There are some good business opportunities for hospitality entrepreneurs in the North of England, particularly at the top end of the market. Ben Walker reports.
Could business in the North of England finally be picking up? Chain hotels in the North-east enjoyed the highest average occupancy outside London in the five months to May 2010, according to TRI Hospitality Consulting's regional UK Hotstats survey. Average occupancy was 70.2% in the North-east compared with a provincial average of 65.8% and 77.7% in London. Across all three Government office regions - the North-east, the North-west, and Yorkshire and Humberside - revenue per available room was higher than the provincial average of £44.06.
There are signs that sales activity in the North is picking up. The Leeds office of licensed property agent and broker Christie & Co reported a 33% rise in agreed deals in the first half of 2010 compared with the previous six months, and viewings totalled 570 against 420 in the second half of 2009.
More high-quality businesses are coming up for sale compared with last year, says David Lee, a director based in Christie & Co's Newcastle and Leeds offices. He has sold half-a-dozen good-quality trading hotels at prices close to £1m this year. In contrast, last year's market was almost exclusively dominated by forced sales.
Simon Hall, a director at chartered surveyor Fleurets, agrees: "A lot more people are considering selling, because they realise that the market has already bottomed out and they are fed up with waiting and want to get on with their lives. Once more proven businesses with decent accounts come up for sale, let's see if the banks are as good as their word and start lending."
Christie & Co is currently marketing the freehold of the 11-bedroom Newton House hotel in Knaresborough, North Yorkshire, for £899,000 and Fleurets has Otterburn Tower, an 18-bedroom medieval castle complete with three restaurants, four flats, Wi-Fi throughout and access to 3.5 miles of "the best salmon fishing in England", up for sale at £2.5m.
There is demand for hotels in much higher price brackets. In May, Doxford Hall near Alnwick, Northumberland, was sold off an asking price of £9m. The four-star, 25-bedroom country house hotel attracted interest from several parties and new owners Robert and Gina Parker paid substantially more to secure the sale than their own bank's valuation.
Another significant multimillion-pound sale came at the start of the year: Holbeck Ghyll Country House Hotel in Troutbeck, Cumbria, was sold confidentially for a figure "reasonably close" to the asking price of £8m.
"This may be a spin-off from the strength of the London market. There are still people who are prepared to pay a premium for a premium asset," says Leigh Parsons, a partner based in the Leeds office of agent Knight Frank.
In both cases, the buyers were wealthy individuals with successful businesses and strong connections to the local areas. Parsons says that he is currently confidentially marketing three similar hotels. "The owners don't want to be seen to be selling in the current market because this is interpreted negatively; they are happy to entertain potential interest," he says.
There is still a fair amount of distressed hotel stock up for sale which is of very poor quality and consequently very cheap - half price compared with two years ago. The failed businesses are mostly midmarket city centre hotels, a market segment heavily reliant on commercial demand, which has dropped during the downturn.
But, in spite of the low prices, Parsons advises caution: "They might look like bargains but they are not for the naïve. I think they will go to alternative use. The downturn is speeding up a natural progression of poor-quality midmarket hotels which are destined for the scrap heap."
Such properties are usually in bad physical shape and will require significant amounts of capital investment; second, they are currently making no money and will take at least three years to turn around; and third, they will have bad reputations that will require further effort and expenditure to overcome.
For Parsons, there is still too little activity between the extremes of distressed stock and trophy assets. The bid-ask gap still remains a "gaping chasm" which is preventing many good-quality businesses coming to market.
"There are plenty of hotels that would like to sell because the owners have plans and they don't want to stay there forever. If they are making a profit, banks are being supportive even though in many cases they have breached their loan-to-value covenant," he says.
"But buyers are looking for bargains and are not prepared to pay what the owners want. You can't close the gap. Buyers will look at a failed hotel on the market for £20,000 per room and a trading hotel at £50,000 per room and they don't get it. The situation won't change unless one of two things happens: either the banks start pulling the plug on a lot of reasonably good businesses, or they start lending money again and relaxing their loan-to-value requirements so that buyers can afford to pay more."
Sales of urban coffee shops and restaurants are "buoyant" in the Leeds and Newcastle areas, according to Lee at Christie & Co. City centre leaseholds are being snapped up by chefs or business people with no catering experience for between £25,000 and £100,000. There is increasing interest in daytime deli/coffee shop operations, which do not require an alcohol licence and make for attractive lifestyle or post-redundancy businesses, since they are not usually open in the evening.
Offers are invited for the leasehold and contents of former Pizza Hut units in Manchester, Hull, Southport and Preston through Fleurets. A new operator will want to strip out the front-of-house decor and give the restaurant its own identity, so this expense will need to be considered. On the plus side, kitchen equipment and back of house tend to be of a very high standard, but independent restaurateurs will need to bargain hard to avoid paying higher-than-market rents.
In the more formal dining sector, the sale of 3 York Place, a fully fitted restaurant in the business district of Leeds, has attracted competitive bids and Fleurets is in the process of selecting a new operator. The business, which closed in April 2010 for non-trade-related reasons, is understood to have been profitable, although no accounts were made available during the marketing process.
In the pub sector, the main sales activity is freehold disposals by the large pub companies (Enterprise Inns, Punch Taverns, Admiral Taverns, Scottish & Newcastle, Greene King, Marstons) which are coming to market in groups of 10 or 12 rather than the floods of properties seen last year.
Hall at Fleurets says major pub companies are under considerable pressure to sell closed units quickly owing to the threat of vandalism and the cost of security and empty property rates. This is resulting in some attractive prices. "There are some amazing deals going through: lovely detached freehold village pubs for around £140,000," he says. Some are being taken on by chefs who are investing further capital to extend and improve the food side of these businesses.
The most prominent buyers of existing freehold pub assets in the region are Greene King and Orchid Group; the latter has been expanding at an astonishing rate, winning a strong reputation for regenerating businesses that have been written off by their previous owners.
There are also plenty of free-of-tie high street nil-premium leaseholds available. A good recent example is the Waterhole Bar & Restaurant in Leeds. Having previously been a traditional ale house under the Hogshead brand, refurbishment and improvements were carried out in order to redirect the business towards a café-bar and restaurant operation. The business closed in July 2008. The head leasee remains Greene King which has now sublet the property to Market Town Taverns, an operator of 10 food and ale taverns in Yorkshire, at an annual rent of £49,000.
"Just because the business is not viable for Greene King, that doesn't mean another operator with lower central overheads cannot come in and make a go of it," comments Hall.
"A lot more people are considering selling, because they realise that the market has already bottomed out and they are fed up with waiting and want to get on with their lives"
Christie & Co has sold the freehold of the Weston hotel on Scarborough's Esplanade to first-time buyers Tom and Pat Hendry from Cheshire for a substantial seven-figure sum after a confidential marketing process. Christie & Co's sister company Christie Finance secured funding for the deal.
On the South Cliff, close to the town centre, the 36-bedroom hotel is arranged over five storeys and features a residents' lounge, a lounge bar with a capacity for about 40, a 70-seat dining room, a function room with capacity for 70, and two-bedroom private accommodation.
Before purchasing the Weston, Tom held various management positions with De Vere Village Hotels for the past 17 years.
Pat also has experience working in hotels and met Tom when they both worked at the Royal Station hotel in York.
They plan to continue to operate the property to the same standards achieved by the previous owners. Nick and Sara Allen, who owned the Weston since 2003, sold the hotel to concentrate on their other business in the town, the Red Lea hotel.