What, therefore, has been driving the depression in leisure investment activity? The answer to this question is essentially ‘concerns around occupier credit’.
If we compare the leisure sector to retail warehousing for a moment, it is our belief that the risk and return relationship in the latter looks much more favourable than it does in other sectors when you consider the strong occupational fundamentals and financial stability of the sector’s key occupiers.
Assessing the INCANS Tenant Global Score, which is a measure of the financial strength and stability of a retailer based on its public accounts, tells us the financial stability of the out-of-town markets’ top operators is solid. Of the top 25 larger format operators, in terms of the number of units they have across retail, leisure and shopping parks combined (excluding F&B and gyms), 20 are considered ‘low risk’ or ‘very low risk’ in terms of financial failure.
However, for occupiers of predominately leisure-focused schemes, a disparity in credit lines is much more apparent, which, in turn, has been affecting investor demand. This may seem a little unfair when you consider the strong post-pandemic occupational recovery across a number of leisure subsectors, alluded to earlier in this report. Nevertheless, this recovery varies from subsector to subsector and even operator to operator that exist within them.
More importantly, the most significant concerning factor for investors in multi-let leisure schemes has undoubtedly been the trade performance of the UK cinema market. With Cineworld and Empire Cinemas filing for administration in the UK last summer, and Vue also needing to restructure its debt position in a swap for equity with its lenders in the early part of 2023, investor confidence has remained muted.
Potential suitors have continued to be much more circumspect as they have done since the pandemic, through fear of saddling themselves with a sizeable liability should an occupier need to vacate – essentially a large unit that is difficult to let without significant capital expenditure to make limited repurposing options more viable.
This has been compounded by the fact the US writers’ and actors’ strikes during the summer caused a number of blockbuster titles to be pushed into 2024 to allow for shoots to finish and promotional activity to resume (including Ghostbusters: Frozen Empire, Kraven The Hunter and Dune: Part II), which, in turn, has impacted box office performance and the fortunes of the UK’s cinema operators.
As a result of all the negative noise on cinema performance, we have inevitably seen a disparity emerge between the strength of the occupational market and the post-pandemic recovery of other leisure sub-sectors, and investor interest in multi-let schemes.
Nevertheless, it appears we are at a crucial turning point in the market. The fundamentals in the cinema market are improving. According to the UK Cinema Association, 2023 was another important step in the recovery of the UK cinema sector post-Covid, with an increase in box office revenue of 8.2% on the previous year, resulting in revenues reaching over £978.5m. At the same time, admissions were also up 5.3% on 2022 at £123.6m. Furthermore, ‘saturation’ releases – those playing in over 250 cinemas – were almost back to pre-Covid levels and with the delayed blockbusters following Hollywood strikes now imminent, the fortunes of the sector are beginning to build.