Leisure Report

8/4/2019 Leisure Report

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MAKING THE

CASE FOR

LEISURE

A Report on the Connuing

Strength and Stability of

the Leisure Industry

A report commissioned by X-Leisure

www.x-leisure.co.uk


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Our denion of Family Leisureis a simple one: It is that partof every familys or individualsspending budget which centreson basic leisure acviesoutside the home in the areas ofentertainment and eang out.The core of the Family Leisuremarket comprises the cinema

and casual dining sectors.Supported by this core are aseries of smaller subsidiarysectors including; tenpinbowling, health and tness, kidsplay and alternave leisure uses.


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FOREWORD BY PY GERBEAU

Leisure acvies have become anessenal part of everyday family life andare embedded in the DNA of the Brishconsumers 21st century lifestyle. It isa strong and quickly maturing sectorrepresenng signicant employment andcontribung billions towards the Brisheconomy.

I am frustrated that this leisure sector is grossly

misunderstood and misrepresented in all aspects,creang a dichotomy between percepon and reality.With my 17 years of experience in all aspects of theLeisure industry, and more parcularly within theproperty sector over the last 9 years, I passionatelybelieve that it is me to establish this sector as aformidable asset class and recognise its strength andstability.

I am not alone in this, and my frustraons are echoedby my peers, key stakeholders including the CEOs ofthe some of the UKs top leisure providers, operators,investors and landlords who have joined me insupporng this report.

Consumers are showing signs that their discreonaryspending is under pressure but they sll want toenjoy a good evening or day out in a fun, value formoney, safe environment with a quality oer andare unwilling to cut the leisure experience. Contraryto popular belief, Family Leisure is at the core ofconsumers spending habits and connues even whenthe purse strings are ghtened.

This report underlines what is driving the strongperformance of this large and resilient segment of themarket which we have dened Family Leisure.

Today we are launching our Leisure Report which listhe lid on our industry, denes our sector and idenesthe signicant opportunies for future growth.

Voila !

PY Gerbeau

CEO X-Leisure

i


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EXECUTIVE SUMMARY

ii

1. Reputaon Inc.

X-Leisure, the UKs leading acve leisureproperty management and investmentcompany, is today launching this LeisureReport, on the connuing strength andstability of the Family Leisure Industry.

The Report idenes the leisure sector as beingmisunderstood and misrepresented by the press,commentators, investors and advisors.

Within the broader leisure sector is a segment wedene as Family Leisure. The report provides

evidence that Family Leisure, a major 90 billionsegment of the UK market, is connuing to showresilience and stability despite the current constriconof all aspects of consumers discreonary spend.

The core of the Family Leisure market, which we haveidened within the leisure property world, comprisesthe cinema and casual dining sectors, supported by aseries of smaller subsidiary sectors including; health &tness, tenpin bowling, kids play and alternave leisureuses. These leisure acvies have become an integralpart of todays consumer lifestyle and householdspend. As a result, and contrary to popular belief,

spend in this sector is robust. The resilient FamilyLeisure spend is increasingly a reecon of todays newlifestyles and eang habits and is one of the last areasof spending to be eliminated during mes of austerity.

This report highlights the relavely low valuaonplaced on leisure assets by investors and themisconcepons these low values are based on. Tosubstanate the report, X- Leisure commissioned anextensive research review which included interviewinga cross secon of leisure sector CEOs, leading

journalists, sector analysts and other commentators ina survey of leisure specialists views on the way Leisure

is reported and treated in the current market.1

General percepons of leisure focus on sinindustry sectors (pubs, clubs, gaming, bengetc) which are exposed to downturns in consumerspend.Family Leisure, on the other hand, has shownresilience and even growth through toughereconomic mes.

Consequently, the merits and strengths ofFamily Leisure as an investment asset are beingoverlooked by investors.

Family Leisures major contribuon to the UKeconomy a 90billion sector with 1.8 millionemployees - deserves to be beer recognised

Property assets leased to Family Leisure operatorsare good value, defensive and recession proofwith inherent investment merit through typicallylong leases, low voids and xed or minimum rentaluplis.

The key ndings of our report are:


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MAKING A QUOTE FOR LEISURE

iii

Steve Weiner CEO Cineworld

There is so much innovaon going on in the Cinemabusiness at the moment in terms of technologyand new markets. In parcular, we are adding liveentertainment to our oer - for instance with 3D sport,live concerts and opera broadcasts.

There are always good new lms coming through butwe are also seeing a denite trend towards the cinemaas a good value night out - it is one of the few thingsa family of four can do together which does not cost a

fortune.

Graham Turner CEO Tragus

No one gives the leisure sector credit for the way wehave tapped into consumer demographics and theirchanging lifestyles. We react to the important shisand trends in what people think is important to them -whether its healthy eang, value for money or alcohol- and giving them what they want is very good business

for us

Leisure is such a large employer and contributor to theUK economy generally, and yet we get scant recognionand virtually no help from Government. We shouldmake far more eort to work together and to representthe industry on issues like VAT and business rates

Tim Richards CEO Vue

Theres a denite trend towards out of home leisureacvies and entertainment which is bringing people

out, regardless of the weak economy

Steve Thomas Former CEO Luminar Leisure

Leisure businesses have had to transform themselvesinto more agile, exible and recession proof enterprisesand thats helping the sector stay solid and resilientdespite the dicult background we are currentlydealing with

Most of the coverage of leisure spending we see has

absolutely no relaonship to the way our business isperforming in the real world

In response to Making A Case For Leisure

key stakeholders give their insight into thereport:


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1

MAKING A CASE FOR LEISURE

A report on the Connuing Strength and Stability of Family Leisure

i. Foreword By PY Gerbeau, CEO X-Leisureii. Execuve Summaryiii. Making A Quote For Leisure

2. Making The Case For Leisure6. Family Leisure: Big Sector. Big Opportunies8. Leisure And The UK Economy: The Forgoen Sector?

10. Leisure Property Report17. Cinema21. Casual Dining & Fast Food24. Tenpin Bowling26. Health & Fitness29. Addional Leisure Uses (Not Family Leisure)

31. The Case For Leisure


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MAKING THE CASE FOR LEISURE

How consumers behave

Consumers spending behaviour reects both their real

incomes and expectaons of future spending power.It is no surprise that they are currently displayingplenty of cauon across a range of consumer markets.

Consumer spending also reects tastes and lifestyles,social trends and preferences, which change andevolve over me. Consumers spending behaviour canbe broadly divided into two categories; discreonaryand non-discreonary.

What is discreonary spending?

The amount or poron of a consumers spending on

things that are considered to be non-essenal.

A lot of the tradional areas usually considered to beincluded in that denion are not so discreonarythese days. TVs and other electrical appliances are nowconsidered to be basic essenals along with newservices like mobile phones and internet access andsome lifestyle, that is, leisure spending.

These are all now essenal elements in our lives andwe cannot (or will not) do without them.

Is Leisure reliant on discreonary spending?

The leisure sector is perceived to be a cyclical sector,

dependent on discreonary spending and vulnerable tovolume pressure in mes of economic slowdown.

Our experience within the Family Leisure business hasshown us that against a dicult trading backdrop, thevast majority of operators have demonstrated traderesilience and some have even seen growth, as shownin Figure 1.

This stable and even improved trading paernacross these businesses demonstrates that historicpercepons and views in relaon to Family Leisurespend as discreonary are not valid. Todays consumerconnues to spend or indeed switches their spend tothis sector in tougher economic mes.

Consumers are unwilling to cut their core FamilyLeisure spend. As Figure 1 shows, consumer spendingin the core Family Leisure sectors was broadly resilientor saw growth over the period 2007-2009. Althoughunwilling to cut their leisure spend, consumers arehappy to downgrade; for example, replacing ameal in a ne dining restaurant for one in a casualdining outlet. This willingness to downgradeensures consumers are able to enjoy the same leisureexperience whilst reducing their overall expenditure.

The implicaons for future leisurespending within these Family Leisure subsectors, through good and bad mes,are therefore very posive; a view whichwas corroborated by respondents to oursurvey.

2

2007 (m) 2008 (m) 2009 (m)2007-2009 %

change

Cinema 1,159 1,210 1,225 +5.69

Casual Dining 23,364 23,556 23,791 +1.83

Tenpin bowling 278 283 276 -0.72

Private health & tness clubs 2,500 2,520 2,525 +1.00

Figure 1: Consumer expenditure on selected leisure acvites

Source: Mintel internaonal


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2. CAA, Rentrak EDI

3. Allegra Strategies

The new paerns of consumer spending reect bigchanges in society, social habits and atudes. Many ofthose changes an increase in working women, declineof dining room meals in the home, later childbearing,smaller family units, the increased emphasis on theindividual, healthier living and an-smoking campaigns- are ingrained, regardless of economic condions.

Similar inuences have also led to big changes in theoverall paern of leisure spending in recent years.

These are most clearly seen in the drinking and diningout sectors: the growth of coee shops, casual diningchains and gastro-pubs against the decline of thetradional pub and the bingo hall.

In terms of the Family Leisure industry, that meansan evening at the cinema, taking the family out for apizza or taking the kids to a UK leisure desnaon areall regular leisure acvies. Leisure acvies whichare being cut are the larger luxuries such as foreignholidays and meals in ne dining restaurants.

These trends are not new, spending has been under

pressure for the last 36 months, yet certain sub sectors

connue to trade well. Cinemas had a record year in2009 topping 1bn2 in box oce receipts and withstrong product and 3D technology helping to boostcinema sales in 2010, this year is set to exceed it.

The same applies to casual dining; despite some wellpublicised issues with a few red or poorly managed,higher end brands, the UK informal eang out markethad a at 20093 as an industry. Within the eangout market, the casual dining sub-sector, which is

at the core of Family Leisure, performed strongly asconsumers shied their spend to aordable and goodvalue chains.

Another sector reporng strong performance isdesnaon aracons. Merlin Entertainments Groupgures for 2009 were strong and showed doubledigit revenue growth year on year on a like for likebasis. Also beneng the Family Leisure sector is thestaycaon factor. Family trips to leisure desnaonsin the UK are becoming increasingly popular as theyare a cost ecient alternave to the tradional holidayabroad.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

No good prospects

Lacking good prospects

Neutral

Good prospects

Very good prospects

DOES THE LEISURE SECTOR HAVE GOODPROSPECTS?

Cultural change driving sector growth (more going outetc)

Growing faster than economy

Emergence of innovave and entrpreneurial operators

Value for money business will survive

Agility is key

Hard to shake investor image issues

3


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WHY HASNT THE CITY RECOGNISED IT?

The key message in all of this is thatFamily Leisure spend is non-discreonary.In tougher mes the consumer is moredemanding in terms of value for money.As a result, well posioned leisurebusinesses are beneng from strongtrade and stable or growing revenues.

This is not apparent in investors reacons to theleisure sector, or from the industrys press. This hasfocussed almost exclusively on the bad news; thesmoking ban, binge drinking, declining pub sales,problem gambling, the near collapse of the bingosector.

There are a number of reasons for this, but the mainone is the disparate nature of the leisure sector. Itis a collecon of dierent businesses with dierentcustomer proles and challenges, so it is not surprisingthat many journalists and investors tend to concentrate

on individual sub-sectors and the companies operangwithin them, with the result that the larger sectortends to be tarnished by these reports.

It is also not surprising that the car crash factorhas come into this. There is always a fascinaonwith a disaster story. Many leading hotel and leisurecompanies were the subject of private equity leveragedbuy-outs in the 2005-7 years, when borrowing waseasy on the back of either their assets (hotels) orstrong cash ow (pubs, bingo, gambling). Many ofthese companies have struggled in the much changedeconomic and nance environment since 2008 andtheir agony makes good copy.

The law of unintended consequences from all that dealmaking has also played its part. It has led to the virtualeliminaon of the quoted hotel and leisure sector.

That in turn has meant that hotel and leisure analystshave disappeared as a class. The same has happenedin business journalism, leisure specialists now mainlycover other sectors for their day job, typically retail.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Very unfavourable reputaon

Unfavourable reputaon

Neutral

Favourable reputaon

Very favourable reputaon

DOES THE LEISURE SECTOR CURRENTLY HAVEA GOOD REPUTATION?

The leisure industry has the advantages of size,ubiquity, and close links with consumers: feel good is

the sectors businessSector commentator

The Leisure Industry is a big employer and contributorto the UK economy

Journalist

Areas of the sector have been caught with too muchleverage. They have been punished in the press - leased

pub operators, beng shops, private equirty-ownedoperaons being obvious examples

Leisure analyst

Regulatory and taxaon developments have heapedfurther woes on the drinks and gambling sub-sectors

Journalist

4


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There is a dearth of experienced commentators

observing the industry as an industry, calling the trendsand idenfying important developments. That is notlikely to change in the near future, so it is up to us to llthe gap and explain what is going on to investors andthe generalist business reporters.

DO THE PRESS GENERALLY TREAT LEISURE

AS A SECTOR OR AS A DISPARATE LEISUREBUSINESS?

Denitely a collecon of disparate businesses...Leisure analyst

It is certainly the laer, a collecon of disparatebusinesses

Journalist

There is no longer a Stock market leisure sector assuch, very few people are described as leisure analysts -

and very few journalists are leisure specialistsSector commentator

HOW WOULD YOU RATE THE GENERAL

FAVORABILITY OF LEISURE SECTOR

COVERAGE?

I would say the coverage is in general, very

unfavourable - most stu focuses on issues like bingedrinking, violence, gamblingLeisure analyst

Main subjects of coverage have been either car crashstories or issues with mainly negave connotaons e.g.smoking ban, binge drinking etcSector commentator

Very unfavourable

Unfavourable

Neutral

Favourable

Very favourable

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

5

The disparate nature of the leisure sectorresults in blanket statements, assumpons

and percepons. These are generallyfounded on the more high prole leisuresub-sectors; gambling, nightclubs, pubsand bars, and excludes the Family Leisuresector, a sector with very dierentcharacteriscs.


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FAMILY LEISURE: BIG SECTOR. BIG OPPORTUNITIES.

The outlook for the next few years is forecast to bea hard, slow grind for all of us. The recession may betheorecally over, but boom mes and spending spreesare unlikely to return in the near future.

How will the Family Leisure sector react to thesechallenging mes?

People will not sit at home with the blinds drawn unlall debts are paid o. The consumer sll wants to goout, to enjoy their leisure me and to be entertained.They will, however, have to do it on a ghter budgetand with a more careful eye on value for money.

Operators giving good value are therefore well

posioned to maintain or even gain a bigger shareof what there is to spend. Family Leisure has beengrowing year on year and that relave trend is set toconnue and, we argue, accelerate.

The owners of property assets which are let to thestrong, growing and cash generang Family Leisuresegment will also benet strongly. Tenants that aretrading well pose less of a risk to landlords, cemenngtheir rental stream and minimise their risks to vacantproperes.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

No good prospects

Lacking good prospects

Neutral

Good prospects

Very good prospects

DOES THE LEISURE SECTOR HAVE GOODPROSPECTS?

Cultural change driving sector growth (moregoing out etc)

Growing faster than economy

Emergence of innovave and entrepreneurialoperators

Value for money business will survive

Agility is key

Hard to shake investor image issues

6


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WHAT IS FAMILY LEISURE?

Our denion of Family Leisure is a simple one: It is thepart of every familys or individuals spending budgetwhich centres on basic leisure acvies outside thehome in the areas of entertainment and eang out.The core of the Family Leisure market comprisesthe cinema and casual dining sectors. Supported bythis core are a series of smaller subsidiary sectorsincluding; tenpin bowling, health & tness, kids playand alternave leisure uses.

The annual amount spent on these acvies adds up,in our calculaon, to well over 90 billion. Figures forsome of these sub-sectors are hard to pull togetherbut we esmate that Family Leisure, as we dene it,had annual growth in 2009 in excess of 5%, despite a

2.2% fall in household expenditure as a whole and theadverse economic background for consumer spendinggenerally. Prospects for 2010 are good with gures setto exceed this.

FAMILY LEISURE: BIG SECTOR. BIG OPPORTUNITIES.

LIPSTICK LEISURE

The facts suggest that certain areas ofleisure spend, including Family Leisure,demonstrate resilience during recessionalmes, and in some cases spending evenincreases.

There are of course many areas of leisure spend thatare discreonary and are likely to be severely impactedon during mes of economic downturn. These includeeang out in high end restaurants and luxury holidays/hotels. It is, however, as discussed through the report,important not to categorise all leisure spend like thisand assume it all to be a discreonary spend that is cutback when consumer income comes under pressure,as the majority of investors, analysts and journalistspresume.

This phenomenon is similar to the Lipsck Index,a phrase used to describe the rise seen in cosmecsales during periods of economic downturn. Thisregular paern occurs because consumers indulge inaordable luxuries when they have to sacrice thelarger ones. Thus we coin the expression LipsckLeisure for Family Leisure.

7


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LEISURE AND THE UK ECONOMY THE FORGOTTEN SECTOR?

Leisure as a sector currently employs anesmated 1.8 million people4, nearly 10%

of the UK total and not far behind the 2.5million employed in the retail sector.5

Leisure is a labour intensive service industry whichgets scant recognion for its role as one of the UKsmajor employers. This is parcularly unfair given theindustrys regular role as the villain in any debate aboutacvies deemed to have socially undesirable eectsor consequences which require ght Governmentcontrols or regulaon, at either naonal or local level.

Our survey of leisure CEOs, specialist press and

industry commentators strongly agreed with theproposion that the sector received scant recognion:

Nor was there any serious disagreement with theproposion that the sector is largely responsible forthis situaon because of its historic failure to presenta united front in representaons to Government.Individual sub-sectors, like gambling or pubs, havetried to inuence Government policies on issues likesmoking. Occasionally there have been eorts togather together a wider coalion of leisure intereststo lobby for central funding or tax relief on specicacvies with a bearing on the public interest, liketourism or the Olympics.

Our survey revealed strong support for the proposion

that the sector is largely responsible for this situaonbecause of its historic failure to present a united frontin representaons to Government.

We are therefore calling for leading gures frommajor companies operang in Family Leisure to cometogether to lobby Government on important issuesimpacng the sub-sector. The aim would be to wingreater respect and recognion for the sector s leadingrole in employment generaon and for its economiccontribuon generally.

Collecon of disparate businesses

Sector as a whole

DOES THE COVERAGE RECOGNISE THE

LEISURE SECTORS CONTRIBUTION TO THE

UK ECONOMY?

The press will always focus on the negave; hencethe coverage doesnt recognise the leisure sectorscontribuon to the UK economy in generalLeisure journalist

We have always thought that we are undervalued;manufacturing doesnt get an easy ride eitherSector commentator

Weve just done an economic impact study on thebeng industry poinng out that it generates asignicant amount of employment. That is not usuallymenoned in the pressSector analyst

The leisure sector is a huge employer, but theworkforce is a largely low-paid and low-skilledCity editor

SHOULD THE LEISURE SECTORCOLLABORATE MORE EFFECTIVELY IN ITS

REPRESENTATIONS TO THE GOVERNMENT?

Leisure could take a leaf out of the retail industrysbook and get some leverage with the Government onimportant issues aecng the consumer and the leisureindustryLeisure analyst

Leisure businesses are very dierent so it would behard to unify them completely but they could certainlycome together on certain issuesSector commentator

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Most denitly not

Possibly not

Neutral

Yes possibly

Most denitly

8

4. Brish Hospitality Associaon

5. Brish Retail Consorum


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LEISURE PROPERTY: Whendiscussing leisure property weare referring to leisure parks,predominantly let to FamilyLeisure operators. These leisureparks are anchored by a cinemawith a strong casual dining orfast food oering. These assets

may also include some or all ofthe following; tenpin bowling;health and tness; kids play,gaming, nightclubs, bars andalternave leisure uses.


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LEISURE

PROPERTYREPORT


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LEISURE PROPERTY REPORT

Figure 3: Net Inial Yields

Source: IPD

RELATIVE PRICING vs RISK

Leisure property is currently valued at less than retail

and retail warehouse property, commanding a higherall risk yield.

Figure 3 below, shows that that over the period 2002-2010, the inial yield for leisure has been, on average,the highest inial yield of all the property classes, asidefrom industrial where the risks are obvious, with 12.9%voids and 43.9% over-renng. (See Figure 5 page 14).

Leisure property is currently valued at aconsiderable discount, based on historic

percepons of risk and return, to otherproperty sectors. We believe that thisis incorrect and that the merits andstrengths of leisure as an investment assetare being overlooked by investors, due toa lack of leisure knowledge and a fear ofthe unknown.

LEISURE PROPERTY: When discussing leisure property

we are referring to leisure parks, predominantly letto Family Leisure operators. These leisure parks areanchored by a cinema with a strong casual diningor fast food oering. These assets may also includesome or all of the following; tenpin bowling; healthand tness; kids play, gaming, nighclubs and bars andalternave leisure uses.

PROPERTY VALUATION

In order to assess the case for leisure as a propertyinvestment class, a basic understanding of themethodology of property valuaons is required. In

simplisc terms property valuaons are calculated bymulplying net rental stream by the reciprocal of theAll Risk Yield. The reciprocal in eect, produces amulplier.

The All Risk Yield is intended to capture and reectthe future security and growth of a rental stream.Factors such as covenant strength, length of leasesand sustainability and growth prospects of the currentrental stream are all hypothecally encapsulated bythis factor. The riskier the future prospects of thecurrent rental stream, the less the property is worth,the higher the yield and the lower the reciprocal

mulplier and vice versa.

Figure 2: Net inial yeilds, 30 Sept 2010

Source: IPD

11

10

8

6

4

2

%

NET INITIAL YIELDS

Leisure 7.00%

Retail Warehousing 5.90%

Oces 6.10%

Retail 6.00%

Industrial 7.10%

Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-

On a 2 year and 30 year basis leisure property has

out-performed all other core property sectors.

Leisure property is forecast to return 8.8% per

annum over the next 4 years whilst retail is

forecast to return 8.1% over the same period.

Source: Capital Economics


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12

This implies that leisure is considered to be the riskiestof the major property asset classes to invest in. Thereality is that leisure property is not being valued on itsown merits. Within the property investment industry,the leisure sector is valued on a historic percepon,that relave to the other more recognised propertysectors, leisure is an inferior asset. Through a lack ofknowledge and awareness, leisure is considered to bea risky, niche asset class, dependant on discreonaryspend and a ckle consumer.

Contrary to this belief, the facts reveal that leisure is nomore risky than other asset classes. Leisure propertyhas demonstrated itself to be less risky throughperiods of recession than the other major propertyasset classes. It is a stable and defensive stock,demonstrang lile volality in revenue streams.

Leisures underlying characteriscs and strength ofrental stream should be considered and reected in itsvaluaon. In addion, the valuaon of leisure shouldreect the merits and strengths of the leisure tenantmarket and not the current weakness and troublesapparent in other sectors and misconcepons througha lack of knowledge and understanding.

Is retail property a less risky asset class than

leisure?

Should leisure be valued more conservavely

than retail?

In answering these quesons, this paperconcentrates on the last, economicallychallenging, 36 months.

Assuming the basic method of property valuaon,the most signicant factor aecng the all risksyield, and therefore the value of property assets,is the perceived strength and future growth of therental stream. The leisure rental stream can beshown to be stronger and more robust, especiallyin challenging mes, than the retail rental stream.

Why then is it valued as the inferior asset class

across the property sector?

Why do we witness a weight of money chasing

retail assets and not leisure assets?

And why have we seen the pricing of leisure

assets connue to lag behind other, moreapparently volale, sectors?

It is me to beer understand theunderlying characteriscs of leisureproperty and its relave merits as aninvestment asset and to dismiss thenegave misconcepons that investorshave of leisure property.

COMMON MISCONCEPTIONS

Thin Tenant Market

Weak Covenants

Discreonary Spend

Obsolescence

Unaordable Rents

Risky Asset Class

Leisure

Oce

Industrial

Retail

Retail Warehouses

07 Mar-08 Mar-09 Mar-10


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MACRO ECONOMICS

In order to assess the relave characteriscs and

strength of the leisure and retail rental streams, themacro-economic climate must be considered alongsideoperators trading performances.

The macro-economic situaon can be summarised asfollows:

With household expenditure down and unemploymentrising, is the consumer reducing their overallexpenditure?

Yes. Households have reduced spending signicantlyacross the board over the last 36 months and growth isnot forecast to return unl 2011.


Our research at the front of the report, provides theevidence to support the conclusion that in tough

economic mes, Family Leisure spend remains robustand is not being cut back. This is further demonstratedby the lack of leisure operator failures comparedto the large number of highly publicised retaileradministraons.

PROPERTY FUNDAMENTALS

Consumers cung back on expenditure has aconsequenal knock-on eect on the retail rentalstream leading to a decrease in operator revenues.There has been an increase in vacant retail unitsdue to retailers scaling back their operaons, and in

many cases entering administraon, coupled witha signicant reducon in the number of operatorsexpanding and acquiring new outlets, means thatdemand for retail premises has fallen substanally.This fall in demand and subsequent increase in supplycreates disequilibrium in the market and to correctthis, rental values must then fall. This is parcularlyevidenced within the retail sector compared to theleisure sector.

Unemployment is increasing and forecast toconnue to increase through 2010 and 2011,eclipsing 3million unemployed.6

Household expenditure has contracted over2008/2009 and is forecast to remain stac before

growing slightly in 2011.

7

6. EIU

7. Experian

Figure 4: Rental Growth, 2008 - 2012

Source: PMA Forecasts 2010

2

1

0

-1

-2

-3

-4

-5

-6

-7

-82008 2009 2010 2011 2012

All property

Retail warehouse

Retail

Leisure

13

%


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As well as a fall in rental value, landlords with vacantproperty are being forced to accept tenants everincreasing demands in order to secure new lengs.

Lengthy rent free periods as well as large capitalcontribuons are now being included in the majority ofrental lengs, impacng the net rental stream.

It is important to note that vacant properes carry areal cost as well as an opportunity cost of lost rentalstream. Landlords are liable for empty rates, propertyinsurance and maintenance/service charge costs. Avacant unit therefore has a double hit on net incomethrough a loss of revenue and an increase in costs.

Landlords with retail properes that have remained letare also facing problems. They have faced an increasing

number of tenants defaulng on rental payments orrequesng a rental concession to ensure they avoidadministraon. In this situaon the landlord has lileopon but to agree to the concession, again impacngrental stream, to avoid losing the tenant. It is also nowcommon within the retail sector for tenants to payrents monthly rather than quarterly in advance.

As Figure 4 shows, the retail property sector appears tohave suered at the hands of the recession to a greaterextent than leisure as rental values have contractedfurther, and remain in negave growth for a longerperiod than leisure.

In addion, Figure 5 shows that void rates are higher inretail properes than leisure and a higher proporonof units are over-rented, increasing risk. Despite theapparent resilience and beer prospects of the leisuresector it connues to be valued at a discount to retail.As at September 2010 leisure had an inial yield of7.00%, compared to 6.00% for retail and 5.90% forretail warehousing.8

What has happened and is happening to leisure

spend and how has this aected the leisure

rental stream?

Should leisure be perceived as an inferior

investment to other property investment classesand be priced at a discount to this sector?

LEISURE ADMINISTRATIONSRegent Inns (Bar operator)Novis Bars (Nightclub operator)SELECTED RETAIL ADMINISTRATIONSWoolworthsEthel AusnZavviThe PierMFI

Threshers/WinerackLand of LeatherMiss Sixty

AdamsOcers ClubWrapitBordersMK One

The WorksRosebysUSC

Voids (% of ERV) % Over-rented % Reversionary

Leisure 4.0 18.2 71.4

Retail 5.8 41.3 45.4Retail Warehousing 4.3 41.4 50.9

Oce 13.9 44.4 33.3

Industrial 12.9 43.9 37.2

All Property 9.4 41.9 41.5

Figure 5: Occupancy Stascs, June 2010

Source: IPD Quarterly Index, June 2010

8. IPD

14

The instuonal core asset classes appearto have suered at the hands of the recessionto a greater extent than leisure as rentalvalues have contracted further, void rateshave increased to a greater extent andover-renng has become more prevalent.

Leisure is more robust.


20/40


LIPSTICK LEISURE

As highlighted earlier in the report,certain areas of leisure spend displayresilience or grow during recessionalmes. Consumers indulge in aordableluxuries whilst sacricing the larger ones.Leisure property is exposed to the area ofleisure spend that benets from LipsckLeisure.

Figure 6 shows that the spend on Family Leisure

sectors increases over the recessional period. There areof course many areas of leisure spend (larger luxuries)that are very discreonary and are severely impactedupon during mes of economic downturn. Theseinclude eang out in high end restaurants and luxuryholidays/hotels. Consumers who have to sacrice theselarger luxuries instead spend on aordable luxurieslike a trip to the cinema or a meal out in a casualdining restaurant, leading to revenue growth for thesesectors.

Source: Mintel Internaonal 2010

120

110

100

90

80

70

Health & Fitness

Tenpin Bowling

Casual Dining

Cinema

2005 2006 2007 2008 2009

Figure 6: Changes in consumer spend on certain leisure acvies

15


21/40


The leisure property sector is typically invested in, andincome split between, the leisure sub sectors as shownin gure 7.

The leisure rental stream is dominated by the cinemaand restaurant sector. Indeed, some leisure parks willonly have these two sub sectors and those that includeother sub sectors are sll likely to generate more than50% of their income from these two key sectors.

Minimum % Maximum %

Cinema 35 90

Casual dining / fast food 10 50

Tenpin Bowling 0 35

Health and Fitness 0 25

Bar / Nightclub 0 10

Gaming 0 5

Figure 7: Typical split of leisure park income

Source: X-Leisure Ltd

It is a popular misconceponthat all leisure spend is highly

discreonary. In reality, coreFamily Leisure spend actually

increases during mes ofausterity.

16


22/40

CINEMA INDUSTRY

2009 was another record breaking yearfor the cinema industry with admissionstotalling 173.5 million and gross box oce

receipts exceeding 1 billion for the rstme in history.

The Cinema industry is at the core of the Family Leisuresector. The anchor tenant of a leisure park, the cinemais the key fooall driver.

The 3 key players in the market are Cineworld, Odeonand Vue who between them account for 61%9 of thescreens in the UK. There are 5 smaller operators whoaccount for the majority of the remaining screens;Showcase, Picturehouse, Reel Cinemas, Empire and

Apollo.

PERFORMANCE

2009 was another record breaking year for the UKcinema industry, with admissions totalling 173.5million, the highest level since 2002 and the secondhighest since 1971.10

As Figure 8 shows, the last 4 years have seen yearon year growth in admissions. This highlights that

0

50

100

150

200

consumers are unwilling to decrease their spendingon cinema going, despite the harder economic mes.A trip to the cinema is seen to be an aordable luxuryin which consumers are willing to indulge to replacelarger luxuries they have been forced to sacrice.

As admissions have risen over the period, so too hasthe average admission price. This increase in admissionprice is due largely to the introducon of, and the pricepremium that can be charged for, 3D lms. In 2009, 3Dlms accounted for 16% of UK and Republic of Irelandbox oce revenues (176 million), up from just 0.4% in2008.11

This growth in admissions, coupled with the risein average admission price has led to a signicantincrease in box oce revenues.

200

150

100

50

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 8: UK Cinema Admissions

Source: CAA, Rentrak EDI

Number of 3D

digital screens

3D % of all digital

screens

2006 5 3.4

2007 47 15.9

2008 69 22.6

2009 449 69.9

Figure 9: Number of 3D screens

Source: Mintel Internaonal

9. Mintel Internaonal10. UK Film Council

11. UK Film Council

17

Million


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2009 was a great year for cinema product withseveral massive blockbuster releases.

Avatar, released in 2009, became the highestgrossing lm in UK box oce history, takingover 90m. The most recent lm in the HarryPoer franchise, Harry Poer and the HalfBlood Prince, also performed exceponally wellgrossing in excess of 50m. As well as these twostand out releases there were a further 12 lms

that took in excess of 20m each.13

2010 is forecast to exceed 2009 both in terms ofadmissions and box oce receipts, as shown inFigure 11. This view is substanated by guresreleased in September 2010 which show thatbox oce receipts for the rst 8 months ofthe year have hit 768m. This is an increase of8% on the same period in the record breaking2009.14

Looking ahead to the future, this stellarperformance is set to connue, with revenues

and admissions both forecast to increase overthe next ve years (Figure 11).

CINEMA

Figure 10: Gross UK Box Oce Reciepts, 2000-2009

Figure 11: The cinema market 2005-2015

Source: CAA, Rentrak EDI


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800

600

400

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Esmated

revenues*

(m)

Index Admissions (m) Index

Yield per

admission

()

2005 1,078 75 164.7 90 6.55

2006 1,082 75 156.6 86 6.91

2007 1,149 80 162.5 89 7.07

2008 1,188 83 164.2 90 7.24

2009 1,301 91 173.5 95 7.5

2010 1,437 100 182.2 100 7.89

2011 1,529 106 186 102 8.22

2012 1,576 110 188.4 103 8.36

2013 1,634 114 194.2 107 8.41

2014 1,711 119 201.6 111 8.49

2015 1,787 124 209.4 115 8.54

With the connuing strength of cinemaproduct being released and the quality ofproduct sll in the pipeline, revenues look

set to remain strong.

The total UK gross box oce receipts for 2009 was arecord 944 million, up 11% on 2008 and the overallterritory gross (including the Republic of Ireland)exceeded 1 billion for the rst me in history.12

This growth in box oce receipts can be aributed to

rising admissions and average admission price, as wellas the quality of the cinema product.

12. UK Film Council13. UK Film Council

14. Film Distributors Associaon

18


24/40

CINEMA

This investment looks set to connue with Cineworldreporng that they are aiming to install a further 150digital projectors by the end of January 2011. Oncecompleted over 50% of their 801 screens would bedigital, with the vast majority being 3D enabled,further extending their capability to oer more 3D andalternave content to their customers.15

With the sector performing so well and forecastto connue doing so, the key cinema operatorsare looking at ways to capitalise and increase theirrevenue streams. They have found it more and moredicult to open new sites in recent years due to theslowdown in the number of new leisure developmentsbeing constructed (due to planning and economicconstraints) and the fact that each scheme andgeographical locaon can only support one cinema.However, they have connued to invest heavilythroughout the recessional mes, with a signicantfocus being on the introducon of digital screens.Digital screens do away with the need for a tradionalprojecon room and allow cinemas to be more exiblein their layout and reduce operang costs.

As a result of the introducon of digital screens andthe subsequent exibility this generates regardingthe layout of screens, cinema operators have beenable to expand their cinemas into adjoining units inorder to increase their capacity to match the growingcustomer demand. Another benet of digital screensis that it enables cinemas to show alternave content,such as live sports events, theatre, ballet and operaperformances, which gives them an addional revenuestream.

RENTAL STREAM

The cinema is the anchor tenant of a leisure parkand accounts for anything between 35% - 90% of atradional leisure parks income. The strength of thecinema industry and its connued growth and recordperformance should ensure that cinema tenantsprovide a strong and secure rental stream and fewworries or risks for landlords.

Cinema leases frequently benet from xed, or

minimum, pre agreed rental uplis at rent reviews.These reviews are commonly in line with the retailprice index (RPI) or xed at circa 2.5%-3% per annumand ensure that rental growth prospects are notconstrained by the economic condions at the point inme of the ve year rent review cycle. It is a commonmisconcepon among investors that these minimumuplis lead to over renng through the lease term.This rent that is perceived to be in excess of the marketlevel is considered risky and unsustainable.

With limited open market lengs and large incenvesoered to cinema operators to secure lengs, it is

dicult to assess cinema open market rental values.Therefore, without the underpinning of rental growththrough minimum/xed uplis it would be dicult todetermine rental increases throughout the term of thelease.

Figure 13 shows that between 1998 and 2008 theprice of cket sales has increased in excess of the retailprice index. The annualised gures are 3.5% and 2.8%respecvely.

2005 2006 2007 2008 2009

No ofdigitalscreens

38 148 296 310 642

As %of totalscreens

1 4 8 8 17

Figure 12: Number of digital cinema screens in the UK


15. Cineworld Group PLC

19


25/40

This increase in average admission price, coupled withgrowing admissions, demonstrate the cinemas shouldbe achieving a greater level of protability, and thatrents that have risen on average 2.5% - 3% per annumthrough xed, minimum or RPI related uplis are infact more aordable.

With average admission prices andvolumes set to connue increasing rentsare set to remain aordable well into thefuture. The concern in relaon to over-renng and the perceived riskiness ofhigher than open market rental levelsshould be dismissed.

TENANT MARKET

The cinema industry is dominated by 3 players:Cineworld, Odeon and Vue.

Cineworld, which is the only listed cinema operatorand accounts for 21%16 of the UK share of screens,has connued to trade strongly through the lastchallenging 36 months. They have seen year on yeargrowth in revenues. The latest gures they havereported show that box oce receipts for the 42 weeksto 21 October 2010 are up 8.3% and other incomeis up 43.8%, on the same period in 2009. They are

connuing to invest heavily in digital technology andimproving exisng sites.17

The largest of the 3 main players with over 800screens18, Odeon is owned by the private equity groupTerra Firma and as a result, nancial informaon is hardto come by. The latest set of gures available showthat for the year ended December 31 2008, revenueswere up 8.3%.19 We understand that Odeon connueto trade well and in November 2009 the company had187 digital screens and entered into an agreementwith three Hollywood studios to convert the remaining470 screens to the digital format at an investment of70 million.20 In 2010, Odeon added an addional 2Imax screens, making them the largest operator of thistechnology in the UK.

CINEMA

As tenants, all 3 companies are rated as havingnegligible risk associated with them, according to IPD.22

The rest of the tenant market is made up of 5medium sized companies (50+ screens); Showcase,Picturehouse, Reel Cinemas, Empire and Apollo anda series of independent operaons. It is a commonmisconcepon that the cinema tenant market is thin.

SUMMARY

The cinema industry is looking strongtoday and robust for the future.Consumers are increasing, rather thancung, their cinema spend. Add to thisa long pipeline of good product andsignicant investment in new innovavetechnology and the cinema sector is set toremain resilient and stable. This connuedstrong performance, relave aordabilityof rental levels and minimum xed uplismake cinemas a low risk, secure andstable anchor tenant.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Annualised

Gross Ticket Price 3.69 3.91 4.04 4.22 4.29 4.43 4.49 4.68 4.87 5.05 5.18 -

% Change - 5.96 3.32 4.46 1.66 3.26 1.35 4.23 4.06 3.70 2.57 3.5

RPI 162.9 165.4 170.3 173.3 176.2 181.3 186.7 192.0 198.1 206.6 214.8 -

% Change - 1.53 2.96 1.76 1.67 2.89 2.98 2.84 3.18 4.29 3.97 2.8

Figure 13: Gross cket price and RPI growth

Source: X-Leisure Ltd

16. Mintel Internaonal

17. Cineworld Group PLC


19. Odeon UCI Cinemas

20. Mintel Internaonal21. Vue Cinemas

22. IPD Rental Informaon Service

Vue is management owned although rumours persistthat the management are seeking a sale to a privateequity group. For the year ending 26 November 2009,Vue reported a rise in revenues of 9.7% on the previousyear.21 The company said that this growth in revenueswas due to a strong cinema product, a shi to digital

screening and a new pricing strategy. In mid-2009, thecompany said that it planned to open an addionaleight cinemas across the UK by the end of 2011.

20


26/40

CASUAL DINING & FAST FOOD

Revenues in the UK informal eang outmarket are esmated to be 40.1 billion,and are forecast to grow by c.20% to 47.5billion by 2014.

The casual dining and fast food sectors are, alongwith cinema, at the core of the Family Leisure market.The casual dining market covers a wide range ofoperators including Pizza Hut, Frankie and Bennys,Nandos, Chiquitos, Bella Italia and Caf Rouge. Thefast food sector is dominated by 3 key players: BurgerKing, McDonalds and KFC. The market benets froman increasing popularity to eat out as well as fooalldriven to the park by the cinema.

PERFORMANCE

Revenues in the UK informal eang out market (Casualdining, fast food, coee houses and sandwich shops)were esmated to be 40.1bn at the end of 2009.23This is a fall of just 0.5% since 2008 and is sll abovepre-recessional levels, clearly demonstrang resiliencedespite consumers ghtening their purse strings acrossthe board.

As Figure 14 shows, prior to 2009, the industryhad seen year on year growth in revenues over theprevious 8 years. This is primarily due to the growthin the number of meals eaten out of the home.Research suggests that one in every nine meals areeaten out of the home each week, translang to a

total of 148 million in 2009. This has led to the eangout market taking a greater share of total expenditureby consumers on food and beverages, up from 14% in1969 to 22% in 200924, with the trend set to connueinto the future.

This strong market-wide performance is misleading,and resilience is not being experienced throughoutall of the sub-sectors. The mid market and upper endoperators are suering as consumers downgradeduring these dicult economic mes and marginssqueezed through discount oers and vouchers. Aswith the wider economy, the value operator, prevalent

in the casual dining and fast food sector, is seeing tradeincrease as consumers indulge in aordable luxuries atthe expense of larger ones.

Consumers will not forget what they are learning

from the recessionand will not go back to paying

over the odds for a meal.

This strong performance and growth of the casualdining and fast food sector is set to connue into thefuture. As Figure 14 shows, growth is expected toreturn to the market in 2010 and is forecast to grow byc.20% to 47.5bn by 2014.25

0

10000

20000

30000

40000

5000050

40

30

20

10

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 14: Expenditure in the UK informal eang out market

Source: Allegra Strategies 2010

23. Allegra Strategies24. Allegra Strategies

25. Allegra Strategies

21

Billion


27/40

sales increase and 7.5% growth in customer visits.27Going forward McDonalds looks set to increase storeopenings in Europe with 250 planned for 2010, up 14%from 220 in 2009.28

Burger King has also beneed from an increase in

trade as a result of consumers downgrading wheneang out. Looking to the future, the main focus forBurger King will be on the refurbishment of its currentoutlets into the new, more upscale design format andsimultaneously rolling out its new, smaller WhopperBar concept.

KFC also has expansion plans, as a result of strongtrading over the last few years and going forward theyhave announced an intenon to open 200-300 outletsin the UK over the next 3-5 years. This is a huge stepup from the 30 outlets they opened in the year endingNovember 2009.29

The casual dining side of this sector has a large numberof operators. Brands including the following all t intothis market: Nandos, Pizza Hut, Pizza Express, CafRouge, Yo! Sushi, Prezzo, Chimi Changa, Zizzi, Strada,Gourmet Burger Kitchen, ASK, Girrae, La Tasca,Frankie and Bennys and Bella Italia. These operatorshave all connued to trade well over the last 36months, due mainly to the heavy use of promoonsand special oers.The Restaurant Group, who operate, among others,the brands Frankie and Bennys and Chiquitos, haveannounced that year on year revenues are up 9% and

EBITDA up 10% for the 27 weeks to 4th July 2010. Theyare also planning to open an addional 35 sites overthe course of 2011.30

Prezzo, who operate 140 restaurants, have announceda similarly strong set of results which show that for therst 26 weeks of 2010 both revenues and EBITDA wereup, by 11% and 17% respecvely.31

RENTAL STREAM

The casual dining and fast food sector is the secondcore tenant group on a leisure park and anythingbetween 10% - 50% of a tradional leisure parksincome comes from this sector.

The shi in consumers preferences tovalue oerings, the increasing number ofmeals that are eaten out of the home andthe strength of the cinema trade ensurethat casual dining and fast food tenantsprovide a strong, secure rental stream forlandlords.

Restaurant leases on leisure parks are commonly for a

minimum of 15 years term certain. Rental levels rangefrom 20-30psf, meaning rents are aordable andthere is the room for rental growth in the future.

Casual dining and fast food operators will seekrepresentaon on all leisure parks where the cinema istrading relavely well. The result is strong demand andcompeon from the restaurant sector for availableunits with consequenal low voids and good rentalgrowth prospects.

This desire for restaurants to seek space on goodtrading parks also means that there are protable

asset management iniaves that can be undertaken.Exisng units can be extended, redundant unitssplit into smaller units or new units created toaccommodate the increase in restaurant demand.Likewise, if a cinema raonalises, ground oor screenscan be split o and restaurant units added.

The casual dining and fast food rental stream isaordable, secure and has room for future growth. Thevast number of operators seeking representaon onleisure parks signicantly reduces the risks to landlordsassociated with holding these units.

TENANT MARKET

The fast food side of this sector prevalent on leisureparks has 3 key operators: McDonalds, Burger Kingand KFC. The recession and consumers increasedsenment to the value end of the market has seen thissector grow by 8% in the last year.26

McDonalds UK, who operate 1,200 restaurants acrossthe country connues to trade strongly. A recentoverhaul of their oer has helped them to introducevarying price points and to capitalise on the breakfastmarket. In 2009 they reported an 11% like-for-like



27. McDonalds


29. Mintel Internaonal30. Restaurant Group Plc

31. Prezzo Restaurants Ltd

22


28/40


Tragus, whose brands include Bella Italia, Caf Rougeand Strada, have announced that for the 52 weeks to30 May 2010 revenues were up 5.9% and EBITDA up

7.8%, both year on year.32

On the back of this strongperformance, they are looking to open a further 20restaurants before May 2011, an increase on the 15opened in the previous 12 months.33

This strong trade has ensured that casual diningoperators have remained acquisive and look set toconnue acquiring new sites. As the table oppositeshows, 160 new sites are being sought by a selecon of

just 7 selected operators in the market, a 28% increaseon units opened by the same operators in the previousyear.34

SUMMARY

The casual dining/fast food sector whichthe core leisure property market isexposed to has shown strong resilience,kept customers coming through thedoor and connues to trade without anynotable failures. This sector, which is akey tenant in leisure schemes, has faired

especially well. Trading has remainedstrong as consumers seek value with anincreasing propensity to eat out.

This strong restaurant performance has also led to anincrease in corporate acvity in the restaurant sectorwith notable examples including Carluccios beingbought for 90m and Nandos close to nalising adeal to purchase Clapham House Group. With over 10mes EBITDA being paid for Carluccios, this corporateacvity highlights how strongly the operators aretrading and how aracve they are to investors. Why

then are leisure parks, which derive up to 50% of theirrent-roll from this sector, deemed to be so risky?

2009/2010

(opened)

2010/2011 )

PlannedThe Restaurant Group 15 35

Tragus 15 20+

Gondola 30 50

Prezzo 30 15

Nandos 25 20

Las Iguanas 5 10

Cote 5 10

Total 125 160

Figure 15: New openings planned

Source: UK Commercial Leisure Bullen, Savills, September 2010

32. TRAGUS33. Savills

34. Savills

23


29/40

TENPIN BOWLING INDUSTRY

The primary bowling lane revenue has held up farbeer than the ancillary revenue from food, beverage,pool tables, and machines. Consumers sll want to

enjoy a game of tenpin bowling but as in all industries,they now have a much closer eye on their secondaryspend. The secondary spend has also been hit by thesmoking ban and de regulaon of licensing hours. Thisfall in secondary spend has hit the tenpin bowlingoperators total revenues. This situaon, however, nowappears to have stabilised.

As shown in Figure 16, growth is forecast to return tothe market in 2010 and connue back to pre-recessionlevels over the next 5 years. There remains a posivesenment for the future within the tenpin bowlingsector, with addional areas of business being exploredto maximise revenue generang potenal of thepremises, and consolidaon of some of the smalleroperators.

Tenpin bowling has a universal aracon and spans abroad range of markets including kids pares, studentsand 20s 30s group acvies.

Following a period of sustained growth of 2-3% perannum, the level of consumer expenditure in thetenpin bowling market fell by an esmated 11%between 2007 and 2009, to reach a value of just under250 million.35

As Figure 16 below shows, the sector has shown robustperformance over the last 3 years, given wider marketcondions. Spending on the core acvity of bowlingremained relavely at throughout the period, with areducon in secondary revenues causing the overallfall. The tenpin bowling market appears to have

returned to growth during the rst half of 2010, withvolumes increasing and overall levels of spend aheadof last year.

The tenpin bowling market appears tohave returned to growth during the rsthalf of 2010, with volumes increasing andoverall levels of spend ahead of last year.

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Figure 16: Expenditure on Bowling in the UK



24


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RENTAL STREAM

Bowl operators could account for up to 35% of leisureparks income, although they are not present in all

schemes. Their standard property requirement is ac.25,000 sq oorplate at rental levels in the regionof 8-10 psf. Many leases will also benet fromminimum or xed uplis.

Despite falling revenues, bowl operators pose few risksto landlords. Falls in income have been oset in part bycomprehensive cost cung measures and operatorshave streamlined operaons to concentrate onmaximising primary revenues. New secondary revenuestream ideas are also being explored to boost futureincome. (Improved food oers, karaoke etc.)

In addion, rental levels in the sector are aordableand this has helped to ensure that despite a fall inrevenues across the sector, there have been no tenantfailures.

All of the big box uses on a leisure park are readilyinterchangeable with new uses such as kids play.With new concepts entering the market alternaveoccupiers are readily available for any surplusaccommodaon.

TENANT MARKET

Essenden (formerly Georgica) is the holding companyfor the Tenpin brand. Tenpin is the UK market leaderwith 38 sites, 997 lanes, 4.7 million customer visitsin 2009 and an esmated 23% of market share byvalue.36 The group reported a decline in sales of 7.5%for 2009. However, following an 11% decrease in therst half of the year, the decline aened out to 4.6%in the second half. Following its nancial restructure in2009, Essenden has conducted a strategic review andhas a number of new iniaves in the pipeline centredaround plans to further upgrade the core bowlingproduct.37

AMF Bowling is now the second-largest operatorfollowing its purchase of the Hollywood bowl operaonfrom Mitchells and Butlers in September 2010.38 Thecompany was sold to private equity investors in 2004and as such nancial informaon is dicult to come by.The latest results show that over the period 2004-08,revenues grew by 10.6%.39

Bowlplex, the third-largest operator in the market, hassteadily grown over the past decade from seven sites in2000 into a naonwide chain of 18 centres currently.40Following the trend in the market, revenues fell in

2009 by 6%. During this period, however, an eciencydrive achieved 2 million of annual cost savings whichhelped to oset this revenue decline.41

Tenpin, AMF and Bowlplex are all classed as havingnegligible or low levels of risk associated with them byIPD.42

The remainder of the tenant market is made up ofNAMCO, Newbury Leisure and American Amusementswho operate at least 10 sites each as well as numerousindependent operators.

SUMMARY

The tenpin bowling sector has been hitby the recession with revenues in 2010down 11% from the 2007 highs. However,there have been no tenant failures in thetenpin bowling sector and there remains aposive senment for the future. Growth

is forecast from 2010 taking marketrevenues to in excess of 250m.

Operators are exploring addional areasof business to maximise revenues andcost reducon programs have helped tomaintain prot levels. They oer goodvalue entertainment and experience forthe ever discerning and value for moneyseeking customer and family.

TENPIN BOWLING


37. Essenden


39. AMF


41. Bowlplex

42. IPD Rental Informaon

Service

25


31/40


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3000

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forecast to remain at the same level in 2010. The latestresearch suggests 23% of consumers have cancelledtheir gym membership as a result of the recession.However, the connued publicity of the benets of

exercise, driven largely by the government, coupledwith introductory oers oered by the health clubsand a greater awareness of body image, are allencouraging signicant numbers of new members to

join. New memberships are oseng those cancellingtheir memberships ensuring revenues and membershiplevels remain robust.

Not all sectors of the market have performed equallyover the last 36 months, with the mid-market oercoming under pressure as a result of the recession,although to a lesser extent than was envisaged. Withthe average gym membership in the UK cosng 37

per month

and consumers becoming ever more costconscious, the UK market has seen the emergence ofthe budget health club sector.

This sector is already well established in the US andmainland Europe and is now starng to aack the mid-market oering in the UK. They do not provide classes,

just ample machinery with limited sta and in manycases open 24 hours a day. These gyms oer exibilityand value with memberships available for just 24 hoursand monthly memberships oered at very compeverates; sub 20 per month. Within the last 24 monthsat least 4 new operators have entered the budget gymmarket.

Revenues in the health and tness sectorgrew by 25% between 2004 and 2009,driven predominantly by the aggressiveexpansion by several key operators.

Over the same period membership levels also grew by25%, with the latest research suggesng that 10% ofthe UK adult populaon are now members of a healthclub. That is sll some way below the levels in Americaof 19.5%, suggesng that the market sll has potenalfor signicant growth in the future.43

PERFORMANCE

As gure 17 shows, growth in consumer spend in thehealth and tness sector grew rapidly between 2004and 2007. Since then expenditure in the sector haslevelled o and signicantly, not fallen. This rapidgrowth has halted as a result of a sharp fall in thenumber of new clubs being developed and openingdue to the prevailing economic climate.

As gure 18 over the page shows, membership levelshave remained at over the period 2007-2009 and are

HEALTH & FITNESS INDUSTRY

3.5

3

2.5

2

1.5

1

0.5

02004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 17: Expenditure on Health & Fitness UK


26

Billion


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HEALTH & FITNESS

This cost consciousness is ancipated to lead to a shiin demand in the market with the mid range gyms

likely to come under increasing pressure as consumerslook to downgrade as they ghten their purse strings.The top end racquet and spa clubs, such as David LloydLeisure, appear to be maintaining their market share.

The market as a whole is proving to be resilient withboth membership levels and revenues robust andset to grow in the future. The longer-term growthprospects for this sector are also perceived to be good.Firstly, membership levels in the UK are relavely low,

just 10% of adults are members of a gym in the UKcompared to 19.5% in the US44, suggesng that there isroom for the market to grow substanally. In addion,

factors that have helped to grow the market to date aresll relevant. These include growing levels of obesity, agreater focus on body image, and a connued driveto publicise the benets of exercise.

RENTAL STREAM

Health and tness clubs could contribute up to 25% ofa leisure parks income, although they are not presentin all schemes. Typical occupancy is anywhere from8,000 to 30,000 sq and rental levels are aordable,in the region of 8-14 psf outside of central London,with many leases beneng from minimum or xeduplis.

Health and tness clubs present few risks to Landlords.Membership cancellaons as a result of the currenteconomic situaon have been oset by the numberof new members joining clubs. This has ensuredmembership levels and therefore revenues to remain

strong throughout the last 36 months. Forecasts showthat there is room for the market to grow in the futureand rents should follow suit.

All of the big box uses on a leisure park are readilyinterchangeable with new concepts such as kids playentering the market, alternave occupiers are readilyavailable for surplus accommodaon. In addion,the very buoyant budget gym market is aggressivelyseeking representaon across the UK.

0

1

2

3

4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 18: Membership levels UK health and tness clubs


8

7

6

5

4

3

2

1

0

Million

27



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HEALTH & FITNESS

TENANT MARKET

David Lloyd Leisure Ltd is controlled by London &

Regional Properes. As of 1 October 2009, there were78 David Lloyd Leisure clubs, with a total of 426,692paying members, an average of 5,470 members perclub.45 Revenues for the period March 2005 to March2009 were up 12.9%. Retenon rates for premiumclubs such as David Lloyd run at 70-80%, compared to60-70% for the market as a whole.46

Fitness First is now one of the largest tness cluboperators in the world, with more than 550 clubsand 1.5 million members worldwide. In the UK,the company operates a total of 170 clubs. As of 1October 2009, the company had an esmated 420,000members, equang to an average of 2,471 membersper club.47 Revenues for the period October 2004 toOctober 2008 were up 13.4%.48

The Virgin Acve Group trades worldwide through 184health & tness clubs in South Africa, the UK, Italy,Spain and Portugal. As of 1 October 2009, the companyoperated a total of 72 clubs in the UK, with 320,000members, an average of 4,444 members per club.49 Thebusiness has seen signicant expansion over the last sixyears arising from both organic and acquisive growth.Through expansion and like for like growth, revenuesfor the period December 2004 to December 2008 wereup 436%.50

LA Fitness is ulmately owned by Cayman Islands-based Ultramar Capital Ltd. As of 1 October 2009,LA Fitness operated 86 clubs in the UK, with 235,000members, an average of 2,733 members per club.51

David Lloyd Leisure, Virgin Acve, Fitness First and LAFitness are all considered to have negligible or low riskaributed to them according to IPD.52

There are a number of other medium sized operaonsin the market including: DW Sports Fitness, Esporta,Bannatynes Health and Fitness and Nueld Health as

well as numerous independent operators.

The budget gym market is sll in its infancy in theUK but there are currently numerous operatorsaggressively seeking to increase their representaon inthe UK: Fit Space, Easy Gym, Gym 4 All etc.

SUMMARY

The health and tness market is proving

to be resilient in these tough economicmes. Following rapid growth in theperiod 2004-07, with both membershiplevels and revenues seeing growth of25%53, the market has remained robust.

Although some 23%54 of members have cancelled theirmemberships as a result of the recession, this has beenoset by new memberships taken out throughout theperiod. Membership levels and therefore revenueshave remained strong and have not fallen.

The longer-term growth prospects for this sector arealso excellent. Despite massive growth over the last 5years, membership levels in the UK are sll relavelylow, just 10% of adults are members of a gym in theUK compared to 19.5%55 in the US. This suggests thatthere is signicant room for the market to grow. Inaddion, factors that have helped to grow the marketto date are sll relevant. These include growing levelsof obesity, a greater focus on body image, and aconnued drive to publicise the benets of exerciseand healthy living.

45 Mintel Internaonal

46 David Lloyd Leisure Group Ltd


48 Fitness First


50 Virgin Acve51 Mintel Internaonal

52 IPD Rental Informaon Service

53. Mintel Internaonal54. Mintel Internaonal


28


34/40

ADDITIONAL LEISURE USES NOT FAMILY LEISURE

NIGHTCLUB AND BAR

This leisure sub-sector is showing itself to be the mostsensive to the overall economic environment. Thesector weathered the smoking ban to then come under

pressure from cheap supermarket alcohol sales. Thetradional edge or out of town leisure park would notinclude this leisure sub-sector. Those parks that dohave a nightclub or bar, typically derive up to 10 % oftheir income from the sector.

The nightclub industry has been hit hard in theserecessional mes. As in all sectors, consumers arelooking for value and quality and are ghtening thepurse strings. Nightclub expenditure is seen by theconsumer to be discreonary and customers for thismarket are predominantly in the 18 to 24 year agegroup, who have been signicantly impacted by the

recession. According to Luminar, some 18% of thisage group are now unemployed and many more arestudents or on low incomes.56

It should be noted that trading in the sector is avery mixed picture, strong bar operators such asWeatherspoons, Whitbread and Marstons haveenjoyed year on year and like for like growth. JDWetherspoons released their end of year results forthe 52 weeks to the end of July 2010 which showed

revenues up 4.3% and prot before tax up 7.3%.57Preliminary results for Whitbreads 2009/2010 yearhave reported a 6.6% rise in pre tax prots, supportedby a 3.1% increase in like for like sales in Q4 2009.58 It isa similar story with Marstons who reported an increase

in like for like sales for the 26 weeks to 3 April 2010 of1.4% and in increase in group revenue of 0.6%.59 Theseresults are on the back of a strong 2009 for the abovebrands.

There have however been casuales within thenightclub and late night bar sectors. Regent Inns(Walkabout and Jongleurs Comedy Club) and part ofNovus Bars (Tiger Tiger) have entered administraon.Luminar, the listed nighclub company, have reportedresults that are consistent with the tough mes thissector is facing They have reported for the year to 25February 2010 prot before tax of 4.4m, down 78%

on 2009 and Sales down 9.9% on the previous year ona like for like basis.60

The nightclub and late night bar sectors have beenhit hard by the recession. The discreonary nature ofspend, the increase in unemployment in the targetaudience and an increase in the availability of cheapalcohol from supermarkets have all combined toundermine the sector.

2,000

1,500

1,000

500

02003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 19: Expenditure in the nightclub market

Source: Mintel Internaonal56. Luminar Group Holdings Plc

57. JD Wetherspoons

58. Whitbred59. Marstons

60. Luminar Group Holdings Plc

29


35/40

ADDITIONAL LEISURE USES NOT FAMILY LEISURE

500

1000

1500

2000

2500

3000

0

200

400

600

800

1000

1200

14001,400

1,200

1,000

800

600

400

200

02004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 20: Expenditure in the casino sector


1,400

1,200

1,000

800

600

400

200

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 21: Expenditure in bingo clubs


GAMING

A typical edge or out of town leisure park would notinclude this sector. This sector is split between bingoand casino operators, with the main players being

Rank and Gala Coral. The sector struggled with theintroducon of the smoking ban in 2007, as well as theremoval of Secon 21 gaming machines under the 2005Gaming Act.

As Figure 21 shows, revenues in the bingo sector havefallen year on year for the last 3 years and are forecastto connue doing so into the future. In contrast, therevenue in the casino segment of this sector remainsat and the sector, as shown in Figure 20, appears tohave consolidated and stabilised.

Thus the main challenges faced by the industry relate

to the bingo sector rather than the casino sector, witha fall in bingo revenues of nearly 12% over the period


62. Rank Group Plc

30

2007-2009.61 This is in addion to falling aendancesyear on year and a squeezing of margins as prizes areraised to try and aract more customers. The largerplayers in the sector have managed to more thancompensate for this fall in site revenues through an

increase in online revenues, ensuring that covenantsremain strong.

Despite the publicised problems in the industry, thepicture is actually relavely posive. Rank Group Plcannounced 7% like-for-like growth in Group revenuefor the 14 weeks to 3 October 2010, driven byimprovements in each of its businesses. Over the sameperiod, total Group revenue increased by 8%. For theyear to date (to 3 October) like-for-like revenue is up by4% and total growth has increased by 7%.62

It is important to remember that the majority of leisure

parks do not have gaming as part of the tenant baseand would not be impacted by this area of leisurespend that does appear to be suering to a greaterdegree than the other leisure sub sectors reviewed.


36/40

THE CASE FOR LEISURE

Leisure property is currently valued at aconsiderable discount, based on historic

percepons of risk, to retail and retailwarehousing. The merits and strengths ofleisure as an investment asset are beingoverlooked by investors, due to a lackof leisure knowledge and a fear of theunknown.

The most signicant factor aecng the value ofproperty assets is the perceived strength of therental stream. This paper has highlighted the tradingperformances of the key Family Leisure sectors and

provided evidence that through the tougher economictrading periods the leisure tenant market has showngreater resilience and is less volale than the othermain property sectors, including the retail sector.

Key to this resilient performance is the non-discreonalnature of the consumers leisure spend on coreFamily Leisure acvies. This means that leisurespend is not signicantly impacted by changingeconomic condions. In contrast, a lot of retailspend is discreonary and is therefore very sensiveto changing economic condions. As a result theretail rental stream has suered to a greater extent

than leisure during the recent economic slowdown,evidenced by the large number of retailers, comparedto leisure operators that have entered administraonover the last 36 months. This relave strength isfurther supported by IPD who report that leisure voidrates are sll far below the other core sectors, notablyretail and retail warehousing.63

Leisure also benets from longer leases and thereforegreater longevity of rental stream than other sectors.Leases to Cinemas and restaurants frequently have 20-25 years term certain. In addion, these leases oenhave minimum uplis in them ensuring that rentalgrowth is achievable at rent reviews no maer what

the economic climate at the rent review date.

Fears that these minimum uplis will lead to over-renng should be dismissed. Leisure rents arecommonly at aordable levels and so have roomto grow. The average rent on a restaurant is 25psfwith the big box operators paying around 10psf.

Cinema leases most oen contain minimum uplis andresearch has shown that the average admission priceand volume of admissions have increased faster thanthe rate of the average minimum upli.

These aordable rental levels as a result of steadyand stable rental growth, have ensured that rentalvalues have also held up to a greater extent in theleisure sector, with a less severe contracon of rentalgrowth and shorter period of negave growth thanexperienced by retail. In addion, PMA have forecastthat over the period 2010-2015 leisure rents willgrow by 6.6%. This is compared to 3.9% for retailwarehousing and 5.0% for retail.64

We have reviewed the core sectors within leisureproperty and demonstrated sophiscated and mature

operators with strong nancial performance areoperang within this sector and that there is not acovenant issue.

As such, the leisure rental stream is as, if not more,robust and secure than the retail rental stream and webelieve leisure property should be valued accordingly.It is apparent that a lack of knowledge, coupled witha historic percepon of risk, restricts leisures value.X-Leisure is aempng to widen the knowledgebase and will connue to demonstrate that the risksassociated with the sector are not those perceived bythe wider property industry.

The strength of the leisure sector is further supportedby the increase in corporate acvity, especially in thecasual dining sector, where investors are willing to paya premium to buy strongly performing brands. Wehave also seen restaurant operators and cinemas, thecore of the Family Leisure market, connue to expandduring these recessional mes.

With a robust rental stream, low voids, long leases,minimum rental uplis and solid covenants, investorsneed to turn their heads to this sector and see that the100bp 200bp dierenal in pricing between leisure

and retail is not always jused.

63. IPD

64. PMA Forecasts

31

The sector demands greaterconsideraon and appreciaon

in the current investmentmarket. At current prices, leisure

is a good value defensive stockthat can be seen as recession

proof with scope for rentalgrowth and capital returns.


37/40

Long leases

Low voids

Secure rental growth

Aordable rents

Inherent site value

Lipsck leisure

REALITY


38/40


39/40


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Making The Case For Leisure: A report commissioned by X-Leisure October 2010

X-Leisure Ltd

Francis House

11 Francis Street

London

SW1P 1DE

0207 5921 500

[email protected]

www.x-leisure.co.uk

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