Market conditions have been changing with increasing pace in the past few years. As transactional volumes increase and confidence grows, financial institutions continue to review and scrutinise the evidence they are willing to consider when making a lending decision. Pete Seymour guides us through Graham and Sibbald‘s inaugural quarterly property report…

As many operators will be aware, between 2008 and last year it was hard for operators to raise funds for property transactions, mainly because fittings, furnishings, equipment and goodwill make up around 40% of the Market value of a business. Essentially, the main financial institutions were not willing to risk lending against such volatile and intangible assets, regardless of what the market wanted.

Valuers, including ourselves, were being asked to ignore the trading history, inventories, liquor licenses and the fact that the business was open, and instead ask as part of a restricted marketing campaign what discount needed to be applied to sell the business. The loan was then assessed against this unrealistic value, but the banks were only willing to take the risk against the worst possible situation they could imagine.

Thankfully, this all now seems to have passed, providing the borrower has the experience and skills to the run the business properly.  During the latter half of 2017, our valuation team witnessed an increasing number of lenders asking sensible questions when considering valuations; instructions requested us to consider market value as well as closed value with special assumptions, and we have been asked to discuss the differences between existing turnover and profits against our opinions of the fair Maintainable Operating Profit and fair maintainable operating profit.

If banks are now factoring in whether or not a business is being run efficiently then in my opinion they are once again asking the right questions and factoring in the correct levels of risk into their lending decisions.

As it happens, the principal lenders are now looking at the cash surplus in the business, the skills and experience of the borrower, the stability of the trade and the loan-to-Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) ratio, before they look at the loan-to-value ratio.

This increased support will no doubt help increase the number of property transactions in 2018, especially as we are seeing an increase in the number of strong-performing businesses on the open market.

Although there are wider risks to the stability of the market – such as the difficulty that larger groups have exposed themselves to with their rapid expansion in recent years – market conditions remain strong and we are seeing increased activity across the whole of Scotland.

Quarter 1 in 2018 saw the completion of several notable transactions, including Edinburgh’s Caledonian Hotel for a record-breaking £85m, Starwood’s purchase of seven Hilton businesses for £135m and the sale of the capital’s La Belle Angele (pictured left) for an undisclosed sum, in addition to several smaller transactions across central Scotland.

Alongside this, we have also seen the value of assets under offer increasing significantly in the first quarter of this year.

You can view Graham and Sibbald’s Hotel & Leisure Quarter 1 report in full by clicking here.

Pete Seymour is Head of Licensed Trade and Leisure Agency at Graham & Sibbald.  The specialist valuers and chartered surveyors aim to release a similar report at the end of Q2.

For more information, visit www.g-s.co.uk.