Key messages from Leisure Report 2021: responding to an experiential crisis

Written By:

Stephen Springham, Knight Frank

26 Oct 2021

6 minutes to read

Categories: Property Sector Leisure Retail

Read the full 2021 Leisure Report: responding to an experiential crisis

Leisure in its wonderful array of guises, is already a significant cog in the wheel of most successful towns and locations across the country. Expect this role to expand, multiply and diversify as we embark on a fresh wave of centre regeneration and asset repurposing in the wake of 18 months of COVID-induced soul-searching.

Leisure, spend decimated during pandemic

At the same time, few sectors within the wider economy have experienced the scale of devastation experienced by Leisure during the pandemic. Always first into lockdown(s), always last out. And with a more stringent straitjacket of restrictions than virtually any other sector. With false hopes and promises along the way, most notably the government’s ‘Eat Out to Help Out’ scheme. Tough does not even begin to describe the plight of the Leisure market since the onset of the pandemic.

Significant challenges lie ahead

Nor can we be blind to Leisure’s multitude of ongoing challenges. Some of these are self-inflicted, such as Food & Beverage over-expansion and a legacy of unaffordable rents in some locations – and the spectre of Private Equity ownership still weighs heavily on some segments of the market. Other challenges are more generic, chief amongst them staff issues (shortages and wage increases) and supply chain pressures. These are major challenges that the Leisure industry must not merely react to, but rather must address head-on.

Fresh wave of innovation the by-product of lockdown

Paradoxically, the pandemic has also proved a catalyst to exciting and positive change within the Leisure market. As much by default as design, Leisure operators were forced to reengineer their business models during the pandemic, leading to diversification, wider embrace of technology, adoption of a more proactive digital stance and maiden ventures into the multi-channel arena. Now the dust is slowly starting to settle, these are all initiatives that can be nurtured and developed going forward. All potentially exciting growth avenues, albeit ones that also bring fresh challenges, added complexity and incremental cost.

Leisure's lack of transparency requires a brave investor

Judge Leisure on what it can bring, rather than its performance in 2020. Leisure spend was understandably decimated last year, but is already rebounding far more quickly than the doom mongers predicted. It was a growth market before COVID-19 struck and it will remain so when the pandemic fully subsides. The notion of Leisure spend being highly discretionary and therefore volatile in times of crises was questionable before, now it seems highly anachronistic.

Only a brave real estate investor would consider an asset class that has effectively had its cashflow cut off for the best part of a year. As an investment, Leisure has sometimes suffered from being perceived as something of a “poor relation to Retail”, or sitting in the “too hard to understand” specialist sector camp. Like it or not, investment decisions are going to be infinitely more complex in a post-COVID world. Large amounts of capital will inevitably flow towards predictability of income, but the rest will have to be very discerning and much more forensic than it has maybe been in the past. Leisure is very much part of this wider mix and fortune may well favour the brave.

Final Thoughts

The consumer is king in all of this. There is an old adage in Retail that the key to succeeding is simply giving customers what they want. Fun has been in desperately short supply during much of the pandemic. Fun is what battle-weary consumers crave as we emerge and move on from lockdown. Fun is what the Leisure market excels at.

Key messages:

• Leisure has risen up the agenda across the board. Both for consumers, desperate for post-lockdown fun and entertainment. And for landlords, developers, planners and local authorities looking to inject life and vitality into their assets and town centres.
• Leisure spend was decimated during the pandemic (2020: -53.6%), but is rebounding very quickly now that restrictions have eased (2021f: +40.6%, 2022f: +36.0%). Spending propensities / priorities have been redefined and Leisure spend is far less discretionary than it is perceived to be.
• COVID-19 may actually have thrown up considerable expansion opportunities for Leisure operators. Town centre vacancy rates have hit a new high (15.8%) and include high proportions of ex-department store and MSU space. Landlords are increasingly receptive to Leisure tenants and are taking a more progressive view on covenants.
• Significant other opportunities have also arisen: the pandemic has prompted greater embrace of technology and many Leisure operators have made their maiden voyage into the multi-channel arena. Many are now also in a position to leverage “big data” for the first time and deploy it to strategic means across marketing, range and location planning.
• The tap will not be turned off on these initiatives as markets settle. On the contrary, they offer scope for significant development and incremental growth going forward. However, harnessing this potential is rife with complexity and carries both risk and cost.
• Food & Beverage remains the standard-bearer for the whole Leisure market, accounting for ca. 65% of Leisure spend. There are still residual structural issues in the Food & Beverage market, not least ongoing Private Equity ownership and a legacy of over-expansion / over-supply in some markets, coupled with unaffordable rents.
• For all the opportunities, the Leisure sector still faces huge generic challenges. One of the largest and most immediate is labour, in terms of both availability and cost. Hospitality staff shortages are estimated to be in the order of 200,000, while progressive increases (+44% since 2012) in the national minimum wage continue to weigh heavily on industry profitability.
• Expect a fresh wave of innovation in the Leisure sector as an unlikely by-product of the pandemic. In the case of the more traditional Leisure ‘big box’ sectors, this is likely to take the form of evolution, value-added services and diversification, rather than revolutionary change. Amongst the ‘newer breed’, we are likely to see a whole host of new brands, formats and concepts.
• As an investment, Leisure may lack the transparency of other use classes and its ongoing affiliation with Retail is questionable. But since 1981, Leisure Parks have considerably out-performed virtually every other mainstream property asset class, delivering an annual average total return of +11.2% (All Property +8.6%, All Retail +8.0%).
• Yields for Prime Leisure Parks are currently around 7.00% (with Good Secondary Leisure Parks at 8.00%+ and Secondary / Tertiary Leisure Parks at 10.00%+). Prime yields have moved out by +175bps since March 2020 and by +225bps since their 4.75% peak in early 2018. This easing of price has inevitably opened up potential counter-cyclical buying opportunities, for the right stock.