THE GIST
Foreign investors are circling British brewery and pub estates as Brexit-related uncertainty drives down the pound and makes them cheap, attractive targets for acquisition.
This week, Hong Kong property company CKA announced it would buy Greene King’s brewery and pub estate for £2.7 billion ($3.28 billion), just weeks after Cayman-registered private equity firm TDR bought the Ei pub group for £3 billion ($3.64 billion). Between them, Greene King and Ei owned around 6,700 pubs, meaning one in eight of the U.K.’s pubs has changed hands in the last month. The buyers in these deals give credence to the idea that U.K. pubs are increasingly treated as a hedge against Brexit as much as public spaces to have a beer.
While both deals represent around a 40% premium on their share prices, this is more than offset by the fact that the pound is at its third-lowest rate since the EU Referendum on June 23, 2016. CKA’s purchase of Greene King looks particularly clever, given the brewery’s growing popularity in China—it saw a 50% bump in sales after president Xi Jinping was filmed drinking Greene King IPA—and the fact that the 2,700-strong pub estate is valued at £4.6 billion. If some of the assets were considered for redevelopment into homes, that figure could be significantly higher given U.K. house prices.
While acknowledging some redevelopment is possible, David Hatcher, editorial director at online real estate news service React News, believes the investment is more about income stability. The U.K. has always been attractive to foreign property firms because of its older leasing laws, he says, and increasingly pubs are seen as reliable, long-term investments.
“[Secure real estate investments are] becoming increasingly rare in the office sector because of the rise of flexible offices, and the ever-changing world of retail means leases are becoming shorter and shorter, and occupiers are going bust at an alarming rate,” he says. “Pubs commonly still have long leases, and provide the stability investors crave.”
WHY IT MATTERS
Most news about pubs paints them as in decline, but many pub companies are achieving excellent profits, including the Fuller’s estate. The sale of the brewing arm to Asahi for £250 million ($327 million) in January included the historic Griffin Brewery and all its brands, but did not stretch to Fuller’s 380 pubs and hotels.
While the main force for change may have been the offer for Fuller’s—it was the highest ever paid for a U.K. brewery—former CEO Simon Emeny still sees significant value in his pub and hotel estate because it provided 87% of the company’s profits in 2018.
“Brewing has formed an integral part of our history and brand identity,” said Emeny in the announcement of the sale. “However, the core of Fuller’s and the driver of our future growth is now our premium pubs and hotels business.”
Simon Hall, director of Fleurets, a chartered surveyor specializing in licensed properties, agrees that pubs are both a stable and profitable investment for foreign and domestic investors, especially with Brexit looming—and the Greene King purchase might not be the last.
“Brexit means the share price was probably undervalued and the exchange rate made it 20% more attractive,” says Hall. “The U.K. pub market is actually a hedge against Brexit, because pubs are relatively recession-proof. The average punter will still go down and drink his four pints every Friday; it’s cash-generative and it’s asset-backed with the freehold pubs behind it.”
There is no reason to think this will change—the predicted drop in consumer spending during the lead-up to Brexit has yet to hit—but pubs also offer uniquely profitable exit strategies to owners, as most sit in highly prized residential locations across Central London, the commuter belt, and the Home Counties. 12 pubs still close every week in the U.K., with many being knocked down to make way for homes or apartment conversions.
“Whilst the number of pubs has declined, that is almost entirely in the ‘small’ category,” says Hall. “Big pubs have actually increased in number and the overall revenue is actually about 6% higher than it was 10 years ago, so the pub trade is strong, it’s just redistributing. I expect Greene King will continue to rationalize their estate under the same management team.”
While Hall doesn’t expect the strategy to change under CKA, the risk of asset-stripping is considered so high that the Campaign for Real Ale felt pressured to put out a statement.
"The news that Britain's largest pub and brewery company has been sold to an international asset company is very concerning for our beer scene,” says Nik Antona, CAMRA's national chairman. “We will be calling on the new owners to retain the current pub portfolio to safeguard thousands of pubs and jobs across the country."
An element of the news not touched on by CAMRA or any other commentators has been the brewery itself. Greene King IPA is the U.K.’s second-biggest cask brand, selling over 125,000 barrels (150,000 hectoliters) in 2018. However, in the modern market, its beers are seen as out of touch: the erroneous description of its flagship as an IPA, when it is lightly hopped and just 3.8% ABV, is one such example. The brewery had a 12.9% share of the premium bottled ale market in 2016, but as more craft or craft-adjacent breweries have expanded into supermarkets, it has lost ground to beers like BrewDog Punk IPA and Camden Hells. According to rival Marston Brewery’s own 2018 off-trade report, the brewery expects most of the growth in bottled ale to come from “craft styles with more hoppy flavour,” a sector Greene King has never looked able to compete in.
“I think it’s far too big a brewery to be closed down, and the brands are far too strong,” says Hall. “It’s booming in China so maybe that’s something they will look to expand on rather than sell off. They have such an outlet for their products that it will sustain the brewery.”
What a property company will do with a 200-year-old brewery in need of modernization remains to be seen, but if CKA finds the beers aren’t serving the needs of its pub estate and customers, it is unlikely to get the resources it needs to develop further.
Those looking on the positive side might note that being run by a property company rather than a brewery could increase the chances of pubs breaking the beer tie. Others, however, will see these acquisitions as a step away from the traditional idea of the “local”—especially since the landlord lives on the other side of the world.
Words by Jonny Garrett