Investment review

In line with the wider property market, as the economy continues its recovery, we have seen a notable increase in leisure investment activity over the past 12 months. Approximately £675m was transacted in 2013 showing a 30% increase by way of volume (excluding the corporate acquisition by Land Securities of a further stake in the X-Leisure Unit Trust), compared to 2012 volumes of circa £450m. Of the £675m transacted last year, 65% was acquired by UK Institutions, 15% by UK REITs and 20% by Prop Co’s and private investors.

Investor demand for the leisure sector is wider than ever, with a large pool of institutional and non-institutional investors seeking access to the market place. Such pent up demand is being driven by the continued strength and expansion of the occupational market (particularly cinemas and restaurants), long leases with index-linked rent reviews, rental growth prospects and ever-improving covenant security.

That said, there has been a continued squeeze on stock flow, with a limited supply chain, in particular for larger prime assets and multi-let parks. The most sought after product in the main is owned by UK Institutions, who continue to be net investors with an appetite to increase their exposure to the sector rather than sell.

Key recent multi-let investment transactions are listed in Table 1.

We are of the opinion that for a prime leisure investment, with sound property fundamentals including: strong location, national covenants, 15 years + average unexpired lease term, a degree of fixed uplifts/indexation, a strong trading platform and a lot size of between £10m - £30m; a net initial yield of 5.75% - 6% is achievable in the current market.

UK cinema and leisure sale and leaseback investment market

After a number of years of relative inactivity in the solus cinema investment market, 2013 was characterised by a real resurgence in this sub-sector with circa £190m of solus cinema investments transacted (28% of total volumes transacted in 2013).

This was hugely dominated by Odeon Cinemas who have undertaken an extensive sale and lease back programme over the past 12 months, which has culminated in a collective receipt of approximately £146m encompassing 22 cinemas sold both on and off market. Odeon have been offering 25 year leases on their freehold/long leasehold assets, with annual rent reviews linked to RPI (collared and capped at 1% and 5% respectively).

In addition, the trophy solus cinemas of VUE and Odeon, Leicester Square, London have also been traded, along with one of the best performing cinemas in Ireland (Cineworld, Parnell Street, Dublin), which is currently under offer.

The volume of investors and level of prices being achieved for such prime cinemas (5%+ net initial yield outside of London) further demonstrates investor appetite for the sector and in particular the robust cinema market.

It should also be noted that demand for strong covenants, long income and indexation has given rise to other sale and leaseback initiatives, as carried out by Marstons plc. The group has generated over £120m comprising 76 properties in four portfolios and one solus sale, with a further portfolio known to be under offer. The assets have offered lease terms of between 35 - 40 years, with the benefit of five yearly RPI linked rent reviews collared at 1%, and capped at 4%.

Key leisure sale & leaseback transactions are listed in Table 2.

Funding Pipeline

Again, linked to the highly acquisitive occupational market, there is a particularly healthy development pipeline in leisure with a significant number of ‘cinema anchored’ schemes proposed over the next two to three years. Given the difficulties that investors face in trying to secure prime stock, the funding route is becoming ever more favourable and is creating some competition for the best sites, most of which have planning consent and a large proportion of the income secured. Examples include proposed schemes in Bournemouth, Ruislip and Bedford.

As a product of the investor competition, the yield gap between ‘as built’ and funding is continuing to narrow and in our opinion is now between 0 - 25 bps.

Outlook

Leisure will continue to be on investors ‘shopping lists’ into 2014 and beyond. The ability to acquire dominant leisure schemes in strong locations, with solid covenant profiles, long dated lease terms and the chance to add value with proactive management will prove challenging and therefore such ‘rare beasts’ when openly marketed will induce competitive bidding. Like the majority of sectors, leisure transactional volumes have suffered, although not due to lack of money in the market, but rather due to stock availability. 2014 will see selective asset disposals, often dominated by off-market approaches and development fundings will continue to create buying opportunities where traditional investment opportunities are likely to remain scarce.

Taken from
Spotlight: UK Commercial Leisure Q1 2014