Gimmicks and tax breaks can’t save the pub – MoneyWeek

Butbeverycarefulhere。 Whileitiscertainlytruethatitmakesgoodsenseforpuboperatorssittingonalotofpropertytoswitchtorealestateinvestmenttrust(Reit)status

Butbeverycarefulhere。

Whileitiscertainlytruethatitmakesgoodsenseforpuboperatorssittingonalotofpropertytoswitchtorealestateinvestmenttrust(Reit)status,itisnomiraclecureforasectorthatisinserioustrouble。

WhenafirmconvertstoaReititbecomesexemptfromallcorporatetaxes,providedthat90%oftheincomeispaidouttoshareholdersviadividends。

Enterprise’sconversion,forexample,willleadtoaone-offtaxbenefitof£114mand£65mperyearafterwards。

Thiswouldallowittodoubledividendpaymentsinreturnforaone-offentryfeeequivalentto2%ofthegroup’sassetvalue–about£120m。

ByswitchingtoReitstatus,saysDanThomasintheFT,Enterpriseiseffectivelyavoidingalotoftaxwithoutgoingtomucheffort。

Nosurprise,then,thatanalystsexpectotherpublicanstofollowsuit。

Aslongasanarmofyourbusinessderivesatleast75%ofitsincomefrompropertyrents–EnterpriseInnsiseffectivelyalandlordtoitspublicantenants–itcanbespunoffasaReit。

OthercandidatesincludePunchTaverns,which,likeEnterpriseInns,hasboughtpubsinbulkoverthelastdecade。

Infact,thetwopubgroupsarenowBritain’sbiggestlandlords。

Inrecentyears,however,they’vebeenlosingpotentialtenantsfast。

Britishpubsareclosingatarateoffouraday–14timesfasterthanin2005。

Therearejustover57,000pubsinBritaintoday,comparedwith69,000in1980。

ChrisUnwin,whoownsfourpubsinPlymouth,toldTheTimesthathehadbeenforcedtoinject£250,000inthebusinesstokeepitgoingafterlastsummer’sbadweatherandrisingcosts。

Ratesatoneofhisoutletshadshotupfrom£13,000to£21,000inayear。

TheGovernmenthasn’thelped,repeatedlyslappingdutiesonthepriceofapint,happyintheassumptionthatpunterswouldneverchangetheirdrinkinghabits。

Buttheyhave。

Thirtyyearsago,asmuchas95%ofbeerwasconsumedinthelocalpub。

Lastmonth,pubsaccountedforlessthanhalfthebeerconsumedinBritain。

Withthepriceofapintrising(UKbeeristhehighesttaxedinEurope)we’restayinginonFridaynights,pickingupcheapwineandbeeratthesupermarketandwatchingafilm。

Beersalesinpubshaven’tbeenthislowsincethedepressionofthe1930s。

Sowhilepubsarenowtradingathistoriclows,noteanalystsatJPMorgan,theyarebynomeanscheap。

Andagrimeconomicoutlookmeanstheycouldgolower。

Thisisthefirsttimethemajorpub-landlordgroupshavetradedthroughaheavyconsumerdownturn,notesMatthewGoodmaninTheTimes,andnoamountofgourmetburgersortaxbreakswillimprovebusinessthisyearornext。

Forpubownersinquieterbackwaters,thebestoptionopentothemmightbetoselltheirpropertyandgetout。

WhichotherfirmsmightgodowntheReitroute?

AfterEnterpriseInn’sannouncementlastweek,manyexpectedarashoffirmstostarttheirownapplicationforReitstatus。

ButwhilethemovemakessenseforEnterprise,saysKatePettemofLandsbanki,otherpubshavebeenreducingtheirtaxburdenbyre-investingprofitsbackintothebusiness。

TheirtaxsavingswouldnotbeasimpressiveasEnterprise’s,whichhasarelativelylargetaxburden。

Thebestcandidate,accordingtoanalystsatJPMorgan,isPunchTaverns(PUB),whichbyspinningoffitstenantedbusiness,couldsave200ppershare。

Onaforwardp/eof7。

5,JPMorganhasatargetpriceof900pforthestock。

TheonlyotherlikelycandidateforReitstatusisthehotelssector,saysBrewinDolphinanalystDavidPope。

Retailerssuchassupermarketssimplydon’thavethecorrectpropertyprofiletoqualify。

Butforconversionstobeviable,Reitsneedtobeindemand,saysPope。

That’sanythingbutthecasejustnow–UK-basedReitsmaywellbeanattractiveinvestmentatsomepointinthefuture,butwiththepropertymarketinthestateit’sin,investorsareshunningthesector。

Thatmeanshotelgroupsareunlikelytoembarkonaprocessthatcouldtakethemayeartocomplete,taxsavingsornot。

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