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Capital Markets

Enterprising approach for pub sector

Europe’s real estate revolution

It is an age-old question: which is more important – beer or rent? The news that one of the UK’s pub groups is actively examining the merits of conversion to a Reit throws the potential of these vehicles wide open. But the concept faces significant hurdles in that it would require the UK government to accept that beer income is equivalent to rental income. Reit legislation dictates that 75% of taxable income must be derived from rental income.

In its interim results at the end of May, Enterprise Inns revealed that it was considering the move, but accepted that, though there were “significant barriers”, it was “worth further investigation”. The company is understood to have mandated Merrill Lynch to investigate the potential of conversion, but the US bank declined to comment.

Pub companies have significant real estate holdings – something that they have long been expected to exploit. The industry quickly embraced whole business securitization in the 1990s but has proved more reluctant to adopt the wholesale separation of real estate and operational business. Indeed, Karim Naffah, finance director at one of the UK’s largest managed pub chains, Mitchells & Butler, has stated that (in an environment absent of Reits) the sale of pub freeholds via sale/leasebacks is not something that he would consider: “Given the fact that pubs are generally valued as a multiple of sales and profits, capturing the asset appreciation from our successful trading for shareholders is a key part of our strategy.”

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