At the end of last year, I engaged in a healthy debate with Tim Vallance of JLL about leisure pricing.
He was of the opinion that the sector was beginning to look overpriced - I was firmly in the other camp. Further inward yield shift from the then considered prime pricing of 5.25% was inevitable, and in my opinion we could easily see pricing drop below 5% assuming prime retail yields were hovering around 4.5%.
My reasoning was very simple - in 2007, peak leisure pricing was a smidgeon beneath 5% courtesy of WM Mitchell’s purchase of The Gate in Newcastle. We hadn’t yet achieved levels comparable with historic peak pricing. But, whereas in other sectors the peak pricing reached in 2007 is considered a potential barrier and indicative of overpricing, the same argument just doesn’t ring true for leisure.
2007 pricing is not the barrier for further downward yield pressure that it might be for other subsectors, for several reasons. First, in 2007 the number of investors with leisure as an investment criterion could be counted on the fingers of one hand. Today, by contrast, the majority of institutional investors have a requirement for the sector. Second, the supply of quality leisure assets remains relatively limited. So it is quite simply a question of limited supply and increased demand for prime leisure stock from investors, which will drive yields further down.
The increased demand is warranted. Investors now recognise that the leisure sector demonstrates resilience and rental growth because, compared with other sectors, it benefits from relatively long leases and typically has a decent proportion of rental income growth, which is secured through future fixed or minimum uplifts. Not only that, but there is also significant operator demand to secure space on prime parks. This creates rental tension and competition to get into the best schemes and therefore secures rental growth.
That’s what X-Leisure recognised when we published our Making the Case for Leisure report back in November 2010, and the reason Land Securities acquired X-Leisure in 2012. It’s why this once ‘niche’ or ‘alternative’ asset class is now mainstream and on institutional investors’ buy lists, and why demand for the sector is easily outstripping the supply of investment opportunities.
It is, of course, true that supply of leisure stock has increased within the sector through this period as developers and landlords have responded to the occupier and investor demand, and so there are those, like Tim, who are concerned about the risk of over-saturation with too many restaurants and cinema screens.
But I would argue that in this sector increased supply does not equate to oversupply. Our propensity to consume leisure continues apace and shows no sign of slowing down. CACI’s latest research forecasts that between 2015 and 2020, spend on cinema will have increased 30%, eating out 20%, and drinking 19%. So there is significant increased supply, but each year we continue to spend more and more on leisure activities and so the balance is maintained.
However, don’t be misled into thinking that every park and shopping centre extension will benefit from our increased spend. Careful stock and operator selection is important. Oversupply may well exist in local areas. Plus we are becoming more and more discerning, so both quality and experience need to be delivered by operator and landlord to ensure success. Old cinemas are rapidly losing ground to more modern and exciting or boutique offers, and attractions need to correctly match the local demographic. One size does not fit all. What works in London cannot necessarily be replicated outside this vibrant and relatively wealthy city, and what works in out-of-town leisure parks won’t work in a city-centre scheme.
However, if I appraise a prime leisure investment with the appropriate tenant mix, it will have no vacant units and a weighted average unexpired lease term (WAULT) of typically more than 10 years. It is an appraisal that comfortably assumes rental growth across the restaurant sector, and fixed or minimum uplifts across the big boxes. Why, then, should it be valued at a discount to other traditional, more mainstream sectors? Given that these investment attributes are now widely recognised by investors, I don’t see this discount continuing in the short or medium term.
Today, prime leisure yields are 5% (a 25-basis-point improvement since Tim and I debated this topic) and, as long as current economic conditions continue, I’ll wager further downward pressure if the right stock comes to the market. If only we had acquired more, when nobody loved the sector.
Polly Troughton is head of retail parks and leisure at Land Securities