Leisure Investment in the UK has further established itself as a mainstream sector through 2014 with very strong investor demand for both leisure parks and the numerous sub-sectors. Transaction volumes for the sector as a whole (including leisure parks, bingo/bowling outlets, health & fitness, hotels, public houses, restaurants and bars) increased significantly in 2013 to a total of £3.67bn and whilst 2014 showed a marginal decrease, a very healthy £3.29bn was still transacted.

This is led by the development of the sector as a whole with increased consumer spend, a growing number of established brands and dominant operators overcoming years of financial struggle to offer investors strong covenants underpinned by sustainable businesses.

There are still some concerns with a large proportion of occupiers still owned by Private Equity groups with high levels of debt but there is a renewed confidence that operationally these businesses are in an ever improving position and the turbulence in the occupier markets over recent years is nearing an end.

Lease terms also tend to be favourable to investors, especially compared to the other main stream sectors, with long terms certain and fixed uplifts common, particularly in the sub-sectors of public houses, health & fitness and hotels.

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Transaction volumes in the core leisure markets of leisure parks, restaurants, health and fitness, bingo/bowl and cinemas showed a 28% increase from 2013 with c £875m transacted in 2014 although of this amount only c.30% was made up of leisure parks and in town leisure schemes. This is evidence of the continuing squeeze on supply, particularly of good quality prime stock, the majority of which is institutionally owned.

Like most property sectors growth in investment demand is being led by the UK Institutions with depth coming from the UK REIT’s, Private Equity buyers and UK Property Companies. There is some interest in the sector from overseas money but this remains focused on London. This growth in demand has led to a sharpening in prime yields.

We are of the opinion that for a prime leisure investment, with sound property fundamentals including strong location, national covenants, 15 years + average weighted unexpired lease term, a degree of fixed uplifts/ indexation, a strong trading platform and lot size of £10m - £30m, a net initial yield of 5.25 - 5.50% is achievable in the current market. This represents a 50bp inward yield movement over the past 12 months.

We anticipate the strong demand for the sector to continue into 2015 so long as the wider property and consumer markets do not suffer through wider economic changes. Prime yields should remain stable with the potential for further improvement if the UK Institutions continue to experience such high inflows of cash. Much like the past two years, we anticipate that the supply of prime stock will remain constrained and the yield gap between prime and secondary will continue to widen.

Taken from
Spotlight: UK Commercial Leisure Q1 2015