Private Equity Drinks Up Pub Opportunity As Work-From-Home Changes How And Where We Drink

The coronavirus changed the way we drank. During lockdowns, we drank at home, often alone. And since then, as more people work from home more often, when we do go out for a drink, where we go has changed. 

The postwork pint in a pub near the office has become a drink near home — maybe even working in a pub during the day to escape the home office, as the definition of what pubs can offer grows broader. And the change has not escaped the notice of investors. 

Pubs were once a small but stable asset class of the real estate world, with big-name investors like British Land owning significant portfolios in the sector. As pubs have struggled, those investors have sold out and been replaced by a new breed of private equity firms that are looking to capitalise in a sector where demand has been falling. And buying the right pubs in the right locations can still yield returns of 20% or better. 

“We’ll see more investment activity across the sector,” Proprium Capital Partners Head of Europe and co-Managing Partner Philipp Westermann said. “Pubs have proven remarkably resilient, and even with a consumer squeeze, they still represent an affordable night out. We’ve owned pubs through good and bad economic times, and in every situation they have survived those ups and downs.”

Prospects for the UK’s public houses have felt about as bubbly as a pint of lager left out in the sunshine over the past 20 years. Shifting consumer behaviour, changing drinking habits, the high cost of operating bars, the bias toward food service and the ever-increasing cost of a heavily taxed pint compared with cut-price supermarkets have all contributed to the long-term decline in pub numbers.

On top of that, months of closures and restrictions during the pandemic kicked the industry when it was down.

The negative trajectory had started long before Covid-19, with UK pub numbers already down from 60,800 in 2000 to 47,200 in 2019, according to the British Beer and Pub Association.

And stark figures from a new report showed that around 50 pubs per month closed in England and Wales in the first half of the year. That has brought the overall number, including those vacant and being offered to let, to 39,096 at the end of the first half, down 305 compared to 39,401 at the end of 2023, according to data from Altus.

The pandemic has realigned ownership of pubs across the UK, and several of the major players prior to the pandemic have largely exited the market, including CBRE Investment Management, Patron and NewRiver.

In 2021, U.S.-based private equity investor and Majestic Wines owner Fortress Investment Group bought Punch Pubs in a deal for almost 1,300 British pubs thought to be worth as much as £1B. Punch owns more than 90% of the freeholds of its properties, which made it an attractive target for private equity owners. It has focused on rural and suburban pubs, and a spokesman told Bisnow it had invested £240M in its estate over the past five years, while in April it acquired 24 pubs in the Milton 3 portfolio.

Punch was first taken private in 2016 after accepting a £400M takeover from Heineken and the private equity firms Patron Capital and May Capital. 

NewRiver built up one of the largest pub investment portfolios in the UK, with more than 650 pubs valued at around £275M by 2019. But it sold the 674-pub Hawthorn Leisure REIT in July 2021 for £222.3M to Admiral Taverns. 

The common theme with the current crop of owners is that investors have turned their focus primarily to suburban, town and village pubs, while those in major city centres continue to be impacted by work-from-home trends and portfolio acquisitions have heated up, with Admiral Taverns the latest to acquire a group of freehold sites in a package deal. The community pub group is owned by real estate private equity firm Proprium and recently reached an agreement to acquire a portfolio of 18 freehold pubs from Marston’s.

Made up of wet-led establishments, or those that make the majority of their revenue from drinks rather than meals, the acquisition brings Admiral’s total estate to more than 1,420 pubs across the UK and was its second major deal of the year, following its purchase of 37 pubs from Fuller’s in May. Admiral Taverns has invested more than £38M in the last 12 months in its estate, including major refurbishments and sustainability upgrades.

Westermann said community pub acquisitions typically show a circa 20% return on investment, while the possibility of conversion to alternative uses such as residential provides a fallback real estate position.

“As an investor, we like the fact they are underpinned with this flexibility, and we really like the operational performance,” he said. “Our portfolio is national, and we don’t have a particular preference geographically, although we are less exposed to central London. Increased work-from-home has favoured community locations, and we’re likely to stick to our knitting when it comes to the type of pubs we acquire.”

One of the most positive moves this year has come from Heineken UK, which just ahead of the summer of sport announced that it intended to invest £39M in upgrading and reopening pubs in its Star Pubs estate over the remainder of this year, demonstrating its “confidence in the resilience of the great British local,” the drinks giant said.

A quarter of Heineken UK’s 2,400 pubs have been earmarked for improvement, and the investment also covers work to reopen 62 long-closed locals. By the end of the year, Heineken UK will have reopened 156 such pubs since the start of 2023, reducing the number of closed pubs in its estate to prepandemic levels.

Wet-led pubs consistently outperformed the total market over the past 12 months, according to CGA RSM UK management data, with only April showing a dip and London trending above the British average, with sales up 11.9% during July as the UEFA Euro 2024 concluded.

When a ban on indoor smoking in public areas was introduced in 2007, wet-led pubs were hit hardest, and for years the trend was a move toward food-led pubs outperforming. That trend is now not as pronounced. 

“Pubs have generally been performing above the [hospitality] market for the past year, with wet-led pubs sometime stronger, sometimes dry pubs,” CGA Senior Insight Consultant Reuben Pullan said. “But in June and July, wet-led pubs really pulled away. The Euros were a major part of this, and the football support is exaggerated further in the capital, as wet-led pubs inside the M25 outperformed those nationally. So it's a good showing for wet-led pubs, but not in itself the firmest evidence of a long-term comeback above pub-restaurants.”

The performance is underpinning the investment thesis of investors like Proprium.

“The pub sector has bifurcated, which has benefited the wet-led community pub sector,” Westermann said. “If you look at the food-led pub market postpandemic, those establishments have been hit by reduced demand from cost-cutting customers and increases in energy and labour costs. By contrast, the wet-led sector is very cost-light.”

There are other macro trends at play, Pullan said. A significant part of pubs outperforming the market so consistently is the drag that bars and nightclubs, which are in decline, are having on the total market figures.

“We're starting to pick up trends that particularly younger consumers are trading out nightclub visits for wet-led pub visits, and pubs are making more efforts to broaden their offering into the experiential market,” he said.

Indeed, Heineken is far from alone in doubling down on its renewed investment in pubs. In recent months several pub groups have announced fresh plans for investment, with Tim Martin, founder and chair of JD Wetherspoon, declaring that he has a list of 130 towns and cities where he wants to open a pub over the next decade, on top of the 814 he already operates.

“The Friday lunchtime and evening trade has been lost because people typically work at home that day, which conversely has been a boon to local pubs,” Coverpoint Foodservice Consulting partner Richard Moulds said. “I suspect we may see some of these city centre pubs become more experiential, with themed gaming, to try and differentiate and attract customers. It would take a bold investor to acquire city centre pubs right now.

“As a result, I expect to see most of the interest around suburban pubs. In the 1990s, we saw them adapt when they recognised the opportunity around food. I think what Heineken is doing could reset the bar, and we may well see an evolution that is just as significant.”