Hospitality landlords urged to help tenants

BY GREG NINNESS

Landlords in the hospitality sector are under pressure to drop rents or risk being left with vacant buildings.

It is a common arrangement in the hospitality sector, which includes pubs, hotels, motels, cafes and restaurants, for an investor to own the premises, and lease them to an operator who runs the business for a fixed term.

Often the investor who owns the premises is also a former operator of the business, who previously owned the whole package on a freehold going concern basis, but later sold the business with a lease in place, perhaps to retire, and kept the premises as an investment.

However, it is also common for business operators to sell before their lease has expired. That lease will then continue to the end of its term with the new owners and can then be renegotiated.

But tough times in the sector have forced a significant drop in the value of leasehold businesses for sale.

The hospitality business is notoriously fickle and "under new management" signs are a common feature of the industry.

With banks generally more conservative in the current economic climate, they are being cautious when assessing funding applications from people wanting to buy leasehold businesses such as pubs, motels and restaurants.

Peter Harris, a broker with Bayleys Real Estate who specialises in South Island hospitality businesses, said banks would generally fund up to only 50% of the price of a leasehold business, meaning the purchasers would have to provide the rest as equity. Even then, the banks would take a close look at the borrower's track record in the sector and the risks associated with the business they were wanting to buy, with a particular emphasis on its cash flow.

Difficulties raising finance had seen prices tumble for leasehold businesses, in some cases leading to bargains.

"A [leasehold] business I might have sold two years ago for $300,000, you might be able to buy now for $225,000," Harris said, a decline of 25%.

However, a bargain was usually a bargain for a reason, and that often had as much to do with the fact that the business was struggling as with any difficulties raising finance.

Country pubs were struggling.

"I think it's just because of new attitudes now to drinking and driving," Harris said. "People are taking a more responsible attitude and are tending to take their liquor home because they can't afford to get caught drinking and driving."

Lack of patronage at some traditional pubs had forced owners to look for new uses for their properties, such as conversion to a backpackers hostel and turning much of the bar area into a cafe. But with an oversupply of such accommodation in the industry, the market for such properties had "certainly softened," Harris said.

The businesses that were performing best were those on the tourist trail which were able to attract a mix of local patrons and visitors.

Hospitality Association of NZ chief executive Bruce Robertson points the finger at unrealistic landlords for the problems many businesses are facing.

"I think what is at the heart of this issue is that some of the landlords have not recognised that they are still charging too high a rent for the profits a business can generate," he said. "So we've got rents that are too high and too many landlords haven't been willing to recognise that they are better to have a tenant on a lower return than have an empty building."

Robertson said it was common for business operators who were struggling to ask landlords to drop their rent, only to have the request refused. As their debts piled up, operators were forced to walk away from the business and the landlord would be unable to find new operators to take over the lease.

Faced with the option of dropping the rent or have an empty building, landlords would often step in and take over running the business themselves. "We are seeing some of them having to come back in and run the business because they have no choice," Robertson said.

Often that meant coming out of retirement to work in an industry they had not had an active involvement in for many years and which had changed considerably. So they were not necessarily any more successful at running the business than the tenants they replaced.

"If the landlords are more realistic [about rent], they'll be better off in the longer term," Robertson said.

Many landlords also failed to keep investing money in their premises to keep it up to date. Often this meant adding or improving dining and entertainment facilities. "The ones that are struggling are the ones that have had little investment and the landlord may not have put any money back into the property, so they are sort of locked into that 1970s-style and aren't meeting today's needs," Robertson said.

"But if it is, say, a country pub that has had that investment, so it meets the needs of the wider community and is somewhere you'd take your family for a birthday dinner or where mums meet up for coffee after dropping the kids at school, then they are doing pretty well. But to get to that point they've had to have investment in facilities."

Ironically, difficulties with many leasehold arrangements had increased interest from buyers looking to acquire a business and its premises.

"It's become clear, the preference is for buyers to look for freehold going concerns," Harris said.

These were either people who had already been involved in the industry but were currently cashed up, or new entrants to the industry.

Harris said he took a call from a couple last week who had both lost their jobs and were looking to buy a hospitality business, something that was increasingly common.

Many businesses such as pubs or motels often had owners' accommodation attached, so buyers could sell their existing home, use the equity from that and any other savings to help fund the purchase, and then live on the premises with the business providing an ongoing income.

However, whether operators have leasehold arrangements or own their premises, the operating environment is still difficult.

"Tourism numbers are holding well, particularly out of Australia, but we've still got a fair degree of [spare] capacity, in beds, bars, restaurants and cafes, which means New Zealanders and our visitors are pretty well spoilt," said Robertson. "The industry is pretty competitive and people have struggled with yields.

"We may be out of recession but I don't think New Zealanders have really opened their cheque books yet. They are still careful with their discretionary spend, so there's still that lag effect across the hospitality sector."

- © Fairfax NZ News