A promising recovery story for leisure

The good news is that a majority of the operators are still standing and budgeting on customers returning in their droves, tired of enforced separation and keen to get back out there. Whilst there are issues of additional indebtedness from the past 12 months be it rent or CIBIL loans, there does not appear to the same structural changes to the sector that have affected retail and some cautious investment from leisure investors ahead of reopening is promising. CBRE recently completed the sale of the Snowdome in Manchester Trafford City in a competitive sales process with the successful bidder the Snowcentre beating a handful of REITs and PE buyers at a price well above valuation. The belief in a swift recovery of an otherwise strong performing asset underlines the re-emerging confidence in leisure.

Turning to other sectors which have been impacted more by the pandemic, there was malaise in the mid-market restaurant sector present even before Covid. This was prompted by over expansion of some groups into weaker sites, unsustainable rents bid on others and dated brands that lacked vitality. The result, operators trading unprofitably. We have since witnessed a market correction, as CVA’s and Administrations have prompted the closure of underperforming sites. However, those restaurants that have survived are anticipating a major bounce back once allowed to reopen. Whilst market rentals have fallen during the past year, this has arguably been much needed and will allow operators to return to profitability when the economy re-opens, as well-funded chains are waiting with war chests to snap up appealing available sites, but at more sustainable rents. The market is anticipating a very strong summer with everyone utilising outdoor seating where possible, and feedback from venues who opened this week has been very positive.

Likewise, the cinema operators who have been busy raising capital during this period whilst also working with their landlords on rent deferments are expected to survive with the threat of restructuring receding. The film market in H2 2021 is expected to be excellent, owing to pent up demand coupled with much delayed must-see movies finally being released by studios. The industry is geared up to maintain social distancing measures which are expected to remain in place throughout this year but with decent product, cinemas can still trade profitably. This has been evidenced by domestic product in Continental Europe which continued to drive cinema admissions in the second half of 2020 despite Hollywood shutting up shop in March. Whilst it will be a few years before we can expect admissions to return to 2018/19 numbers, these operators who have stripped substantial costs from their businesses will recover and return to profitability.

We are also seeing a resurgence of demand from other big-box leisure outlets, including children’s activity centres, adventure golf, climbing centres as well as a host of other experiential leisure offers. The investors behind these brands are seeking to secure new sites now rather than waiting until the economy has fully reopened in anticipation of a spike in demand from people desperate to escape their own four walls. This increase in demand has lowered the risk of long-term voids and with prudent asset management strategies, new life can breathe into older sites.

The softening of leisure park yields in the sector over the past 12 months (CBRE’s prime leisure park yield has moved from 5.25% in November 2019 to 7.0% in March 2021) has meant that investors are starting to re-examine the sector. Trading volumes have been thin for three years now with a large proportion of sales driven by Local Authority investors who have been arguably maintaining inflated pricing. The withdrawal of these buyers with their low cost of borrowing will see the market rebase itself particularly around pricing for more secondary assets. Available stock on the market is at an all-time low but it is anticipated that some owners will soon look to exit the sector bruised by a year of low rent collection, whilst others with capital to deploy will see this as an excellent buying opportunity in a sector with a very promising recovery story.