This Wednesday, Richard Beenstock and Nick Stewart of Ortus Secured Finance travelled to Edinburgh to present for the NACFB.

Below is an abridged version of their message concerning the resilience of the leisure finance industry….

The leisure sector is seen by many as a high risk area.  There is a belief that, due to its reliance on people’s disposable income, it is the first fall away in times of turmoil and the first to rise as things stabilise.

Whilst we agree that this is true to a certain extent, people’s view of leisure has changed. Eating out is no longer seen as a luxury.  In 1989 only 7% of people ate in a restaurant more often than once a week, in 2011 that figure was 34%. A bankruptcy trustee will even allow the bankrupt funds for restaurant trips. As a result of this change in attitude the industry’s decline during the recent economic downturn was minimal and the recovery since has seen 20 consecutive months of growth in restaurant sales.

Hotels have also seen excellent growth recently.  PwC ‘s latest forecast for UK hotel performance expects growth across the board for the 2014 outturn and into 2015. Overall UK hotels are expected to see a 5.6 per cent gain in RevPAR (revenue per available room) in 2015 (to £67.39), driven by a 4 per cent rate growth (to £86.49) and a 1.6 per cent increase in occupancy (to 78%). This is underpinned by a continued strong recovery in the Provinces as well as strong growth in London, especially in 2015.

The pub sector is more complicated because it has been in decline for many years. Over the last 20 years 20,000 pubs have closed, however this rate of closures is slowing.  Christies, the largest pub broker in the UK, estimates that c. 80 per cent of its pub sales in 2014 were for continued use as a pub.

With this evidence suggesting that we are reaching a sustainable level of pubs and the beer sales in pubs showing their smallest decline since 1996, things are looking good for the future for pubs too. However, this rosy outlook does have a tinge of uncertainty with the upcoming beer duty review which could go either way.

Given that we have presented in Edinburgh, we also conducted a more specific review of the leisure industry in Scotland, which features a lot of the trends mentioned above but also some interesting differences.

The lowering of the drink drive limit in Scotland has had an adverse effect on 75 per cent of pubs north of the border. Spending on eating out in Scotland is growing but it is still far smaller than the rest of the UK.

 On the other hand, Scottish hotel occupancy levels in 2013 were 75 per cent and room yields were £53 compared to 72 per cent and £42 in England. It is, however, worth considering the effect of the Edinburgh festival on these statistics, 100 per cent occupancy for the month of the Edinburgh Festival can skew these without necessarily increasing the hotels profitability.

Finally, we should talk about the need for short term finance. UK banks have made it through recent stress tests but lending to SMEs is still relatively low. Therefore, businesses continue to require alternative financing methods in certain circumstances which include the following :

• Mortgages for tenants buying the freehold of their pub
• Start-up loans for people who are experienced in the industry generally, but not specifically running their own business
• Start-up loans for people without any industry experience, but with a good business plan and healthy slug of equity against the freehold value (>50 per cent )
• Loans for pre-pack administrations (or to exit ordinary administrations), provided there is a tangible reason for the administration and the business is profitable at EBITDA level
• Loans to operators with credit issues (e.g. a recent IVA) provided they will become acceptable to challengers/high street during the course of the loan

Short term interest rates are high but the borrower only pays that rate for 6-24 months before they refinance through a longer term lender.

When viewed as a blended return it is much more manageable; A 12 month bridge at 15 per cent followed by a 10 year term at 5 per cent would leave the borrower paying 5.9 per cent across the term of their repayment.

Both the support provided by the alternative finance market and the gradual improvement in perceptions are increasing the momentum of the leisure sector, a market that is brimming with growth opportunities.  

Earlier this month, the award-winning Ortus Secured Finance embarked on a recruitment drive to source a new BDM and a new professional to lead its marketing operations.