingly focused on either a better-quality experience or getting more for their money as consumers push back on higher retail pricing,” he said.
“This will continue to benefit premium venues at one end of the market and value-driven offers at the other. Those businesses caught in the middle are likely to suffer the most as a result.”
In fact, that polarisation trend is set to continue from a transactional perspective, Owens said.
“There is strong demand for sub-£600,000 freeholds and at the top end of the market where there always seems to be strong interest for those rare assets that only come to the market infrequently. We expect more properties to come to market as the cost pressures and headwinds bite, and operators bring forward plans to sell or exit businesses,” he added.
“Pricing will remain key, as operators increasingly look for bargains and value. Investors see the tenanted and leased market offering relative stability and security compared to the managed house sector and consequently we expect to see more activity from the tenanted and leased (and managed operator) sector.”
Similarly, Everard Cole founder and managing director Tom Nichols echoed Owens’ perspective around the higher end of the market holding up.
He told The Morning Advertiser: “The under £500,000 values have held up much stronger than above because there’s more buyers, it’s more competitive, there’s more access to funding so it has held up very well,” he said.
“We saw values increase by very close to 10% last year. That might be down to better sites and locations. Those will be slightly better than they have been in the past.”
Christie & Co reported the market as flat last year, with a reasonable start to the year. Owens added: “But gains made earlier in the year were quickly eroded pre and post-autumn Budget as buyers postponed investment decisions.”
Currently, there has been a cautious return to a more normalised transactional market, however, there is an increasing supply and thin buyer pool in certain areas, according to Owens, who expects continued pressure on value with prices remaining flat.
Fleurets saw a fall in values in 2024, Davies highlighted. He predicted what is likely to happen this year.
He said: “Overall, we saw a drop in pub values last year, however this is likely to stabilise as interest rates continues to drop, lenders return to the leisure sector and market confidence grows.”
At Everard Cole, transaction volumes were up this year but historically have been higher. However, Nichols said the churn and cyclical change within the sector to constantly adapt, which it is very good at doing, was needed.
Regional analysis
Honeypot locations have previously been cited as a popular area and this remains the case, according to Christie & Co’s Owens.
“Demand in the big cities outside of London, which had seen reasonably good operational performance and demand for assets, saw a slight softening, which is something that may continue. Conversely, London and the south-east have seen something of a resurgence,” he said.
“Lifestyle business in ‘honeypot’ locations remain popular, as do pubs and restaurants with letting accommodation.”
Main hub cities are set to see the most investment and highest growth as a result, according to Fleurets’ James Davies, who predicted London would lead the way, followed by Glasgow, Edinburgh and Cardiff.
“While headlines suggest that the work-from-home trend is reversing, many of the population will remain in a hybrid/remote employment structure,” he added.
“As a result, demand for property outside these hubs is also likely to remain high especially those with excellent transport links. This increased demand will benefit the pubs, restaurants and other leisure venues in those regions.”
The capital was also pinpointed as a popular area by CBRE senior director of operational real estate Simon Johnson.
He said: “London and the south-east of England remain the most desirable markets for many managed operators with the relative affluence making larger, food-led pubs more sustainable.”
Moreover, the wet-led market could see opportunities further up the country, according to Johnson.
“Many wet-led operators find the cost of property, whether that be buying or renting, makes the Midlands and north-based portfolios more sustainable, with some carving out a niche in secondary locations within the south-east,” he added.
Wet-led was also an area highlighted by Everard Cole founder and managing director Nichols who reported positive movement in the segment.
In contrast to Owens’ comments around accommodation, Nichols reported wet-led as a popular area of the market currently.
“We’re seeing a lot of demand in wet-led town centres, which is bucking the trend of what you might think everyone wants – rooms,” he told The Morning Advertiser.
“Everyone wants to try to diversify their income streams – where they’re trying to deskill perhaps and manage staff costs better. There seems to be a shift towards wet-led, town centre [sites].”
Regionally, Nichols outlined where activity was taking place in different areas of the country and the reasons why.
He said: “We’re seeing more turnover in the north, obviously values are slightly less so access to funding is slightly easier whether that’s an economic issue as well maybe.
“Further down, the Midlands is the next most active region and then the south but [we’re] seeing higher value increases in the south.”
Looking ahead, Fleurets’ Davies predicted experience-led venues as an area that will continue to flourish.
He said: “We’ll likely see the continued growth in experience-led venues, as consumers seek more interactive outings and are willing to pay for them. Plus, continued demand for hybrid spaces offering co-working during the day, reflecting evolving work habits.”
The tidying up of some larger estates and recapitalisation of medium-sized portfolios through new equity or an outright change of control is likely to take place this year, CBRE senior director of operational real estate Johnson predicted.
Meanwhile, opportunistic acquisitions for managed houses is set to be on the cards, Nichols of Everard Cole said.
He said: “[Acquisitions will be] opportunistic because there will be value in the sector. If you’re sitting on cash, there will be opportunities.”
Nichols continued to be optimistic about the future for the industry, despite the upcoming headwinds.
He said: “As we move through 2025, it is essential we don’t just focus on the closures and challenges faced in the hospitality sector.
“In order to thrive, we must continue to attract new entrepreneurial talent and shift the focus to the many positives.
“There are obvious challenges ahead but the evidence suggests those willing to adapt and invest in the future of the pub trade will continue to find success.
“The next chapter for the British pub is being written by those who see potential, not just problems.”