UK Pubs in 2024
The UK pub sector has long been a cornerstone of British culture, but recent changes in ownership models and market dynamics have redefined how pubs operate. At Mortgage Lane, we recognise that acquiring or refinancing a pub presents unique challenges and opportunities, especially as brewery involvement evolves in today’s market. Let’s delve into how a pub mortgage works and how brewery ownership is shifting in this dynamic landscape.
Pub Mortgages | What You Need to Know
Pub mortgages differ substantially from residential mortgages due to the commercial nature of the property and the inherent risk involved in operating a pub. When securing a mortgage to buy or refinance a pub, there are several key factors to consider:
- Commercial Viability: Lenders will assess how profitable the pub is or could be under your ownership. This involves examining trading history, profitability, and future projections. If the pub is well-established and already turning a profit, securing financing becomes easier. However, if you’re looking to revive or refurbish a struggling establishment, a detailed business plan will be critical.
- Loan-to-Value (LTV): For pub mortgages, lenders typically offer up to 65-75% LTV. This means you’ll need a larger deposit compared to residential mortgages, often 25-35%. However, if the pub has a proven track record of profitability, you may be able to negotiate better terms.
- Business Plan: Especially for those looking to turn around an underperforming pub, a solid business plan is essential. Your plan should outline revenue streams (food, drinks, entertainment, accommodation), marketing strategies, and how you plan to increase footfall. Lenders need confidence that your approach will lead to sustainable profits.
- Debt Service Coverage Ratio (DSCR): This ratio is key in determining your ability to cover mortgage payments from the pub’s income. Lenders typically look for a DSCR of at least 1.25x, meaning the pub’s income should exceed mortgage obligations by 25%.
- Location and Demographics: The pub’s location plays a huge role in its potential profitability. A pub in a busy urban area, close to transportation hubs or popular attractions, is generally a safer investment than one in a remote, less populated area.
Brewery Ownership of Pubs | A Shift
Historically, most UK pubs were brewery-owned. Major breweries controlled both the production and distribution of beer, establishing thousands of tied pubs where tenants were required to exclusively sell their beer. This vertical integration dominated the sector until the Beer Orders in 1989, which forced breweries to sell off many of their pubs, opening the door for independent pub ownership and the rise of pub companies also known as pubcos.
However, the role of breweries in pub ownership has been evolving once again. While the Beer Orders disrupted the traditional model, recent years have seen breweries regain interest in owning and managing pubs. Unlike in the past, where quantity was the focus, breweries today are more selective, focusing on fewer but more strategically valuable pubs. These are often establishments that can showcase their premium or craft beer offerings and reflect a modern consumer demand for quality.
The Rise of Pub Companies | Pubcos
In the wake of the Beer Orders, pubcos emerged as significant players in the UK pub market naturally due to the change in regulation. Companies like Greene King and Punch Taverns acquired vast portfolios of pubs, operating them on long term lease agreements with tenants. Pubcos allow tenants to lease the pub and operate the business while retaining ownership of the property. This structure provides a lower barrier to entry for entrepreneurs interested in running a pub, as leasing can be more affordable than outright ownership where no deposit is required occasionally.
Pubcos continue to hold a dominant position in the market, although the rise of managed house groups and new ownership models is creating additional pathways to pub ownership. In contrast to pubcos, these managed house groups often maintain full control over pub operations, focusing heavily on branding and food led offerings that can compete with casual dining venues on the high street, it is now not all about the beer but it seems the overall experience also including food. This shift reflects the changing tastes of pub-goers, with more emphasis on dining experiences, high-quality drinks, and even entertainment.
The Current Challenges Facing Pubs and Breweries
While there are many new opportunities for pub ownership and investment, the sector is not without its challenges. The COVID-19 pandemic, rising energy costs, and inflation have placed enormous pressure on both pubs and breweries as well as many other commercial businesses. Many smaller independent pubs and breweries have struggled to survive, with closures on the rise.
Smaller breweries are particularly vulnerable, as they often rely heavily on local pubs to distribute their products. With fewer independent pubs to sell their beer, many breweries face difficulties in maintaining profitability. Additionally, the cost of living crisis has further impacted consumer spending, making it harder for pubs to attract regular customers.
What Does the Future Hold?
Despite these challenges, the UK pub industry is resilient. Pubs have survived economic downturns, wars, and pandemics, and they continue to adapt to changing consumer preferences. Many pubs are expanding their offerings beyond beer, incorporating dining, entertainment, and even accommodation to attract a broader range of customers.
At Mortgage Lane, we believe that pubs will continue to play a vital role in British society, and those willing to adapt to market demands will thrive. Whether you’re an investor looking to buy a pub or a brewery seeking to expand your portfolio, understanding the evolving dynamics of pub ownership and securing the right mortgage will be key to your success.
If you’re considering purchasing a pub or refinancing your current property, contact us at Mortgage Lane. Our expert team can help you navigate the complexities of a pub mortgage and find the best financing solution for your needs.