X-Leisure presents: Making The Case For Leisure

making the

case for

leisure

A Report on the Continuing

Strength and Stability of

the Leisure Industry

A report commissioned by X-Leisure

www.x-leisure.co.uk

our definition of family leisure is a simple one: it is that part of every family’s or individual’s spending budget which centres on basic leisure activities outside the home in the areas of entertainment and eating out. the core of the family leisure market comprises the cinema and casual dining sectors. supported by this core are a series of smaller subsidiary sectors including; tenpin bowling, health and fitness, kids play and alternative leisure uses.

foreword by py gerbeau

leisure activities have become an essential part of everyday family life and are embedded in the dna of the british consumer’s 21st century lifestyle. it is a strong and quickly maturing sector representing significant employment and contributing billions towards the british economy.

I am frustrated that this leisure sector is grossly misunderstood and misrepresented in all aspects, creating a dichotomy between perception and reality. With my 17 years of experience in all aspects of the Leisure industry, and more particularly within the property sector over the last 9 years, I passionately believe that it is time to establish this sector as a formidable asset class and recognise its strength and stability.

I am not alone in this, and my frustrations are echoed by my peers, key stakeholders including the CEO’s of the some of the UK’s top leisure providers, operators, investors and landlords who have joined me in supporting this report.

Consumers are showing signs that their discretionary spending is under pressure – but they still want to enjoy a good evening or day out in a fun, value for money, safe environment with a quality offer and are unwilling to cut the leisure experience. Contrary to popular belief, Family Leisure is at the core of consumers’ spending habits and continues even when the purse strings are tightened.

This report underlines what is driving the strong performance of this large and resilient segment of the market – which we have defined “Family Leisure”.

Today we are launching our Leisure Report which lifts the lid on our industry, defines our sector and identifies the significant opportunities for future growth.

Voila !

py gerbeauCEO X-Leisure

i

executive summary

ii1. Reputation Inc.

x-leisure, the uk’s leading active leisure property management and investment company, is today launching this leisure report, on the continuing strength and stability of the family leisure industry.

The Report identifies the leisure sector as being misunderstood and misrepresented by the press, commentators, investors and advisors.

Within the broader leisure sector is a segment we define as “Family Leisure”. The report provides evidence that Family Leisure, a major £90 billion segment of the UK market, is continuing to show resilience and stability despite the current constriction of all aspects of consumers’ discretionary spend.

The core of the Family Leisure market, which we have identified within the leisure property world, comprises the cinema and casual dining sectors, supported by a series of smaller subsidiary sectors including; health & fitness, tenpin bowling, kids play and alternative leisure uses. These leisure activities have become an integral part of today’s consumer lifestyle and household spend. As a result, and contrary to popular belief, spend in this sector is robust. The resilient Family Leisure spend is increasingly a reflection of today’s new lifestyles and eating habits and is one of the last areas of spending to be eliminated during times of austerity.

This report highlights the relatively low valuation placed on leisure assets by investors and the misconceptions these low values are based on. To substantiate the report, X- Leisure commissioned an extensive research review which included interviewing a cross section of leisure sector CEOs, leading journalists, sector analysts and other commentators in a survey of leisure specialists’ views on the way Leisure is reported and treated in the current market.1

General perceptions of leisure focus on “sin industry” sectors (pubs, clubs, gaming, betting etc) which are exposed to downturns in consumer spend. Family Leisure, on the other hand, has shown resilience and even growth through tougher economic times.

Consequently, the merits and strengths of Family Leisure as an investment asset are being overlooked by investors.

Family Leisure’s major contribution to the UK economy – a £90billion sector with 1.8 million employees - deserves to be better recognised

Property assets leased to Family Leisure operators are good value, defensive and “recession proof” with inherent investment merit through typically long leases, low voids and fixed or minimum rental uplifts.

the key findings of our report are:

making a quote for leisure

iii

steve weiner – ceo cineworld

“There is so much innovation going on in the Cinema business at the moment in terms of technology and new markets. In particular, we are adding live entertainment to our offer - for instance with 3D sport, live concerts and opera broadcasts.”

“There are always good new films coming through but we are also seeing a definite trend towards the cinema as a good value night out - it is one of the few things a 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 we have tapped into consumer demographics and their changing lifestyles. We react to the important shifts and trends in what people think is important to them - whether its healthy eating, 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 the UK economy generally, and yet we get scant recognition and virtually no help from Government. We should make far more effort to work together and to represent the industry on issues like VAT and business rates”

tim richards – ceo vue

“There’s a definite trend towards out of home leisure activities and entertainment which is bringing people out, regardless of the weak economy”

steve thomas – former ceo luminar leisure

“Leisure businesses have had to transform themselves into more agile, flexible and recession proof enterprises and that’s helping the sector stay solid and resilient despite the difficult background we are currently dealing with”

“Most of the coverage of leisure spending we see has absolutely no relationship to the way our business is performing in the real world”

in response to making a case for leisure key stakeholders give their insight into the report:

1

making a case for leisure

a report on the continuing strength and stability of family leisure

i. foreword by py gerbeau, ceo x-leisureii. executive summaryiii. making a quote for leisure

2. making the case for leisure6. family leisure: big sector. big opportunities8. leisure and the uk economy: the forgotten sector?

10. leisure property report17. cinema 21. casual dining & fast food 24. tenpin bowling 26. health & fitness29. additional leisure uses (not family leisure)

31. the case for leisure

making the case for leisure

how consumers behave

Consumers’ spending behaviour reflects both their real incomes and expectations of future spending power. It is no surprise that they are currently displaying plenty of caution across a range of consumer markets.

Consumer spending also reflects tastes and lifestyles, social trends and preferences, which change and evolve over time. Consumers’ spending behaviour can be broadly divided into two categories; discretionary and non-discretionary.

what is discretionary spending?

The amount or portion of a consumer’s spending on things that are considered to be non-essential.

A lot of the traditional areas usually considered to be included in that definition are not so discretionary these days. TVs and other electrical appliances are now considered to be “basic essentials” along with new services like mobile phones and internet access and some “lifestyle”, that is, leisure spending.

These are all now essential elements in our lives and we cannot (or will not) do without them.

is leisure reliant on discretionary spending?

The leisure sector is perceived to be a cyclical sector, dependent on discretionary spending and vulnerable to volume pressure in times of economic slowdown.

Our experience within the Family Leisure business has shown us that against a difficult trading backdrop, the vast majority of operators have demonstrated trade resilience and some have even seen growth, as shown in Figure 1.

This stable and even improved trading pattern across these businesses demonstrates that historic perceptions and views in relation to Family Leisure spend as discretionary are not valid. Today’s consumer continues to spend or indeed switches their spend to this sector in tougher economic times.

Consumers are unwilling to cut their core Family Leisure spend. As Figure 1 shows, consumer spending in the core Family Leisure sectors was broadly resilient or saw growth over the period 2007-2009. Although unwilling to cut their leisure spend, consumers are happy to “downgrade”; for example, replacing a meal in a fine dining restaurant for one in a casual dining outlet. This willingness to “downgrade” ensures consumers are able to enjoy the same leisure experience whilst reducing their overall expenditure.

the implications for future leisure spending within these family leisure sub sectors, through good and bad times, are therefore very positive; a view which was corroborated by respondents to our survey.

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 & fitness clubs 2,500 2,520 2,525 +1.00

Figure 1: Consumer expenditure on selected leisure activites

Source: Mintel international


2. CAA, Rentrak EDI3. Allegra Strategies

The new patterns of consumer spending reflect big changes in society, social habits and attitudes. Many of those changes – an increase in working women, decline of dining room meals in the home, later childbearing, smaller family units, the increased emphasis on the individual, healthier living and anti-smoking campaigns - are ingrained, regardless of economic conditions.

Similar influences have also led to big changes in the overall pattern of leisure spending in recent years. These are most clearly seen in the drinking and dining out sectors: the growth of coffee shops, casual dining chains and gastro-pubs against the decline of the traditional pub and the bingo hall.

In terms of the Family Leisure industry, that means an evening at the cinema, taking the family out for a pizza or taking the kids to a UK leisure destination are all regular leisure activities. Leisure activities which are being cut are the larger luxuries such as foreign holidays and meals in fine dining restaurants.

These trends are not new, spending has been under pressure for the last 36 months, yet certain sub sectors

continue to trade well. Cinemas had a record year in 2009 topping £1bn2 in box office receipts and with strong product and 3D technology helping to boost cinema sales in 2010, this year is set to exceed it.

The same applies to casual dining; despite some well publicised issues with a few tired or poorly managed, higher end brands, the UK informal eating out market had a flat 20093 as an industry. Within the eating out market, the casual dining sub-sector, which is at the core of Family Leisure, performed strongly as consumers shifted their spend to affordable and good value chains.

Another sector reporting strong performance is destination attractions. Merlin Entertainments Group figures for 2009 were strong and showed double digit revenue growth year on year on a like for like basis. Also benefiting the Family Leisure sector is the “staycation” factor. Family trips to leisure destinations in the UK are becoming increasingly popular as they are a cost efficient alternative to the traditional holiday abroad.

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

No good prospects

Lacking good prospects

NeutralGood prospects

Very good prospects

does the leisure sector have good prospects?

Cultural change driving sector growth (more going out etc)

Growing faster than economy

Emergence of innovative and entrpreneurial operators

Value for money business will survive

Agility is key

Hard to shake investor image issues

3


why hasn’t the city recognised it?

the key message in all of this is that family leisure spend is non-discretionary. in tougher times the consumer is more demanding in terms of value for money. as a result, well positioned leisure businesses are benefiting from strong trade and stable or growing revenues.

This is not apparent in investors’ reactions to the leisure sector, or from the industry’s press. This has focussed almost exclusively on the bad news; the smoking ban, binge drinking, declining pub sales, problem gambling, the near collapse of the bingo sector.

There are a number of reasons for this, but the main one is the disparate nature of the leisure sector. It is a collection of different businesses with different customer profiles and challenges, so it is not surprising that many journalists and investors tend to concentrate

on individual sub-sectors and the companies operating within them, with the result that the larger sector tends to be tarnished by these reports.

It is also not surprising that the “car crash factor” has come into this. There is always a fascination with a disaster story. Many leading hotel and leisure companies were the subject of private equity leveraged buy-outs in the 2005-7 years, when borrowing was easy on the back of either their assets (hotels) or strong cash flow (pubs, bingo, gambling). Many of these companies have struggled in the much changed economic and finance environment since 2008 and their agony makes good copy.

The law of unintended consequences from all that deal making has also played its part. It has led to the virtual elimination of the quoted hotel and leisure sector.

That in turn has meant that hotel and leisure analysts have disappeared as a class. The same has happened in business journalism, leisure specialists now mainly cover other sectors for their day job, typically retail.

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

Very unfavourable reputation

Unfavourable reputation

NeutralFavourable reputation

Very favourable reputation

does the leisure sector currently have a good reputation?

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

the sector’s business”Sector commentator

“The Leisure Industry is a big employer and contributor to the UK economy”

Journalist

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

pub operators, betting shops, private equirty-owned operations being obvious examples”

Leisure analyst

“Regulatory and taxation developments have heaped further woes on the drinks and gambling sub-sectors”

Journalist

4


There is a dearth of experienced commentators observing the industry as an industry, calling the trends and identifying important developments. That is not likely to change in the near future, so it is up to us to fill the gap and explain what is going on to investors and the generalist business reporters.

do the press generally treat leisure as a sector or as a disparate leisure

business?

“Definitely a collection of disparate businesses...”Leisure analyst

“It is certainly the latter, a collection of disparate businesses”

Journalist

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

and very few journalists are leisure specialists”Sector commentator

how would you rate the general favorability of leisure sector coverage?

“I would say the coverage is in general, very unfavourable - most stuff focuses on issues like binge drinking, violence, gambling”Leisure analyst

“Main subjects of coverage have been either ‘car crash’ stories or issues with mainly negative connotations e.g. smoking ban, binge drinking etc”Sector commentator

Very unfavourable

Unfavourable

NeutralFavourable

Very favourable

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

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the disparate nature of the leisure sector results in blanket statements, assumptions and perceptions. these are generally founded on the more high profile leisure sub-sectors; gambling, nightclubs, pubs and bars, and excludes the family leisure sector, a sector with very different characteristics.

family leisure: big sector. big opportunities.

The outlook for the next few years is forecast to be a hard, slow grind for all of us. The recession may be theoretically over, but boom times and spending sprees are unlikely to return in the near future.

How will the Family Leisure sector react to these challenging times?

People will not sit at home with the blinds drawn until all debts are paid off. The consumer still wants to go out, to enjoy their leisure time and to be entertained. They will, however, have to do it on a tighter budget and with a more careful eye on value for money.

Operators giving good value are therefore well positioned to maintain or even gain a bigger share of what there is to spend. Family Leisure has been growing year on year and that relative trend is set to continue and, we argue, accelerate.

The owners of property assets which are let to the strong, growing and cash generating Family Leisure segment will also benefit strongly. Tenants that are trading well pose less of a risk to landlords, cementing their rental stream and minimise their risks to vacant properties.

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

No good prospects

Lacking good prospects

NeutralGood prospects

Very good prospects

does the leisure sector have good prospects?

cultural change driving sector growth (more going out etc)

growing faster than economy

emergence of innovative and entrepreneurial operators

value for money business will survive

agility is key

hard to shake investor image issues

6

what is family leisure?

Our definition of Family Leisure is a simple one: It is the part of every family’s or individual’s spending budget which centres on basic leisure activities outside the home in the areas of entertainment and eating out. The core of the “Family Leisure” market comprises the cinema and casual dining sectors. Supported by this core are a series of smaller subsidiary sectors including; tenpin bowling, health & fitness, kids play and alternative leisure uses.

The annual amount spent on these activities adds up, in our calculation, to well over £90 billion. Figures for some of these sub-sectors are hard to pull together but we estimate that Family Leisure, as we define it, had annual growth in 2009 in excess of 5%, despite a 2.2% fall in household expenditure as a whole and the adverse economic background for consumer spending generally. Prospects for 2010 are good with figures set to exceed this.

family leisure: big sector. big opportunities.

lipstick leisure

the facts suggest that certain areas of leisure spend, including family leisure, demonstrate resilience during recessional times, and in some cases spending even increases.

There are of course many areas of leisure spend that are discretionary and are likely to be severely impacted on during times of economic downturn. These include eating 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 this and assume it all to be a discretionary spend that is cut back when consumer income comes under pressure, as the majority of investors, analysts and journalists presume.

This phenomenon is similar to the “Lipstick Index”, a phrase used to describe the rise seen in cosmetic sales during periods of economic downturn. This regular pattern occurs because consumers indulge in affordable luxuries when they have to sacrifice the larger ones. Thus we coin the expression “Lipstick Leisure” for Family Leisure.

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leisure and the uk economy – the forgotten sector?

leisure as a sector currently employs an estimated 1.8 million people4, nearly 10% of the uk total and not far behind the 2.5 million employed in the retail sector.5

Leisure is a labour intensive service industry which gets scant recognition for its role as one of the UK’s major employers. This is particularly unfair given the industry’s regular role as the villain in any debate about activities deemed to have socially undesirable effects or consequences which require tight Government controls or regulation, at either national or local level.

Our survey of leisure CEOs, specialist press and industry commentators strongly agreed with the proposition that the sector received scant recognition:

Nor was there any serious disagreement with the proposition that the sector is largely responsible for this situation because of its historic failure to present a united front in representations to Government. Individual sub-sectors, like gambling or pubs, have tried to influence Government policies on issues like smoking. Occasionally there have been efforts to gather together a wider coalition of leisure interests to lobby for central funding or tax relief on specific activities with a bearing on the public interest, like tourism or the Olympics.

Our survey revealed strong support for the proposition that the sector is largely responsible for this situation because of its historic failure to present a united front in representations to Government.

We are therefore calling for leading figures from major companies operating in Family Leisure to come together to lobby Government on important issues impacting the sub-sector. The aim would be to win greater respect and recognition for the sector’s leading role in employment generation and for its economic contribution generally.

Collection of disparate businesses

Sector as a whole

does the coverage recognise the leisure sector’s contribution to the uk economy?

“The press will always focus on the negative; hence the coverage doesn’t recognise the leisure sector’s contribution to the UK economy in general”Leisure journalist

“We have always thought that we are undervalued; manufacturing doesn’t get an easy ride either”Sector commentator

“We’ve just done an economic impact study on the betting industry pointing out that it generates a significant amount of employment. That is not usually mentioned in the press”Sector analyst

“The leisure sector is a huge employer, but the workforce is a largely low-paid and low-skilled”City editor

should the leisure sector collaborate more effectively in its representations to the government?

“Leisure could take a leaf out of the retail industry’s book and get some leverage with the Government on important issues affecting the consumer and the leisure industry”Leisure analyst

“Leisure businesses are very different so it would be hard to unify them completely but they could certainly come together on certain issues”Sector commentator

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

Most definitly notPossibly notNeutralYes possibly

Most definitly

8

4. British Hospitality Association5. British Retail Consortium

leisure property: when discussing leisure property we are referring to leisure parks, predominantly let to family leisure operators. these leisure parks are anchored by a cinema with a strong casual dining or fast food offering. these assets may also include some or all of the following; tenpin bowling; health and fitness; kids play, gaming, nightclubs, bars and alternative leisure uses.

leisure property report


Figure 3: Net Initial Yields

Source: IPD

relative pricing vs risk

Leisure property is currently valued at less than retail and retail warehouse property, commanding a higher all risk yield.

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

leisure property is currently valued at a considerable discount, based on historic perceptions of risk and return, to other property sectors. we believe that this is incorrect and that the merits and strengths of leisure as an investment asset are being overlooked by investors, due to a lack of leisure knowledge and a fear of the “unknown”.

leisure property: When discussing leisure property we are referring to leisure parks, predominantly let to Family Leisure operators. These leisure parks are anchored by a cinema with a strong casual dining or fast food offering. These assets may also include some or all of the following; tenpin bowling; health and fitness; kids play, gaming, nighclubs and bars and alternative leisure uses.

property valuation

In order to assess the case for leisure as a property investment class, a basic understanding of the methodology of property valuations is required. In simplistic terms property valuations are calculated by multiplying net rental stream by the reciprocal of the “All Risk Yield”. The reciprocal in effect, produces a multiplier.

The “All Risk Yield” is intended to capture and reflect the future security and growth of a rental stream. Factors such as covenant strength, length of leases and sustainability and growth prospects of the current rental stream are all hypothetically encapsulated by this factor. The riskier the future prospects of the current rental stream, the less the property is worth, the higher the yield and the lower the reciprocal multiplier and vice versa.

Figure 2: Net initial yeilds, 30 Sept 2010

Source: IPD

11

10

8

6

4

2

%

net initial yields

Leisure 7.00%

Retail Warehousing 5.90%

Offices 6.10%

Retail 6.00%

Industrial 7.10%

Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

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


12

This implies that leisure is considered to be the riskiest of the major property asset classes to invest in. The reality is that leisure property is not being valued on its own merits. Within the property investment industry, the leisure sector is valued on a historic perception, that relative to the other more recognised property sectors, leisure is an inferior asset. Through a lack of knowledge and awareness, leisure is considered to be a risky, niche asset class, dependant on discretionary spend and a fickle consumer.

Contrary to this belief, the facts reveal that leisure is no more risky than other asset classes. Leisure property has demonstrated itself to be less risky through periods of recession than the other major property asset classes. It is a stable and defensive stock, demonstrating little volatility in revenue streams.

Leisure’s underlying characteristics and strength of rental stream should be considered and reflected in its valuation. In addition, the valuation of leisure should reflect the merits and strengths of the leisure tenant market and not the current weakness and troubles apparent in other sectors and misconceptions through a lack of knowledge and understanding.

Is retail property a less “risky” asset class than leisure?

Should leisure be valued more conservatively than retail?

In answering these questions, this paper concentrates on the last, economically challenging, 36 months.

Assuming the basic method of property valuation, the most significant factor affecting the all risks yield, and therefore the value of property assets, is the perceived strength and future growth of the rental stream. The leisure rental stream can be shown to be stronger and more robust, especially in challenging times, 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 continue to lag behind other, more apparently volatile, sectors?

it is time to better understand the underlying characteristics of leisure property and its relative merits as an investment asset and to dismiss the negative misconceptions that investors have of leisure property.

common misconceptions

thin tenant market

weak covenants

discretionary spend

obsolescence

unaffordable rents

risky asset class

Leisure

Office

Industrial

RetailRetail Warehouses

Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

macro economics

In order to assess the relative characteristics and strength of the leisure and retail rental streams, the macro-economic climate must be considered alongside operators’ trading performances.

The macro-economic situation can be summarised as follows:

With household expenditure down and unemployment rising, is the consumer reducing their overall expenditure?

Yes. Households have reduced spending significantly across the board over the last 36 months and growth is not forecast to return until 2011.


Our research at the front of the report, provides the evidence to support the conclusion that in tough economic times, Family Leisure spend remains robust and is not being cut back. This is further demonstrated by the lack of leisure operator failures compared to the large number of highly publicised retailer administrations.

property fundamentals

Consumers cutting back on expenditure has a consequential knock-on effect on the retail rental stream leading to a decrease in operator revenues. There has been an increase in vacant retail units due to retailers scaling back their operations, and in many cases entering administration, coupled with a significant reduction in the number of operators expanding and acquiring new outlets, means that demand for retail premises has fallen substantially. This fall in demand and subsequent increase in supply creates disequilibrium in the market and to correct this, rental values must then fall. This is particularly evidenced within the retail sector compared to the leisure sector.

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

Household expenditure has contracted over 2008/2009 and is forecast to remain static before growing slightly in 2011.7

6. EIU7. 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 propertyRetail warehouseRetail

Leisure

13

%


As well as a fall in rental value, landlords with vacant property are being forced to accept tenants’ ever increasing demands in order to secure new lettings. Lengthy rent free periods as well as large capital contributions are now being included in the majority of rental lettings, impacting the net rental stream.

It is important to note that vacant properties carry a real cost as well as an opportunity cost of lost rental stream. Landlords are liable for empty rates, property insurance and maintenance/service charge costs. A vacant unit therefore has a double hit on net income through a loss of revenue and an increase in costs.

Landlords with retail properties that have remained let are also facing problems. They have faced an increasing number of tenants defaulting on rental payments or requesting a rental concession to ensure they avoid administration. In this situation the landlord has little option but to agree to the concession, again impacting rental stream, to avoid losing the tenant. It is also now common within the retail sector for tenants to pay rents monthly rather than quarterly in advance.

As Figure 4 shows, the retail property sector appears to have suffered at the hands of the recession to a greater extent than leisure as rental values have contracted further, and remain in negative growth for a longer period than leisure.

In addition, Figure 5 shows that void rates are higher in retail properties than leisure and a higher proportion of units are over-rented, increasing risk. Despite the apparent resilience and better prospects of the leisure sector it continues to be valued at a discount to retail. As at September 2010 leisure had an initial yield of 7.00%, compared to 6.00% for retail and 5.90% for retail warehousing.8

What has happened and is happening to leisure spend and how has this affected the leisure rental stream?

Should leisure be perceived as an inferior investment to other property investment classes and be priced at a discount to this sector?

leisure administrations Regent Inns (Bar operator) Novis Bars (Nightclub operator) selected retail administrations Woolworths Ethel AustinZavvi The PierMFI Threshers/WinerackLand of Leather Miss Sixty

AdamsOfficers Club WrapitBorders MK OneThe Works RosebysUSC

voids (% of erv) % over-rented % reversionary

leisure 4.0 18.2 71.4

retail 5.8 41.3 45.4

retail warehousing 4.3 41.4 50.9

office 13.9 44.4 33.3

industrial 12.9 43.9 37.2

all property 9.4 41.9 41.5

Figure 5: Occupancy Statistics, June 2010

Source: IPD Quarterly Index, June 2010

8. IPD

14

the institutional core asset classes appearto have suffered at the hands of the recession to a greater extent than leisure as rental values have contracted further, void rates have increased to a greater extent and over-renting has become more prevalent.

leisure is more robust.


lipstick leisure

as highlighted earlier in the report, certain areas of leisure spend display resilience or grow during recessional times. consumers indulge in affordable luxuries whilst sacrificing the larger ones. leisure property is exposed to the area of leisure spend that benefits from “lipstick leisure”.

Figure 6 shows that the spend on Family Leisure sectors increases over the recessional period. There are of course many areas of leisure spend (larger luxuries) that are very discretionary and are severely impacted upon during times of economic downturn. These include eating out in high end restaurants and luxury holidays/hotels. Consumers who have to sacrifice these larger luxuries instead spend on affordable luxuries like a trip to the cinema or a meal out in a casual dining restaurant, leading to revenue growth for these sectors.

Source: Mintel International 2010

120

110

100

90

80

70

Health & FitnessTenpin BowlingCasual Dining

Cinema

2005 2006 2007 2008 2009

Figure 6: Changes in consumer spend on certain leisure activities

15


The leisure property sector is typically invested in, and income split between, the leisure sub sectors as shown in figure 7.

The leisure rental stream is dominated by the cinema and restaurant sector. Indeed, some leisure parks will only have these two sub sectors and those that include other sub sectors are still likely to generate more than 50% 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 misconception that all leisure spend is highly

discretionary. in reality, core family leisure spend actually

increases during times of austerity.

16

cinema industry

2009 was another record breaking year for the cinema industry with admissions totalling 173.5 million and gross box office receipts exceeding £1 billion for the first time in history.

The Cinema industry is at the core of the Family Leisure sector. The anchor tenant of a leisure park, the cinema is the key footfall driver.

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

performance

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

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

0

50

100

150

200

consumers are unwilling to decrease their spending on cinema going, despite the harder economic times. A trip to the cinema is seen to be an affordable luxury in which consumers are willing to indulge to replace larger luxuries they have been forced to sacrifice.

As admissions have risen over the period, so too has the average admission price. This increase in admission price is due largely to the introduction of, and the price premium that can be charged for, 3D films. In 2009, 3D films accounted for 16% of UK and Republic of Ireland box office revenues (£176 million), up from just 0.4% in 2008.11

This growth in admissions, coupled with the rise in average admission price has led to a significant increase in box office revenues.

200

150

100

50

02000 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 International

9. Mintel International10. UK Film Council11. UK Film Council

17

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

Avatar, released in 2009, became the highest grossing film in UK box office history, taking over £90m. The most recent film in the Harry Potter franchise, Harry Potter and the Half Blood Prince, also performed exceptionally well grossing in excess of £50m. As well as these two stand out releases there were a further 12 films that took in excess of £20m each.13

2010 is forecast to exceed 2009 both in terms of admissions and box office receipts, as shown in Figure 11. This view is substantiated by figures released in September 2010 which show that box office receipts for the first 8 months of the year have hit £768m. This is an increase of 8% on the same period in the record breaking 2009.14

Looking ahead to the future, this stellar performance is set to continue, with revenues and admissions both forecast to increase over the next five years (Figure 11).

cinema

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

Figure 11: The cinema market 2005-2015

Source: CAA, Rentrak EDI


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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 continuing strength of cinema product being released and the quality of product still in the pipeline, revenues look set to remain strong.

The total UK gross box office receipts for 2009 was a record £944 million, up 11% on 2008 and the overall territory gross (including the Republic of Ireland) exceeded £1 billion for the first time in history.12

This growth in box office receipts can be attributed to rising admissions and average admission price, as well as the quality of the cinema product.

12. UK Film Council13. UK Film Council14. Film Distributors’ Association

18

cinema

This investment looks set to continue with Cineworld reporting that they are aiming to install a further 150 digital projectors by the end of January 2011. Once completed over 50% of their 801 screens would be digital, with the vast majority being 3D enabled, further extending their capability to offer more 3D and alternative content to their customers.15

With the sector performing so well and forecast to continue doing so, the key cinema operators are looking at ways to capitalise and increase their revenue streams. They have found it more and more difficult to open new sites in recent years due to the slowdown in the number of new leisure developments being constructed (due to planning and economic constraints) and the fact that each scheme and geographical location can only support one cinema. However, they have continued to invest heavily throughout the recessional times, with a significant focus being on the introduction of digital screens. Digital screens do away with the need for a traditional projection room and allow cinemas to be more flexible in their layout and reduce operating costs.

As a result of the introduction of digital screens and the subsequent flexibility this generates regarding the layout of screens, cinema operators have been able to expand their cinemas into adjoining units in order to increase their capacity to match the growing customer demand. Another benefit of digital screens is that it enables cinemas to show alternative content, such as live sports events, theatre, ballet and opera performances, which gives them an additional revenue stream.

rental stream

The cinema is the anchor tenant of a leisure park and accounts for anything between 35% - 90% of a traditional leisure park’s income. The strength of the cinema industry and its continued growth and record performance should ensure that cinema tenants provide a strong and secure rental stream and few worries or risks for landlords.

Cinema leases frequently benefit from fixed, or minimum, pre agreed rental uplifts at rent reviews. These reviews are commonly in line with the retail price index (RPI) or fixed at circa 2.5%-3% per annum and ensure that rental growth prospects are not constrained by the economic conditions at the point in time of the five year rent review cycle. It is a common misconception among investors that these minimum uplifts lead to “over renting” through the lease term. This rent that is perceived to be in excess of the market level is considered risky and unsustainable.

With limited open market lettings and large incentives offered to cinema operators to secure lettings, it is difficult to assess cinema open market rental values. Therefore, without the underpinning of rental growth through minimum/fixed uplifts it would be difficult to determine rental increases throughout the term of the lease.

Figure 13 shows that between 1998 and 2008 the price of ticket sales has increased in excess of the retail price index. The annualised figures are 3.5% and 2.8% respectively.

2005 2006 2007 2008 2009

No of digital screens

38 148 296 310 642

As % of total screens

1 4 8 8 17

Figure 12: Number of digital cinema screens in the UK


15. Cineworld Group PLC

19

This increase in average admission price, coupled with growing admissions, demonstrate the cinemas should be achieving a greater level of profitability, and that rents that have risen on average 2.5% - 3% per annum through fixed, minimum or RPI related uplifts are in fact more affordable.

with average admission prices and volumes set to continue increasing rents are set to remain affordable well into the future. the concern in relation to over-renting and the perceived riskiness of higher than open market rental levels should be dismissed.

tenant market

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

Cineworld, which is the only listed cinema operator and accounts for 21%16 of the UK share of screens, has continued to trade strongly through the last challenging 36 months. They have seen year on year growth in revenues. The latest figures they have reported show that box office receipts for the 42 weeks to 21 October 2010 are up 8.3% and other income is up 43.8%, on the same period in 2009. They are continuing to invest heavily in digital technology and improving existing sites.17

The largest of the 3 main players with over 800 screens18, Odeon is owned by the private equity group Terra Firma and as a result, financial information is hard to come by. The latest set of figures available show that for the year ended December 31 2008, revenues were up 8.3%.19 We understand that Odeon continue to trade well and in November 2009 the company had 187 digital screens and entered into an agreement with three Hollywood studios to convert the remaining 470 screens to the digital format at an investment of £70 million.20 In 2010, Odeon added an additional 2 Imax screens, making them the largest operator of this technology in the UK.

cinema

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

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

summary

the cinema industry is looking strong today and robust for the future. consumers are increasing, rather than cutting, their cinema spend. add to this a long pipeline of good product and significant investment in new innovative technology and the cinema sector is set to remain resilient and stable. this continued strong performance, relative affordability of rental levels and minimum fixed uplifts make cinemas a low risk, secure and stable 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 ticket price and RPI growth

Source: X-Leisure Ltd

16. Mintel International17. Cineworld Group PLC18. Mintel International19. Odeon UCI Cinemas20. Mintel International21. Vue Cinemas22. IPD Rental Information Service

Vue is management owned although rumours persist that the management are seeking a sale to a private equity group. For the year ending 26 November 2009, Vue reported a rise in revenues of 9.7% on the previous year.21 The company said that this growth in revenues was due to a strong cinema product, a shift to digital screening and a new pricing strategy. In mid-2009, the company said that it planned to open an additional eight cinemas across the UK by the end of 2011.

20

casual dining & fast food

revenues in the uk informal eating out market are estimated to be £40.1 billion, and are forecast to grow by c.20% to £47.5 billion by 2014.

The casual dining and fast food sectors are, along with cinema, at the core of the Family Leisure market. The casual dining market covers a wide range of operators including Pizza Hut, Frankie and Benny’s, Nandos, Chiquitos, Bella Italia and Café Rouge. The fast food sector is dominated by 3 key players: Burger King, McDonalds and KFC. The market benefits from an increasing popularity to eat out as well as footfall driven to the park by the cinema.

performance

Revenues in the UK informal eating out market (Casual dining, fast food, coffee houses and sandwich shops) were estimated to be £40.1bn at the end of 2009.23 This is a fall of just 0.5% since 2008 and is still above pre-recessional levels, clearly demonstrating resilience despite consumers tightening their purse strings across the board.

As Figure 14 shows, prior to 2009, the industry had seen year on year growth in revenues over the previous 8 years. This is primarily due to the growth in the number of meals eaten out of the home. Research suggests that one in every nine meals are eaten out of the home each week, translating to a total of 148 million in 2009. This has led to the eating out market taking a greater share of total expenditure by consumers on food and beverages, up from 14% in 1969 to 22% in 200924, with the trend set to continue into the future.

This strong market-wide performance is misleading, and resilience is not being experienced throughout all of the sub-sectors. The mid market and upper end operators are suffering as consumers downgrade during these difficult economic times and margins squeezed through discount offers and vouchers. As with the wider economy, the value operator, prevalent in the casual dining and fast food sector, is seeing trade increase as consumers indulge in affordable luxuries at the expense of larger ones.

“Consumers will not forget what they are learning from the recession…and will not go back to paying

over the odds for a meal.”

This strong performance and growth of the casual dining and fast food sector is set to continue into the future. As Figure 14 shows, growth is expected to return to the market in 2010 and is forecast to grow by c.20% to £47.5bn by 2014.25

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Figure 14: Expenditure in the UK informal eating out market

Source: Allegra Strategies 2010

23. Allegra Strategies24. Allegra Strategies25. Allegra Strategies

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

Burger King has also benefitted from an increase in trade as a result of consumers downgrading when eating out. Looking to the future, the main focus for Burger King will be on the refurbishment of its current outlets into the new, more upscale design format and simultaneously rolling out its new, smaller ‘Whopper Bar’ concept.

KFC also has expansion plans, as a result of strong trading over the last few years and going forward they have announced an intention to open 200-300 outlets in the UK over the next 3-5 years. This is a huge step up from the 30 outlets they opened in the year ending November 2009.29

The casual dining side of this sector has a large number of operators. Brands including the following all fit into this market: Nando’s, Pizza Hut, Pizza Express, Café Rouge, Yo! Sushi, Prezzo, Chimi Changa, Zizzi, Strada, Gourmet Burger Kitchen, ASK, Girraffe, La Tasca, Frankie and Benny’s and Bella Italia. These operators have all continued to trade well over the last 36 months, due mainly to the heavy use of promotions and special offers. The Restaurant Group, who operate, among others, the brands Frankie and Benny’s and Chiquitos, have announced that year on year revenues are up 9% and EBITDA up 10% for the 27 weeks to 4th July 2010. They are also planning to open an additional 35 sites over the course of 2011.30

Prezzo, who operate 140 restaurants, have announced a similarly strong set of results which show that for the first 26 weeks of 2010 both revenues and EBITDA were up, by 11% and 17% respectively.31

rental stream

The casual dining and fast food sector is the second core tenant group on a leisure park and anything between 10% - 50% of a traditional leisure park’s income comes from this sector.

the shift in consumers’ preferences to value offerings, the increasing number of meals that are eaten out of the home and the strength of the cinema trade ensure that casual dining and fast food tenants provide a strong, secure rental stream for landlords.

Restaurant leases on leisure parks are commonly for a minimum of 15 years term certain. Rental levels range from £20-£30psf, meaning rents are affordable and there is the room for rental growth in the future.

Casual dining and fast food operators will seek representation on all leisure parks where the cinema is trading relatively well. The result is strong demand and competition from the restaurant sector for available units with consequential low voids and good rental growth prospects.

This desire for restaurants to seek space on good trading parks also means that there are profitable asset management initiatives that can be undertaken. Existing units can be extended, redundant units split into smaller units or new units created to accommodate the increase in restaurant demand. Likewise, if a cinema rationalises, ground floor screens can be split off and restaurant units added.

The casual dining and fast food rental stream is affordable, secure and has room for future growth. The vast number of operators seeking representation on leisure parks significantly reduces the risks to landlords associated with holding these units.

tenant market

The fast food side of this sector prevalent on leisure parks has 3 key operators: McDonalds, Burger King and KFC. The recession and consumers’ increased sentiment to the value end of the market has seen this sector grow by 8% in the last year.26

McDonalds UK, who operate 1,200 restaurants across the country continues to trade strongly. A recent overhaul of their offer has helped them to introduce varying price points and to capitalise on the breakfast market. In 2009 they reported an 11% like-for-like


26. Mintel International27. McDonalds28. Mintel International29. Mintel International30. Restaurant Group Plc31. Prezzo Restaurants Ltd

22


Tragus, whose brands include Bella Italia, Café Rouge and Strada, have announced that for the 52 weeks to 30 May 2010 revenues were up 5.9% and EBITDA up 7.8%, both year on year.32 On the back of this strong performance, they are looking to open a further 20 restaurants before May 2011, an increase on the 15 opened in the previous 12 months.33

This strong trade has ensured that casual dining operators have remained acquisitive and look set to continue acquiring new sites. As the table opposite shows, 160 new sites are being sought by a selection of just 7 selected operators in the market, a 28% increase on units opened by the same operators in the previous year.34

summary

the casual dining/fast food sector which the core leisure property market is exposed to has shown strong resilience, kept customers coming through the door and continues to trade without any notable failures. this sector, which is a key tenant in leisure schemes, has faired especially well. trading has remained strong as consumers seek value with an increasing propensity to eat out.

This strong restaurant performance has also led to an increase in corporate activity in the restaurant sector with notable examples including Carluccio’s being bought for £90m and Nando’s close to finalising a deal to purchase Clapham House Group. With over 10 times EBITDA being paid for Carluccio’s, this corporate activity highlights how strongly the operators are trading and how attractive they are to investors. Why then are leisure parks, which derive up to 50% of their rent-roll from this sector, deemed to be so risky?

2009/2010 (opened)

2010/2011 ) Planned

The 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 Bulletin, Savills, September 2010

32. TRAGUS33. Savills34. Savills

23

tenpin bowling industry

The primary bowling lane revenue has held up far better than the ancillary revenue from food, beverage, pool tables, and machines. Consumers still want to enjoy a game of tenpin bowling but as in all industries, they now have a much closer eye on their secondary spend. The secondary spend has also been hit by the smoking ban and de regulation of licensing hours. This fall in secondary spend has hit the tenpin bowling operators total revenues. This situation, however, now appears to have stabilised.

As shown in Figure 16, growth is forecast to return to the market in 2010 and continue back to pre-recession levels over the next 5 years. There remains a positive sentiment for the future within the tenpin bowling sector, with additional areas of business being explored to maximise revenue generating potential of the premises, and consolidation of some of the smaller operators.

Tenpin bowling has a universal attraction and spans a broad range of markets including kids’ parties, students and 20s – 30s group activities.

Following a period of sustained growth of 2-3% per annum, the level of consumer expenditure in the tenpin bowling market fell by an estimated 11% between 2007 and 2009, to reach a value of just under £250 million.35

As Figure 16 below shows, the sector has shown robust performance over the last 3 years, given wider market conditions. Spending on the core activity of bowling remained relatively flat throughout the period, with a reduction in secondary revenues causing the overall fall. The tenpin bowling market appears to have returned to growth during the first half of 2010, with volumes increasing and overall levels of spend ahead of last year.

the tenpin bowling market appears to have returned to growth during the first half of 2010, with volumes increasing and overall levels of spend ahead of last year.

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Figure 16: Expenditure on Bowling in the UK


35. Mintel International

24

rental stream

Bowl operators could account for up to 35% of leisure parks’ income, although they are not present in all schemes. Their standard property requirement is a c.25,000 sq ft floorplate at rental levels in the region of £8-£10 psf. Many leases will also benefit from minimum or fixed uplifts.

Despite falling revenues, bowl operators pose few risks to landlords. Falls in income have been offset in part by comprehensive cost cutting measures and operators have streamlined operations to concentrate on maximising primary revenues. New secondary revenue stream ideas are also being explored to boost future income. (Improved food offers, karaoke etc.)

In addition, rental levels in the sector are affordable and this has helped to ensure that despite a fall in revenues across the sector, there have been no tenant failures.

All of the “big box” uses on a leisure park are readily interchangeable with new uses such as kids play. With new concepts entering the market alternative occupiers are readily available for any surplus accommodation.

tenant market

Essenden (formerly Georgica) is the holding company for the Tenpin brand. Tenpin is the UK market leader with 38 sites, 997 lanes, 4.7 million customer visits in 2009 and an estimated 23% of market share by value.36 The group reported a decline in sales of 7.5% for 2009. However, following an 11% decrease in the first half of the year, the decline flattened out to 4.6% in the second half. Following its financial restructure in 2009, Essenden has conducted a strategic review and has a number of new initiatives in the pipeline centred around plans to further upgrade the core bowling product.37

AMF Bowling is now the second-largest operator following its purchase of the Hollywood bowl operation from Mitchells and Butlers in September 2010.38 The company was sold to private equity investors in 2004 and as such financial information is difficult 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, has steadily grown over the past decade from seven sites in 2000 into a nationwide chain of 18 centres currently.40 Following the trend in the market, revenues fell in

2009 by 6%. During this period, however, an efficiency drive achieved £2 million of annual cost savings which helped to offset this revenue decline.41

Tenpin, AMF and Bowlplex are all classed as having negligible or low levels of risk associated with them by IPD.42

The remainder of the tenant market is made up of NAMCO, Newbury Leisure and American Amusements who operate at least 10 sites each as well as numerous independent operators.

summary

the tenpin bowling sector has been hit by the recession with revenues in 2010 down 11% from the 2007 highs. however, there have been no tenant failures in the tenpin bowling sector and there remains a positive sentiment for the future. growth is forecast from 2010 taking market revenues to in excess of £250m.

operators are exploring additional areas of business to maximise revenues and cost reduction programs have helped to maintain profit levels. they offer good value entertainment and experience for the ever discerning and value for money seeking customer and family.

tenpin bowling

36. Mintel International37. Essenden38. Mintel International39. AMF

40. Mintel International41. Bowlplex42. IPD Rental Information Service

25


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forecast to remain at the same level in 2010. The latest research suggests 23% of consumers have cancelled their gym membership as a result of the recession. However, the continued publicity of the benefits of exercise, driven largely by the government, coupled with introductory offers offered by the health clubs and a greater awareness of “body image,” are all encouraging significant numbers of new members to join. New memberships are offsetting those cancelling their memberships ensuring revenues and membership levels remain robust.

Not all sectors of the market have performed equally over the last 36 months, with the mid-market offer coming under pressure as a result of the recession, although to a lesser extent than was envisaged. With the average gym membership in the UK costing £37 per month and consumers becoming ever more cost conscious, the UK market has seen the emergence of the “budget” health club sector.

This sector is already well established in the US and mainland Europe and is now starting to attack the mid-market offering in the UK. They do not provide classes, just ample machinery with limited staff and in many cases open 24 hours a day. These gyms offer flexibility and value with memberships available for just 24 hours and monthly memberships offered at very competitive rates; sub £20 per month. Within the last 24 months at least 4 new operators have entered the budget gym market.

revenues in the health and fitness sector grew by 25% between 2004 and 2009, driven predominantly by the aggressive expansion by several key operators.

Over the same period membership levels also grew by 25%, with the latest research suggesting that 10% of the UK adult population are now members of a health club. That is still some way below the levels in America of 19.5%, suggesting that the market still has potential for significant growth in the future.43

performance

As figure 17 shows, growth in consumer spend in the health and fitness sector grew rapidly between 2004 and 2007. Since then expenditure in the sector has levelled off and significantly, not fallen. This rapid growth has halted as a result of a sharp fall in the number of new clubs being developed and opening due to the prevailing economic climate.

As figure 18 over the page shows, membership levels have remained flat over the period 2007-2009 and are

health & fitness industry

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Figure 17: Expenditure on Health & Fitness UK


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health & fitness

This cost consciousness is anticipated to lead to a shift in demand in the market with the mid range gyms likely to come under increasing pressure as consumers look to downgrade as they tighten their purse strings. The top end racquet and spa clubs, such as David Lloyd Leisure, appear to be maintaining their market share.

The market as a whole is proving to be resilient with both membership levels and revenues robust and set to grow in the future. The longer-term growth prospects for this sector are also perceived to be good. Firstly, membership levels in the UK are relatively low, just 10% of adults are members of a gym in the UK compared to 19.5% in the US44, suggesting that there is room for the market to grow substantially. In addition, factors that have helped to grow the market to date are still relevant. These include growing levels of obesity, a greater focus on “body image”, and a continued drive to publicise the benefits of exercise.

rental stream

Health and fitness clubs could contribute up to 25% of a leisure park’s income, although they are not present in all schemes. Typical occupancy is anywhere from 8,000 to 30,000 sq ft and rental levels are affordable, in the region of £8-£14 psf outside of central London, with many leases benefiting from minimum or fixed uplifts.

Health and fitness clubs present few risks to Landlords. Membership cancellations as a result of the current economic situation have been offset by the number of new members joining clubs. This has ensured membership levels and therefore revenues to remain strong throughout the last 36 months. Forecasts show that there is room for the market to grow in the future and rents should follow suit.

All of the “big box” uses on a leisure park are readily interchangeable with new concepts such as kids play entering the market, alternative occupiers are readily available for surplus accommodation. In addition, the very buoyant budget gym market is aggressively seeking representation across the UK.

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Figure 18: Membership levels UK health and fitness clubs


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health & fitness

tenant market

David Lloyd Leisure Ltd is controlled by London & Regional Properties. As of 1 October 2009, there were 78 David Lloyd Leisure clubs, with a total of 426,692 paying members, an average of 5,470 members per club.45 Revenues for the period March 2005 to March 2009 were up 12.9%. Retention rates for premium clubs such as David Lloyd run at 70-80%, compared to 60-70% for the market as a whole.46

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

The Virgin Active Group trades worldwide through 184 health & fitness clubs in South Africa, the UK, Italy, Spain and Portugal. As of 1 October 2009, the company operated a total of 72 clubs in the UK, with 320,000 members, an average of 4,444 members per club.49 The business has seen significant expansion over the last six years arising from both organic and acquisitive growth. Through expansion and like for like growth, revenues for the period December 2004 to December 2008 were up 436%.50

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

David Lloyd Leisure, Virgin Active, Fitness First and LA Fitness are all considered to have negligible or low risk attributed to them according to IPD.52

There are a number of other medium sized operations in the market including: DW Sports Fitness, Esporta, Bannatyne’s Health and Fitness and Nuffield Health as well as numerous independent operators.

The budget gym market is still in its infancy in the UK but there are currently numerous operators aggressively seeking to increase their representation in the UK: Fit Space, Easy Gym, Gym 4 All etc.

summary

the health and fitness market is proving to be resilient in these tough economic times. following rapid growth in the period 2004-07, with both membership levels and revenues seeing growth of 25%53, the market has remained robust.

Although some 23%54 of members have cancelled their memberships as a result of the recession, this has been offset by new memberships taken out throughout the period. Membership levels and therefore revenues have remained strong and have not fallen.

The longer-term growth prospects for this sector are also excellent. Despite massive growth over the last 5 years, membership levels in the UK are still relatively low, just 10% of adults are members of a gym in the UK compared to 19.5%55 in the US. This suggests that there is significant room for the market to grow. In addition, factors that have helped to grow the market to date are still relevant. These include growing levels of obesity, a greater focus on “body image”, and a continued drive to publicise the benefits of exercise and healthy living.

45 Mintel International46 David Lloyd Leisure Group Ltd47 Mintel International48 Fitness First49 Mintel International50 Virgin Active51 Mintel International52 IPD Rental Information Service

53. Mintel International54. Mintel International55. Mintel International

28

additional leisure uses (not family leisure)

nightclub and bar

This leisure sub-sector is showing itself to be the most sensitive to the overall economic environment. The sector weathered the smoking ban to then come under pressure from cheap supermarket alcohol sales. The traditional edge or out of town leisure park would not include this leisure sub-sector. Those parks that do have a nightclub or bar, typically derive up to 10 % of their income from the sector.

The nightclub industry has been hit hard in these recessional times. As in all sectors, consumers are looking for value and quality and are tightening the purse strings. Nightclub expenditure is seen by the consumer to be discretionary and customers for this market are predominantly in the 18 to 24 year age group, who have been significantly impacted by the recession. According to Luminar, some 18% of this age group are now unemployed and many more are students or on low incomes.56

It should be noted that trading in the sector is a very mixed picture, strong bar operators such as Weatherspoons, Whitbread and Marstons have enjoyed year on year and like for like growth. JD Wetherspoons released their end of year results for the 52 weeks to the end of July 2010 which showed

revenues up 4.3% and profit before tax up 7.3%.57 Preliminary results for Whitbread’s 2009/2010 year have reported a 6.6% rise in pre tax profits, supported by a 3.1% increase in like for like sales in Q4 2009.58 It is a similar story with Marstons who reported an increase in like for like sales for the 26 weeks to 3 April 2010 of 1.4% and in increase in group revenue of 0.6%.59 These results are on the back of a strong 2009 for the above brands.

There have however been casualties within the nightclub and late night bar sectors. Regent Inns (Walkabout and Jongleurs Comedy Club) and part of Novus Bars (Tiger Tiger) have entered administration. Luminar, the listed nighclub company, have reported results that are consistent with the tough times this sector is facing They have reported for the year to 25 February 2010 profit before tax of £4.4m, down 78% on 2009 and Sales down 9.9% on the previous year on a like for like basis.60

The nightclub and late night bar sectors have been hit hard by the recession. The discretionary nature of spend, the increase in unemployment in the target audience and an increase in the availability of cheap alcohol from supermarkets have all combined to undermine the sector.

2,000

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Figure 19: Expenditure in the nightclub market

Source: Mintel International56. Luminar Group Holdings Plc57. JD Wetherspoons58. Whitbred59. Marstons60. Luminar Group Holdings Plc

29

additional leisure uses (not family leisure)

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Figure 20: Expenditure in the casino sector


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Figure 21: Expenditure in bingo clubs


gaming

A typical edge or out of town leisure park would not include this sector. This sector is split between bingo and casino operators, with the main players being Rank and Gala Coral. The sector struggled with the introduction of the smoking ban in 2007, as well as the removal of Section 21 gaming machines under the 2005 Gaming Act.

As Figure 21 shows, revenues in the bingo sector have fallen year on year for the last 3 years and are forecast to continue doing so into the future. In contrast, the revenue in the casino segment of this sector remains flat and the sector, as shown in Figure 20, appears to have consolidated and stabilised.

Thus the main challenges faced by the industry relate to the bingo sector rather than the casino sector, with a fall in bingo revenues of nearly 12% over the period

61. Mintel International62. Rank Group Plc

30

2007-2009.61 This is in addition to falling attendances year on year and a squeezing of margins as prizes are raised to try and attract more customers. The larger players in the sector have managed to more than compensate for this fall in site revenues through an increase in online revenues, ensuring that covenants remain strong.

Despite the publicised problems in the industry, the picture is actually relatively positive. Rank Group Plc announced 7% like-for-like growth in Group revenue for the 14 weeks to 3 October 2010, driven by improvements in each of its businesses. Over the same period, total Group revenue increased by 8%. For the year to date (to 3 October) like-for-like revenue is up by 4% 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 base and would not be impacted by this area of leisure spend that does appear to be suffering to a greater degree than the other leisure sub sectors reviewed.

the case for leisure

leisure property is currently valued at a considerable discount, based on historic perceptions of risk, to retail and retail warehousing. the merits and strengths of leisure as an investment asset are being overlooked by investors, due to a lack of leisure knowledge and a fear of the unknown.

The most significant factor affecting the value of property assets is the perceived strength of the rental stream. This paper has highlighted the trading performances of the key Family Leisure sectors and provided evidence that through the tougher economic trading periods the leisure tenant market has shown greater resilience and is less volatile than the other main property sectors, including the retail sector.

Key to this resilient performance is the non-discretional nature of the consumers’ leisure spend on core Family Leisure activities. This means that leisure spend is not significantly impacted by changing economic conditions. In contrast, a lot of retail spend is discretionary and is therefore very sensitive to changing economic conditions. As a result the retail rental stream has suffered to a greater extent than leisure during the recent economic slowdown, evidenced by the large number of retailers, compared to leisure operators that have entered administration over the last 36 months. This relative strength is further supported by IPD who report that leisure void rates are still far below the other core sectors, notably retail and retail warehousing.63

Leisure also benefits from longer leases and therefore greater longevity of rental stream than other sectors. Leases to Cinemas and restaurants frequently have 20-25 years term certain. In addition, these leases often have minimum uplifts in them ensuring that rental growth is achievable at rent reviews no matter what the economic climate at the rent review date.

Fears that these minimum uplifts will lead to over-renting should be dismissed. Leisure rents are commonly at affordable levels and so have room to grow. The average rent on a restaurant is £25psf with the “big box” operators paying around £10psf.

Cinema leases most often contain minimum uplifts and research has shown that the average admission price and volume of admissions have increased faster than the rate of the average minimum uplift.

These affordable rental levels as a result of steady and stable rental growth, have ensured that rental values have also held up to a greater extent in the leisure sector, with a less severe contraction of rental growth and shorter period of negative growth than experienced by retail. In addition, PMA have forecast that over the period 2010-2015 leisure rents will grow by 6.6%. This is compared to 3.9% for retail warehousing and 5.0% for retail.64

We have reviewed the core sectors within leisure property and demonstrated sophisticated and mature operators with strong financial performance are operating within this sector and that there is not a covenant issue.

As such, the leisure rental stream is as, if not more, robust and secure than the retail rental stream and we believe leisure property should be valued accordingly. It is apparent that a lack of knowledge, coupled with a historic perception of risk, restricts leisure’s value. X-Leisure is attempting to widen the knowledge base and will continue to demonstrate that the risks associated with the sector are not those perceived by the wider property industry.

The strength of the leisure sector is further supported by the increase in corporate activity, especially in the casual dining sector, where investors are willing to pay a premium to buy strongly performing brands. We have also seen restaurant operators and cinemas, the core of the Family Leisure market, continue to expand during these recessional times.

With a robust rental stream, low voids, long leases, minimum rental uplifts and solid covenants, investors need to turn their heads to this sector and see that the 100bp – 200bp differential in pricing between leisure and retail is not always justified.

63. IPD64. PMA Forecasts

31

the sector demands greater consideration and appreciation

in the current investment market. at current prices, leisure

is a good value defensive stock that can be seen as “recession

proof” with scope for rental growth and capital returns.

long leases low voids secure rental growth

affordable rents inherent site value lipstick leisure

reality

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

X-Leisure LtdFrancis House

11 Francis StreetLondon

SW1P 1DE

0207 5921 [email protected]

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X-Leisure presents: Making The Case For Leisure

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