Traditionally in the pub sector, most bank debt (such as a mortgage on a licensed property) was secured against freeholds or long leaseholds of 75 years plus. However, recent years have seen a shift towards banks offering pub operators debt on much shorter leases of around 25 to 30 years, using the lease itself as loan security. If the operator becomes unable to make the required payments, the bank will essentially take over the lease and sell it on to another party.
This positive shift is creating new opportunities for aspiring pub owners and operators who otherwise may not have enough capital to make significant investments in the property. By borrowing against their lease, they can secure the funds needed to carry out improvement works on a property bought at a more affordable price precisely because it needs those works.
For banks, the benefit lies in generating additional revenue from operating businesses in comparison to lending to property investors. As competition between lenders increases and the number of businesses requiring finance and backed with freehold or long leasehold assets decreases, banks are looking at a wider variety of markets to lend money. Good quality leasehold pubs offer this opportunity.
What does this mean for the future? History has shown that when finance is available for pubs, either freehold or leasehold values rise and the reverse is true when debt is withdrawn or becomes more difficult to obtain. With a more enthusiastic approach to lending on leases in the pub sector, leasehold premiums should improve for those businesses that tick the boxes with lenders.
All lending is still done with a degree of caution, but the willingness of banks to secure debt against shorter lease terms ultimately means pub companies could build portfolios on a leasehold basis while still being able to secure a reasonable level of debt.
- This content first appeared in The Morning Advertiser.
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