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Pubs have always been regarded as recession-proof assets, providing solid income during the toughest of economic times but the current state of the pub market is worse than many people realise, characterised by receiverships and consolidation.

A large number of smaller operators have been squeezed out of the sector by higher operating costs, compliance difficulties and a hard-line approach from lenders.

It has meant large hoteliers, including Bruce Mathieson and his Woolworths backed-Australian Leisure and Hospitality Group, have dominated pub transactions in recent times but agents say there is still a niche for wealthy individuals with deep pockets and previous operating knowledge to buy into the sector.

Jones Lang LaSalle agent John Musca says individuals looking to enter the pub market can expect to borrow only up to 65 per cent of a property’s value.

Musca just recently sold the Cooper’s Hotel in Newtown, Sydney, for $13.5 million to a private, first-time pub owner.

He is now marketing the Belgian Beer Café at The Rocks and its sister pub at Cammeray, both also in the Sydney market, after they were placed in receivership this month.

Musca says he expects most of the distressed assets to be “cleaned up” by the second quarter of next year and he is already “seeing the early signs of competitive tension” among buyers.

Mathieson hopes Musca is right.

Perhaps counter-intuitively, Mathieson prefers a strong market, because it boosts the value of his portfolio.

“It’s bad because you’re buying pubs at a distressed price but don’t forget all of my assets get hurt, too, [in valuation terms] so it doesn’t do anyone any good,” he says.

“The better the competition we have, the better we go because it keeps everyone on their toes.”

Mathieson recently retired as the head of ALH Group, passing the reigns over to his son.

ALH snapped up the Compass Hotel Group’s $86 million portfolio in Western Australia in September.

The Perth-suburbs pubs were sold after Compass was placed in receivership earlier this year.

Western Australia is considered one of the most highly regulated pub markets in the country, imposing a significant barrier to new entrants. This makes the existing properties particularly sought-after.

CB Richard Ellis agent Joel Fisher says Queensland’s pub market is still lumbered with a high number of receivership sales, while NSW’s is starting to improve.

He says Victoria’s gaming pub market is going through a period of stasis as buyers and vendors assess the impact on earnings of the government’s new poker machine licensing system, which will take effect next year.

However, he added that the turnover of food and beverage pubs in Victoria – which are unaffected by the legislation – is higher.

For prospective buyers, Fisher cautions that credit is incredibly tight and that making a purchase now requires more equity than ever.

“Look for assets with high underlying property values, good, high-traffic locations near shopping centres, train stations or large car parks – defensive-style assets,” he advises. “People should try to limit their downside.”

Deals certainly are still being made. Computershare founder Chris Morris surprised many in the pub industry when he snapped up nine establishments from the failed Cornerstone Group with his Colonial Leisure Group.

Morris tells BRW it has required constant hard work to ensure that each of his food and beverage-based hotels, including the Botanical in South Yarra, remains relevant in its particular market.

“To be successful in F&B hotels, you need to have a point of difference,” he says. “Colonial Leisure Group is unique in that it owns it own a beer brand and brewery in Margaret River, which produces some of the best craft beers in Australia.

“This craft and premium beer segment is an aspect of the Colonial Leisure business which is showing good growth. It is good for the patrons, as they get great-tasting craft beer and good for us as we have limited sales and marketing costs to sell our beer.”

Still, Morris says the market is just as tough as when he bought back in 2009.

Hotel broker Terry Board says many publicans are struggling to secure credit to fund acquisitions.

He says regional pub markets without gaming have been decimated in recent years, although South Australia remains stronger than elsewhere.

“I think it’s a bloody good industry to get into, but like any, it has its problems,” he says.

BRW

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