There is no doubt the last four years have been an incredibly challenging trading environment in the UK leisure investment market, with volumes falling further below already depressed levels of transaction activity in that time period (volumes exclude pubs and hotels).

Leisure deals have in fact been falling year on year since 2016, each below the long-term average of c.£500m per annum. They inevitably reached an all-time low in 2020 with the onset of Covid – lower than the impact the global financial crisis had on the market back in 2008/09.

However, the post-pandemic recovery has been tepid – since 2020, transaction volumes have struggled to return to the below-average levels seen pre-Covid. In fact, 2023 saw UK leisure investment volumes reach only £127.9m, the lowest they have been since the millennium, with the exception of the two economic shock events mentioned above. Last year’s performance represents a -63% fall in transactions since 2019, and -46% on the previous year.

What, therefore, has been driving the depression in leisure investment activity? The answer to this question is essentially ‘concerns around occupier credit’.

If we compare the leisure sector to retail warehousing for a moment, it is our belief that the risk and return relationship in the latter looks much more favourable than it does in other sectors when you consider the strong occupational fundamentals and financial stability of the sector's key occupiers.

Assessing the INCANS Tenant Global Score, which is a measure of the financial strength and stability of a retailer based on its public accounts, tells us the financial stability of the out-of-town markets’ top operators is solid. Of the top 25 larger format operators, in terms of the number of units they have across retail, leisure and shopping parks combined (excluding F&B and gyms), 20 are considered ‘low risk’ or ‘very low risk’ in terms of financial failure.

However, for occupiers of predominately leisure-focused schemes, a disparity in credit lines is much more apparent, which, in turn, has been affecting investor demand. This may seem a little unfair when you consider the strong post-pandemic occupational recovery across a number of leisure subsectors, alluded to earlier in this report. Nevertheless, this recovery varies from subsector to subsector and even operator to operator that exist within them.

More importantly, the most significant concerning factor for investors in multi-let leisure schemes has undoubtedly been the trade performance of the UK cinema market. With Cineworld and Empire Cinemas filing for administration in the UK last summer, and Vue also needing to restructure its debt position in a swap for equity with its lenders in the early part of 2023, investor confidence has remained muted.

Potential suitors have continued to be much more circumspect as they have done since the pandemic, through fear of saddling themselves with a sizeable liability should an occupier need to vacate – essentially a large unit that is difficult to let without significant capital expenditure to make limited repurposing options more viable.

This has been compounded by the fact the US writers’ and actors’ strikes during the summer caused a number of blockbuster titles to be pushed into 2024 to allow for shoots to finish and promotional activity to resume (including Ghostbusters: Frozen Empire, Kraven The Hunter and Dune: Part II), which, in turn, has impacted box office performance and the fortunes of the UK’s cinema operators.

As a result of all the negative noise on cinema performance, we have inevitably seen a disparity emerge between the strength of the occupational market and the post-pandemic recovery of other leisure sub-sectors, and investor interest in multi-let schemes.

Nevertheless, it appears we are at a crucial turning point in the market. The fundamentals in the cinema market are improving. According to the UK Cinema Association, 2023 was another important step in the recovery of the UK cinema sector post-Covid, with an increase in box office revenue of 8.2% on the previous year, resulting in revenues reaching over £978.5m. At the same time, admissions were also up 5.3% on 2022 at £123.6m. Furthermore, ‘saturation’ releases – those playing in over 250 cinemas – were almost back to pre-Covid levels and with the delayed blockbusters following Hollywood strikes now imminent, the fortunes of the sector are beginning to build.

This is especially true when you consider the continued rebasing of rents across the cinema sector. The size and nature of cinema units and the lack of alternative uses and/or occupiers continue to drive landlords to the negotiating table with purveyors of cinema space, which, of course, means any potential investor is buying off tomorrow’s rent rather than today’s, providing them with a more stable occupier base.

Combine this with the uptick in occupational performance across a number of other subsectors, it is no surprise we saw some significant transactions toward the end of 2023. In October last year, we saw Croydon Council sell Colonnades Leisure Park to Melford Capital for £30m, reflecting a 7.75% yield. Meridian Leisure Park, in Leicester, was also traded, bought by Greenridge Opportunities LP from Legal & General Investment Management (LGIM) for £25m, reflecting a yield of 8.5% in December; this scheme contains a recently regeared eight-screen Vue cinema as well as a gym, bowling alley, soft play centre, nursery and a number of F&B options.

With the strength of the occupational market continuing to build, 2024 and beyond looks brighter in terms of the depth of investor appetite for leisure schemes. One factor that may help convince potential buyers is pricing, especially when considered in relativity to other sectors and longer-term averages.

Prime yields at c.8% in multi-let leisure look favourable when compared to the high watermark level of 2016/17 when it reached its lowest point in the last 15 years at 5%. If we look at the yield trajectory over that time period, the market started at 9% in early 2009, fell to 5% by mid-2016 and has since risen to where it currently sits at 7.75%. This cycle suggests leisure yields are arguably more attractive in terms of their relative longer-term performance and the ability to capitalise on value accretion over time.

It is true across the wider leisure market, there are always a number of immature businesses without a well-established, robust financial footing, which, of course, places some question marks over their credit lines and, ultimately, their longevity. This is particularly true for new and emerging F&B operators, competitive socialising concepts or immersive leisure operators that are yet to establish a foothold in their respective subsectors. That said, this is part of the natural ebb and flow of a dynamic market so closely linked to the changing tastes of the consumer.

However, as broader subsector performance continues to improve occupationally, the depth of investor interest is set to build, particularly amongst those that recognise the longer-term potential evidenced by the yield trajectory of the last 15 years.

_{Read the articles within Spotlight: UK Leisure – 2024 below.}