Not coming soon …

22.01.10

Cinemas are undergoing a renaissance, leading to record revenues.

As you watch the three-dimensional characters of Avatar seeming to cavort a few feet before your eyes, it is easy to appreciate why cinema-goers spent a record £1bn buying cinema tickets last year, compared with £950m in 2008.

But, returning the 3D glasses for recycling, as instructed in a pre-film announcement, thoughts turn to the “property” reality of cinemas and away from the 3D fantasy world of Avatar.

Despite cinema chains reporting healthy results, almost no new cinemas will open this year.

Multiplex operators such as Vue Entertainment, Cineworld Group and Odeon, which have already grown through acquisitions (see table, overleaf), cannot expand to capitalise on the growing popularity of films until development begins again on retail and leisure schemes. Nothing will start without funding — and no bank is disposed to lend on cinema development.

Cinemas are expensive to build, and the operator, knowing the importance of a multiplex in attracting other tenants, pays a low rent. This is a definite turn-off in today’s funding market. Indeed, independent operators have resorted to circuitous routes to open new cinemas (see box).

Cineworld benefited from the last decade’s retail and leisure developments. Its biggest is a 12-screen multiplex in the Eden shopping centre in High Wycombe in 2008, but it has 10 screens in Hammerson’s Union Square and opened five in Simons Developments and Kandahar’s Marriotts Walk in Witney, Oxfordshire, last year.

However, this year, there is nothing but uncertainty, despite box office takings rising 7%.

As Cineworld chief executive Steve Weiner reveals: “We have had several projects postponed for 2010. As of right now, we do not have any openings scheduled. But none of our projects has been cancelled.”

It is the irritation of postponement rather than cancellation that means nothing will happen in the short term.

As Weiner points out: “We have no plans to develop sites ourselves, as there are still developers in the market with the ability to start projects now.”

Only two Town Centre multiplexes are scheduled to open this year — and even that figure had a wobble earlier this month when the developer, Thornfield, went into administration before completing the Rock, a regeneration of the heart of Bury. Hammerson will complete the scheme and a spokeswoman confirms that the 10-screen Vue will open on time this summer with the rest of the development.

Vue will also open next month in Westfield London, where its 14 screens will replace the original tenant, Cinema de Lux.

Vue has already lost out on other openings, such as the Waterside at Trowbridge Wiltshire, where it would have leased a 30,000 sq ft eight-screen multiplex if the developer, modus, had not gone into administration just as work was about to start.

Discovery Properties has postponed the Oval, Darlington, where Vue had also signed an agreement for a multiplex that should have opened this summer.

Big ticket

The vagaries of cinema development are familiar to Hugo Hawkings, chief executive of Discovery. Having completed multiplex-based leisure schemes in Hartlepool in 1999 and in Ilford in 2002, the Oval, Darlington, is shelved for want of funding.

In August 2007, Vue agreed a 20-year lease for a nine-screen multiplex within the £110m scheme, alongside a Debenhams and 34 other shops.

Yet to a developer, multiplexes are only viable in a boom market.

Hawkings confesses: “The yields from cinemas don't make it worthwhile building them. You don’t have to pay the operators huge amounts of money, but the buildings that they require are specialised and more expensive to construct.

"Against that, the rent you get isn’t that huge.

If you compare that with a supermarket, which will pay three times as much per square foot.

"That’s the real issue: with a cinema, the investment yields are in double figures, and with a supermarket, you are down to 5%.”

Hawkings believes that only in the good times can the yield from a cinema-based scheme attractive. He would like to do more business with Vue, which he considers a good operator.

But he concludes: “It’s a vicious circle. They don’t want to put up the rent, and that’s the only way to make the product viable. The time might come at some stage when they find that there is such a shortage that they will have to pay more rent. On the flipside, cinemas attract people to a scheme. But we would like them on the basis that they are cost neutral, rather than costing us money.”

Geoff Moore, development director of Vue, refutes the low rent argument, saying: “We do pay a good rent. We pay a market rent."

He adds: “The state of the development market has affected our ability to open cinemas this year and next year — possibly about four or five were planned.”

Development interval

Odeon, like Cineworld, will open no cinemas this year. Last year, the only openings were a relocation into Eagles Meadow, a retail development in Wrexham and, last month, the relocation of the Odeon within the MetroCentre in Gateshead.

Yet, as in previous property cycles, a pipeline of stalled proposed developments awaits the cinema chains (see graph). Savills has a list of 100 proposed cinemas to be developed within leisure or retail schemes before 2015. David Bell, Savills’ associate director, says some operators may ask developers to pay for the digital technology necessary for 3D films.

Such equipment costs £70,000 for each screen. As nothing new is being built, cinema chains are paying to convert to 3D themselves. The big operators deny that they would ask the developer to pay for the technology when work begins again.

Chris Warren, Cushman & Wakefield’s head of leisure, says: “There are delays in the schedule over the next five years, but I am not sure that cinemas would build their own.

"The schemes are postponed, not cancelled. No one is going to build in isolation, when something is going to happen two years later than envisaged.”

Warren considers that the only place that standalone development could take place is in the London suburbs, which are “underscreened".

In many regional locations, such as Manchester, there are already several city centre leisure development that include multiplexes.

The impasse will continue until funding becomes available for mixed-use development. In the meantime, cinema audiences will not diminish, both because the rediscovered craze for 3D and also because of a new trend of screening live sporting and cultural events.

Cineworld’s Weiner says not being able to get a seat is nothing new.

“Turning away customers when the demand for a film is beyond our seating capacity at peak times is something that has been happening in our industry when ‘must-see’ films like Avatar open,” he says.

Perhaps, being turned away from a full house, and trying again to see a blockbuster, is all part of the magic of cinema.

Ingenious independent plotlines

Movie-goers may be thronging to multiplexes to see the latest blockbuster, but the independent sector is also thriving.

Independent cinemas open by all sorts of ingenious routes.

When Fred Pritchard, chairman of the Pritchard Group, failed to raise the £30m needed to develop Avon Plaza, a bowling, cinema and hotel scheme in Cannock, he simply refurbished the 1914 cinema on the development site — and became a cinema operator himself. He spent less than £100,000 on a five-week refurbishment.

While Vue waits in the wings for the time when Pritchard can lease it a six-screen multiplex, the Electric Palace Picture House has been doing great business. The gala opening was in November with 2012.

“The community needed a cinema — and it has turned out to be extremely profitable.

"I am making more money out of this than I am out of property at the moment,” reveals Pritchard, who has a 60% stake in the Electric Palace company. Graeme Cotton, the manager, holds 40%.

But Pritchard, the developer, has granted Pritchard, the cinema operator, only a five-year lease with breaks — just in case the banks have a change of heart and decide to finance Avon Plaza.

David and Mark Williams run four cinemas in Cornwall and are expanding, so far, through their own resources.

Two years ago, the father and son began site assembly for a cinema in Newquay, after buying freeholds from three landowners. Next month work will begin on site for a multiplex that opens in spring 2011, thus going down a development route the bigger chains would not contemplate.

Without giving figures, Mark Williams admits that the land prices would be cheaper today. But the company, WTW Cinemas, had already achieved a clever property deal when it sold its St Austell cinema to the South West of England Regional Development Agency to form part of the White River Place shopping centre on condition that it could become a low-rent tenant in the new development.

Williams says this condition made the land price lower than it would have been.

But it ensured that when the St Austell cinema opened in December 2008, the four cinemas in the chain maintained their annual audience attendance of 400,000.

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