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2018 Legal & General Investment Management, Real Assets – The Future of Leisure
The future
of leisure
For professional investors and their advisers only
Legal & General Investment Management, Real Assets
By definition, leisure means free
time, but is evolving to include
socialising, networking, experience
and entertainment – are you ready
for the future of leisure?
2018 The Future of Leisure
Contents
The future of leisure
2
The future of leisure: key messages
5
Setting the scene: the UK leisure property market
9
Who will be the leisure occupier of the future?
15
What will leisure property look like in the future?
39
What will be the implication for leisure owners?
43
Our conviction themes
47
The long-term future of leisure
50
1
Legal & General Investment Management, Real Assets
The future of leisure
What does “leisure” mean now and how might that change in the future? By definition,
leisure is time when one is not working; free time. Statistics tell us we are spending more
than ever filling this time with recreational activities as technological advances mean many
mundane tasks can be automated away and any lifestyle blog will tell you that it’s no
longer spare time but “me time”.
But what actually do we do in our free time, and where or the latest technology to heighten our cinema
and when? Glance down a high street or around a experience.
leisure park and you will see a line-up of familiar
fascias, which suggests our recreational time is still Yet leisure operators are rising to meet this challenge.
underpinned by “traditional” activities: bowling, the Never before has the leisure occupier base been as
cinema or a meal in a restaurant. Look harder and you diversified and dynamic as it is today. Business plans
will see evidence of the significant evolution within the are orientated towards the future, with an eye on
sector, where watching a film is now a multi-sensory what’s next and what’s after that. The evolution is being
experience, foods from around the world are available played out across all types of leisure property, whether
at our fingertips and “contactless” has replaced that be an out-of-town park, a scheme in a city centre
“please sign here”. or a standalone unit. Importantly and refreshingly, it
is not just a London story: regional markets are just as
There is a big macro-trend driving this market vibrant.
movement: experience. The leisure sector is attracting
one and a half times more discretionary spend than This means that the owners of leisure property need
retail and is growing twice as fast1. As sales fall away to be as responsive and forward-thinking as their
on the high street, we appear to be investing more in occupiers. What space will be required to realise the
experience and less in possessions. Participation has ambitions of their occupiers? How can the wider
become the most modern of talking points and an physical environment help create a future-proofed
important building block of social capital. And we’re not location? Where will leisure interact best with other
afraid to pay for it; Generation Ys spend £419.5 million areas of the commercial property market to build the
a month on live experiences and events2. best destination?
Alongside this our leisure time has evolved from a Our “Future of Leisure” report aspires to address
static, one-stop event to a journey involving multiple these issues with a varied toolkit including interviews
touch points; a meal and a visit to the cinema, or a with some of our core leisure occupiers, insight from
trip to the gym followed by a coffee with friends. This leading market agent Savills and a glimpse into the
reflects the widening of our social Venn diagram as future from consumer visionary The Future Laboratory.
the groups of people we spend our free time with The report aspires to answer four key questions:
expands to include not only family and friends, but
also colleagues and casual acquaintances. This means •• How will consumer demand for leisure services
our motivation has also changed: leisure time now evolve?
means to socialise, to network, to experience, to be
entertained – to have “me time”. •• Who will be the leisure occupier of the future?
This expanding definition of leisure is placing greater •• What will be their physical space requirements?
demands on operators and owners of leisure property,
whether that be a refreshed restaurant menu, more •• What are the implications for owners of leisure
adrenaline-filled and competitive gaming environments property?
1 Source: Deloitte
2 Source: Wagamama & Canvas 8
2
2018 The Future of Leisure So, are you ready for the future of leisure? Let’s go!
Legal & General Investment Management, Real Assets
2018 The Future of Leisure The future of leisure: key messages
Legal & General Investment Management, Real Assets
The future of leisure:
key messages
The leisure occupier The leisure property
The best operators optimise location, occasion and Destination is everything! But it needs to be managed
channel to connect with their customers
Stock selection criteria should emphasise flexible
Brands look for locations where their vision will work and space, visibility and accessibility – this is what fit-for-
they can embed their backstory purpose means
Concepts will thrive in the right location, but beware of Reformat spaces for flexibility and make connections
unmarketable ideas or those that don’t translate through technology
The skill of the owner will be in selecting brands that The importance of (re)investing into schemes cannot
are truly democratic and which are location-specific be understated; short-term pain for long-term gain
There needs to be a reimaging of the owner/occupier Units will have to work harder and become more
relationship, particularly around covenants efficient to remain profitable and sustainable
Rents must be affordable for all; understanding Don’t overlook infrastructure; use physical architecture
what is viable now and in the future is a key asset to create a sense of place
management skill
Consider off-pitch locations or repurpose space to
Efficient occupiers (rent to floorspace) will be a key maintain interest
metric for sustainable income
The biggest risk to future growth will be occupiers
unable to find the right location and the right property
The leisure owner
Occupational knowledge should be the key to
investment decisions
Dare to be different! The mid-market is being squeezed
across the sector because people are craving the new
Owners should consider dialling down the importance
of covenant, instead focusing on concept vs. catchment
Owners will place greater emphasis on curating space
AND occupiers; taking best in practice from the retail
sector
Leverage off localism and talent spot great local
traders; these can be successful anchors alongside
big brands
There must always be time for a conversation
6
2018 The Future of Leisure
The leisure consumer
Leisure activities are no longer the preserve of special
occasions
But the model has changed: consumers of leisure want
to be in control – but also entertained
Leisure time is now segmented into a “journey” – of
which retail is often a key feature
The best operators are adapting to this, with initiatives
such as “pay on entry” or cashless payment systems
This aligns operational models with the big macro
trends of experience and personalisation
Owners of leisure property should track both
international markets and the changing regional
consumer
They must also engage and enthuse local communities
to foster civic pride, and repeat visits
Click here for The Future Laboratory Report on page 50
Leisure activities are no
longer the preserve of special
occasions. The best operators
optimise location, occasion
and channel to connect with
their customers. This means
space should be reformatted
to be flexible and make
connections through
technology.
7
Legal & General Investment Management, Real Assets
2018 The Future of Leisure Setting the scene: the UK leisure property market
Legal & General Investment Management, Real Assets
The UK leisure property market
Leisure property in the UK can be found across a This report focuses on what we consider the “leisure
wide spectrum of formats and locations and is often investable universe”; good quality leisure-dominated
included within retail-dominated schemes. The total assets, including in-/out-of-town schemes and
universe of all assets that included a leisure element standalone leisure units. The defining characteristics of
was around 6,150 schemes in 2017, amounting to each type of leisure property are detailed in Table 1.
530 million square foot of gross lettable area. This
represents a 21% increase in the number of properties
since 20093.
There are four main types of leisure property
Table 1
Average gross Average number
Type of property Characteristics
lettable area (sq ft) of units
Out-of-town leisure Cinema-anchored scheme with 2 to 4 115,422 9
park restaurant units, a large car park and often
some “D2” units eg. a gym, bowling or bingo
In-town leisure Located within town/city centre. Strip of 114,663 10
scheme leisure units or specific scheme. Often cinema
anchored
Standalone leisure “Big box” leisure eg casino, standalone 21,486 2
units cinema or bingo hall, perhaps with
accompanying restaurant/bar
Leisure scheme with Hybrid scheme of leisure and retail units 257,738 37
some retail dominated by leisure. Can be located in or
out-of-town
Source: Savills. Note that hotels, or small schemes where the majority of floorspace is attributed to a hotel, have been excluded in this report
What is the structure of the leisure property market?
The leisure property market is weighted towards number of units and average floorspace is illustrated
smaller schemes, often standalone units (Chart 1). This in Chart 2. There is a clear inverse correlation between
will typically be a casino or other “big box” leisure number of units and the number of schemes; 88% of
operators such as bingo halls or a cinema. The average the leisure universe is composed of schemes with ten
size of these developments is small; around 20,000 units or fewer.
square foot. The distribution of leisure schemes by
3 Source: Savills. Excludes high street blocks, fragmented town centre ownership and supermarkets
102018 The Future of Leisure
The majority of leisure schemes are small, with just one or two occupiers
Chart 1 Chart 2
% of units 600 Average area 500,000
Schemes (#)
3% (sq ft)
450,000
11%
500
400,000
350,000
400
300,000
13%
300 250,000
200,000
200
150,000
100,000
73% 100
50,000
0 0
1-2 3-5 6-10 11-15 16-20 21-30 31-50 51-100 100+
Out-of-town leisure park In-town leisure scheme
Standalone leisure units Leisure/retail scheme Number of schemes (LHS) Average floorspace (RHS)
Source: Savills Source: Savills
Over two thirds of the leisure investable universe The large majority of the leisure universe is
is located out-of-town, whether that is on a leisure located out-of-town
park, standalone scheme or in a hybrid leisure/retail
development (Chart 3). Standalone leisure units Chart 3
are weighted towards out-of-town locations whilst 100
leisure and retail schemes are more likely to be found 28
80
in urban, town centre locations. 11% of the leisure
universe is located in Greater London4. Development 77 81
60
of new leisure property has been limited, despite the
%
increase in consumer spending and widening diversity 40 72
of the occupier base. Much of the growth in leisure
units has been outside of the defined investable 20
23 19
universe; in shopping centres, on industrial estates or
0
in mixed-use locations such as office schemes. Leisure Standalone Leisure/
universe leisure units retail scheme
In-town Out-of-town
Source: Savills
4 Source: Savills
11Legal & General Investment Management, Real Assets
Who occupies property within the leisure universe?
The occupier base of leisure property can be grouped into the following:
Occupier base of leisure property
Table 2
Characteristics Example fascias
Cinemas Multiplex or boutique, ancillary retail Odeon, Vue, Cineworld
Food & beverage Restaurants, cafes, pubs Nando’s, Pizza Hut, TGI Fridays
Big box/“D2 traditional” Bingo, bowling, casinos, gyms Hollywood Bowl Group, PureGym
Big box/“D2 emerging” Urban golf, trampolining, escape rooms Junkyard Golf, Vertical Rush, Oxygen
Other Ice rinks, arcades Local operators
Source: LGIM Real Assets
The leisure investable universe is dominated by “big “Retailers are very supportive of having leisure
box” operators such as cinemas, casinos, bowling operators included within a scheme; they can increase
alleys and fitness centres on a square footage basis, dwell time, footfall and add a sense of vibrancy. Food is
which can be located comfortably within larger out-of- particularly important for “selling the dream”.”
town schemes (Table 2). But as can be seen in Chart 4, SIMON RUSSIAN, HEAD OF RETAIL, LGIM REAL
typical “leisure” occupiers can be found across the ASSETS
wider property market. Around 60% of cinemas are
located within the leisure investable universe, which “There has been a dramatic shift in owners” attitudes
means the remaining 40% must be located within towards leisure operators within retail schemes; they
“non-leisure” assets – perhaps anchoring a shopping are far more open minded and willing to consider
centre5. new concepts across a variety of different locations.”
KIDZANIA
Similarly, the majority of restaurants and gyms are
located outside specific leisure-type properties,
which demonstrates how the sector has become
an increasingly integral park of the consumer offer
in more retail-centric locations. “Quick food and
beverage” such as fast food units and coffee shops are
heavily weighted away from typical leisure locations.
5 Note this analysis does not cover high street locations, which would also be a significant part of the provision of some leisure-style occupiers, such as cafés
and restaurants.
122018 The Future of Leisure
Leisure operators can also be found outside of typical leisure schemes
Chart 4
100
15
40 41 41 41
80 45 50 53
57
62
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85 60 59
40 59 59
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% in leisure investable universe % in wider property universe
Source: Savills
13Legal & General Investment Management, Real Assets
2018 The Future of Leisure Who will be the leisure occupier of the future?
Legal & General Investment Management, Real Assets
Cinemas
The “here and now” income from advertising revenue, booking fees, sales
of 3D glasses and auditoria rent increased by 36% to
Leisure schemes are often anchored by a cinema, which £173 million in 2015, illustrating the number of ways
usually contributes the largest proportion of contracted operators are diversifying their income streams.
rent. The on going success and longevity of cinemas
is one of the great successes of the UK leisure sector.
Despite the emergence of structural treats such as
Life on the ground
cable television, Netflix and other digital-screening In 2016 there were 766 cinemas in the UK, with a total
platforms, box office revenues have continued to of 4,046 screens. Around 60% of these cinemas are
rise year after year. This is due to a relentless focus located within the leisure investable universe, with
from operators on improving the viewing experience, the remainder being in retail schemes, independent
introducing innovations such as 3D/4D screens, operations or situated in owner-occupied units.
moveable seats and IMAX technology.
Within the leisure investable universe, the majority
In 2017 UK box office revenue reached over £1.3 billion, of cinemas are located within larger leisure schemes,
a 60% increase over ten years6 (Chart 5). This either in or out-of-town (Chart 6), with only a small
demonstrates the on going demand for film screenings minority in standalone sites. Notably, the majority of
within a “traditional” cinema environment, despite the multiplex cinemas are in leisure-specific assets. This
apparent rising popularity of digital content. Average underlines the importance of a leisure-dominated
annual expenditure on trips to the cinema reached scheme for cinema operators, but also suggests
£19.18 per person in 2016, a 52% increase in a decade7. there is potential for others to challenge for market
share. This is now being borne out in reality by the
boutique cinema market following strong expansion by
Flat cinema admissions have been operators such as Everyman, Curzon and Picturehouse.
compensated by rising non-ticket By 2017 there were 58 boutique schemes in the UK, but
expenditure only four reside within leisure-specific assets – a sharp
contrast to the multiplex market.
Chart 5
1,400 200
1,200
180 Location of cinemas within the leisure
160
universe
Box office revenue (£m)
Admissions (million)
1,000 140
800
120 Chart 6
100
600 80
400 60 69
40
200
20 87
0 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Gross box office (LHS) Admissions (RHS)
Source: Dodona
11
Cinema visits per person have fallen very slightly
from 2.7 per year in 2011 to 2.6 in 2016, but this has 56
been compensated by higher concessional spend as
Out-of-town leisure park In-town leisure scheme
operators better align their retail offer with customer Standalone leisure units Leisure scheme with some retail
demand. Non-ticket expenditure rose from £350 million
Source: Savills, Dodonoa
to £452 million over the five years to 20168. Other
6 Source: Dodonoa
7 Source: Dodonoa
8 Source: Dodonoa
162018 The Future of Leisure
New multiplex openings Development on new multiplexes is cyclical and
mirrors wider property market trends, particularly
Table 3 shopping centre construction. New openings have
Sites Screens recovered since the Global Financial Crisis (Table 3),
but remain below the peak of 284 screens opened in
2010 5 46
2001.
2011 7 58
The occupier base is highly concentrated: the top-
2012 4 27
five exhibitors shared a 79% share of gross box office
2013 8 64 revenues in the UK in 2015, with 69% attributed to the
top-three exhibitors. Recent consolidation of multiplex
2014 5 38
brands and an increase in the boutique offer has
2015 16 132 resulted in the top three multiplex operators (Odeon/
2016 14 96 Cineworld/Vue) now operating around 65% of schemes
in the UK (Table 4).
Source: Savills, Dodonoa
The cinema operator base is highly concentrated
Table 4
Sites 2009 Sites 2017 % of screens
Odeon 116 110 26
Cineworld 76 97 28
Vue 68 85 24
Picturehouse 19 24 2
National Amusements 21 21 8
Everyman Media Group 9 20 1
Reel Cinemas 17 15 2
Merlin Cinemas n/a 14 1
Curzon 5 14 1
Empire Cinemas 17 13 4
Omniplex n/a 13 3
Source: Savills, Dodonoa
17Legal & General Investment Management, Real Assets
Implications for owners Cinema rents have risen to over £14 per
square foot
Vital statistics
Chart 7
•• Average cinema floorplates are around 40,000 –
45,000 square foot 15
•• Floorplates are slightly smaller in shopping centres
at around 38,000 square foot
•• Schemes can range in size from as small as 7,700 14
£ per sq ft
square foot up to 120,000 square foot
•• The largest schemes are located out-of-town due to
cheaper rents 13
Rents
The importance of cinema rental income to leisure
property owners cannot be understated; a cinema can 12
account for over 80% of contracted cashflow on some 2010 2011 2012 2013 2014 2015 2016 2017
schemes!9 Source: Savills
•• Average rents paid by cinema operators on leisure
schemes increased from £13 per square foot to over There is significant regional variation
£14.30 in eight years, an annual increase of 1.3% per in rents
annum10 (Chart 7). This just outpaces the increase in
Chart 8
revenues over the same period
40
•• The cinema rental tone varies by region, and if 35
the cinema is located in- or out-of-town (Chart 8). 30
In 2017, there was a difference of around £3.50 in
25
average rents between in-town (£16.83) vs. out-of-
£ per sq ft
town locations (£13.27) 20
15
•• There is also significant regional variation: over £13
10
per square foot between in-/out-of-town schemes
5
in the East Midlands whilst in Wales and the West
Midlands cinema rents on leisure parks were higher 0
than their in-town comparables. This dynamic
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at
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In-town rent Out-of-town rent Max 2017 rent
•• The rental range is wider for in-town locations; from Source: Savills
£12.76 up to £24.17 in 2017, compared to £10.63 and
£15.50 on out-of-town schemes, due to polarisation
in performance of town centres across the UK
9 Source: LGIM Real Assets
10 Source: Savills
182018 The Future of Leisure
Near-term trends
Property “We aspire to create both a destination
and experience, with the installation of
Development hierarchy
market-leading reclining seating a key
Focused on three types of cinema: feature. Retail is also being used as part
•• Large-screen, technologically advanced formats of a wider strategy to both enhance
•• Family-orientated cinemas in smaller catchment areas experience and explicitly generate
revenue.” ODEON
•• Luxury boutique cinemas aimed at adult consumers
“Cinema operators are improving their retail offer,
speeding up service, targeted offers, refining the
product mix. This helps create segments within the
consumer journey: coffee/film/food.” ODEON
Smaller auditoria
Clear trend towards progressively smaller auditoria.
Between 2010 and 2015 the number of cinema screens
in the UK rose by 10%, but the increase in seat
numbers was less than 1%. Most capital expenditure
continues to be focused upon building new multiplexes
or modernising existing ones.11
Source: Odeon
Premium – but no budget
The premium cinema offer continues to mature, driven
by boutique operators such as Everyman. Multiplex
operators are also broadening their proposition to
encompass the burgeoning premium sector: Odeon
has launched the “Lounge” brand, whilst Cineworld
has introduced “Screening Rooms” to some schemes.
However, there is very little evidence of an emerging
budget cinema offer.
Source: Odeon
Multiplex evolution
IMAX technology already seems mainstream!
Operators are now focusing on installing moveable
seats and superior audio systems to maximise the
viewing experience, with greater investment in seats as
it is this that creates the biggest impact for viewers.
11 Source: LGIM Real Assets
19Legal & General Investment Management, Real Assets
Restaurants
The “here and now”
The restaurant sector represents one of the most
dynamic areas of the leisure market today. As mirrored
in other areas of the consumer services market, the
occupier base has segmented into a hierarchy of
budget, midmarket and premium offers, alongside a
burgeoning “fast casual” or grab-and-go market.
Source: Five Guys
Household spend on eating out is •• A polarisation between health-conscious offers vs.
relatively stable “dude/dirty food’
Chart 9 •• Expansion of coffee shops against the decline of
3,100 traditional wet-led pubs as lifestyles change
2,900
2,700 •• The rise of third-party delivery services such as
Deliveroo.
£ per household
2,500
2,300
Deliveroo has added
2,100
1,900
1,700
1,500
11% to takings.
FIVE GUYS
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Restaurant spend per household
Source: Oxford Economics, Pitney Bowes
Life on the ground
The number of restaurants has grown by only 0.4%
The amount spent on eating out by households has
between 2014 and 2016, but this does not reflect
been relatively consistent at around £2,900 per year,
the change happening on the ground; notably the
which is expected to continue at this level over the
demise of many owner-occupied operations against
near term (Chart 9). However, these headline numbers
the rise of corporately-owned brands. The increased
are not representative of the on going change in
corporatisation and dominance of the “casual dining”
spending patterns. Whilst the absolute amount spent in
market is reflected in Table 5, which illustrates how
restaurants and cafes has held fairly static, the number
some of major restaurant brands in the UK have
of transactions has risen by around 3% per annum over
achieved huge increases in the number of units within
the past three years as prices fall and visits increase to
the leisure universe since 2009.
lower price-point outlets12. Other recent trends include:
Restaurants are an integral part of the leisure universe;
•• The growth in “casual dining’, which has as much an anchor on schemes as a cinema and an
democratised dining – eating out is no longer a treat
important reason for why people will visit a leisure
destination. In 2017 there were 71 different brands
•• The globalisation of food offers, with cuisines from across 945 locations within the leisure universe14.
around the world
As can be seen in Table 6, the large majority of out-of-
town parks and leisure/retail schemes contain at least
•• Brand agnostic customers: one in two restaurant one restaurant.
visits made by London consumers are to a new
restaurant13
12 Source: Global Data
13 Source: CGA
14 Source: Savills
202018 The Future of Leisure
Restaurants are an integral component in Recent issues
leisure schemes
Expansion
Table 5
Table 5 highlights the large increase in the number
of units from some of the main restaurant operators
2009 2017 % change
in the UK. Since 2016 the restaurant sector has come
Pizza Express 346 450 30.1 under increased scrutiny for the scaling-up of mid-
Nando’s 222 378 70.3 market and fast casual brands across the UK. This
created a number of issues:
Frankie &
172 262 52.3
Benny’s •• Motivation for expansion activity varies. If it
Prezzo* 125 258 106.4 is driven by number of units, rather than just
profitability, this can lead to a take-up at all odds and
Pizza Hut 391 242 -38.1 “pay whatever it takes” mentality
Zizzi 107 144 34.6
Wagamama 64 124 93.8
•• This has driven up rents in some high-demand
locations to the point that total occupancy costs
Bella Italia 83 112 34.9 become unaffordable
Carluccio’s* 39 94 141.0
•• Some businesses becoming loaded with debt to
Cote underpin expansion plans
10 87 770.0
Restaurants
Café Rouge 113 85 -24.8 •• Cannibalisation of sales as markets become
saturated, particularly within the mid-market
Table 6
•• High rents and a lack of tested covenants mean
% with restaurants many restaurateurs were unwilling to sub-let
Out-of-town leisure park 85%
•• Ultimately: weaker businesses going into a CVA or
In-town leisure scheme 67% administration, or unsupportable “tail end” units
closed
Standalone leisure units 12%
Leisure scheme with
91% •• Long leases and City/Town focus movement
some retail
In some instances the core business was successful, but
Source: Savills
brands scaled up too quickly and into the wrong locations
and often into the wrong properties. Is it very hard to
*Both Prezzo and Carluccio’s have recently entered Company determine which sites are going to cannibalise others;
Voluntary Agreements whereby they have closed a number of their it is an art not a science. Some catchments can tolerate
loss making stores.
another fascia, some can’t. The average person on the
street doesn’t think about this; they just go out to eat.
PIZZA HUT
Restaurant concepts that move out of London need to
allow themselves time to mature in regional markets,
where there is not necessarily the critical mass of local
and transient consumers to visit week after week.
21Legal & General Investment Management, Real Assets
THE RESTAURANT GROUP
Customer numbers haven’t necessarily dropped
but due to competition across the country
profits have fallen. Our main aim is to increase
profits again as turnover remains stable.
Cost headwinds These can be split into fixed and variable costs
(Table 7), which has resulted in specific issues for
The restaurant sector has not been immune to the
restaurants:
problems in the wider retail market of the many cost
headwinds placing downward pressure on operating
margins. •• Units must make a profit on a standalone basis to be
sustainable; even if revenues are rising this may not
be enough to offset the increased cost base
Restaurateurs are grappling with a range of
cost headwinds •• 69% of businesses increased their prices during
201715. When costs rise, the natural instinct is to cut
Table 7 prices, cut portion sizes and cut the hours of staff.
Fixed costs Variable costs This makes the unit even less attractive speeding up
the downward spiral
Rents: rising around 3% Food prices: rising, as
p.a. but higher in high- seen in supermarket •• Third party delivery companies, such as Deliveroo,
demand locations sector are viewed as both a help and a hindrance. They can
Business rates: have account for 50% of sales in some sites, but at a huge
Currency: fall in sterling cost to operators
increased significantly
pushed up input prices
in some locations
Fit-out costs: brand
•• The greatest immediate concerns for restaurant
Staff shortages: vacancy operators are staff shortages, the increased cost of
standards and desire imports and rising rents16
rates are highest in the
for experience hiking
hospitality sectors
up costs
•• There is some variance by size. Operators with
Payroll costs: increasing smaller portfolios are more concerned with rising
due to statutory rises, material costs and food prices, presumably because
pensions, Apprenticeship they cannot buy at scale. Operators with larger
levy portfolios are concerned with the rise in business
rates and the possible impact of terrorism activities
Source: LGIM Real Assets
15 Source: Savills
16 Source: CGA
222018 The Future of Leisure
“At the root of the problem is the fundamental Rents
juxtaposition of the commitment required by A3
Restaurant rents in the UK have risen by around 3%
occupiers vs. the nature of the casual dining market.
per annum since 2009 (Chart 10)17. For prime pitches,
High fit-out costs and overheads, long paybacks
the rental tone has been pushed up by new entrants
and the low liquidity of assets (in poorer markets)
fighting for space; one of the reasons cited for the
inherently jars with the ever changing demands of
current distress in the market. Table 8 illustrates the
consumers.” PIZZA HUT
rental differential by type of scheme, whilst Chart 11
depicts the range of rents by location and region.
“Since the Referendum vote around £30 million has
been wiped off the bottom line due to exchange
rate movements, business rate increases and wage
Restaurant rents have risen strongly
inflation.” CASUAL DINING GROUP Chart 10
40
Implications for owners
35
Vital statistics
•• The expense of fitting out a restaurant is enormous: 30
up to a million pounds for some of the higher-end 25
London restaurants, but even a mid-market casual
£ per sq ft
dining unit can cost over £500,000 to fit out to brand 20
standards. This puts significant pressure on revenues
15
to justify costs
10
•• Lease lengths have traditionally been long to allow
for these costs to be amortised. However, lease 5
lengths are now coming down as owners include
longer rent-free periods as market dynamics change 0
2009 2010 2011 2012 2013 2014 2015 2016 2017
•• As consumers and restaurateurs become more Source: Savills
social media aware, there is greater awareness of
what fixtures and fittings look good in photographs In-town rents usually higher than out-of-town
and on websites: better lighting, distinctive features
Chart 11
and attractive crockery
40
“We are looking at the opportunities that exist for 35
Pizza Hut… a smaller, more convenience-driven 30
offering is where we see an opportunity for our
25
brand… it’s also more about “assisted service’, with
£ per sq ft
20
the focus skewed to speed and price.” PIZZA HUT
15
10
We have trialled one 5
0
smaller format store of
n
st
nd
So rsi nd
or est
t
s
s
ds
st
d
es
nd
le
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an
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Ea
n
ut de
la
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W
W
a
la
la
gl
n
W
ot
h
th
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h
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id
id
r
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um hi
or
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tM
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er
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of
N
N
st
at
es
Yo
st
Ea
re
W
Ea
G
In-town rent Out-of-town rent
NANDO’S
Source: Savills
17 Source: Savills
23Legal & General Investment Management, Real Assets
•• The average restaurant rent in 2017 was £35 per Restaurant rents are higher in-town
square foot. Rental growth on leisure schemes and in retail-dominated locations
has been more modest than in some city centre
locations, where there are now regular examples of Table 8
headlines rents reaching over £50 per square foot 2017 2017
average max
•• Those schemes that are more orientated towards rent rent
retail command higher rents, particularly
Shopping centre 38 344
high-footfall in-town locations where max rents in
Leisure scheme with some retail 29 50
2017 easily exceed three figures
Retail park 26 61
•• The majority of average rents are higher in-town In-town leisure scheme 26 147
compared to out-of-town locations. However, there Out-of-town leisure park 23 43
are some notable exceptions in the East of England Standalone leisure units 23 37
and the North East restaurant rents are higher out-
of-town Source: Savills
•• The range of average restaurant rents is highest in-
town at £26 per square foot, led by Greater London.
The Capital also commands the highest out-of-town
restaurant rents, although the range is smaller
across parks at just £7 between the most and least
expensive regions
Source: Nando’s
242018 The Future of Leisure
Source: Pizza Hut
Near-term trends
Property Eating experience
Creating a convivial dining experience is incredibly
Dynamic dining
important for restaurateurs, particularly to ensure
Consumer appetite for experience has translated repeat business. This encompasses a number of
over into the food market. This has driven the strong factors: the quality of the food, the fit-out and the
growth in food markets (also leveraging off demand quality of the service.
for “localism”), dining concepts such as supper clubs
and pop up restaurants, and restaurants with a strong Experience can also go beyond service to using food
“omni-channel” offer i.e., are active on social media as an educational tool or medium for demonstrations
platforms. and workshops. This expands your market, changes
demand patterns around time of day and diversifies
British Street Food, run by Richard Johnson ex- your offer. It also helps foster repeat visits if managed
journalist for the Independent was inspired by the food correctly and embeds the restaurant backstory with
markets of New York where you can “eat the world”. consumers.
The company liaises with small-scale, but successful
restaurants in London to take temporary sites in “A new Pay on Entry concept is being trailed across a
regional markets. Strategic use of social media, apps number of units. Customers want to be in control of
and a website promotes the backstory of each vendor, their time and experience is increasingly where this
with particularly successful ventures taking leases in market is going – I can’t see any change in this course.
local units. The long-term view is that more brands will This is an important change in the service model,
transfer between temporary food venues and bricks which appeals to customers because they are in charge
and mortar units as operational strategies evolve and of the pace of their meal… It works for us because it is
new markets open up. more efficient and reduces costs.” PIZZA HUT
“There is no going back for the street food trend. It “I see a fine balance between “customer control” and
is part of the British disinvestment from formality to “offering an experience” – getting this right is key to
acceptance that we no longer need a knife and fork to the future of casual dining.” PIZZA HUT
eat food.” BRITISH STREET FOOD
25Legal & General Investment Management, Real Assets
The future is efficient “Delivery is only a small part of our business, but we
ensure new units are future-proofed by embedding
Consumers are demanding a change in the model
separate entrances and bike parks for delivery drivers
towards self-service, but it has important implications
so the dining out experience isn’t eroded for other
for operators too. It can save on labour, service times
diners.” NANDO’S
and make a huge difference in underperforming
stores (because you are making the customer do the
“We sometimes take out tables to maximise the
work!). This can help combat cost and payroll inflation.
customer experience, which can seem counterintuitive
The success of self-service drinks in some concepts
but works for us.” NANDO’S
suggests this will work in the UK.
An established model in retail, Click & Collect, is Operations
increasingly being used by restaurant operators.
More administrations
Click & Collect is an extension of takeaway and online
ordering, offering the benefits of delivery (more The trading environment of the UK restaurant market
customers and more revenue), with less operational is going to continue to be challenging in the near
and margin impact. Taking third party distributors out term, particularly for casual dining operators and
of the equation means commission chargers are lower; independent operators with no point of difference. The
the restaurant can collect data and build on customer market has moved on from the 1990s model where
relationships. This channel grew by 16% between June location, range and price was enough to underpin a
2016 and June 2017 compared to 8.9% for delivery. successful business.
Sector growth will be subdued but will not decline;
“Units are being forced to work harder, such many casual dining operators still have good concepts
as our new Pay on Entry offer and other and pricing, just too many sites.
P&L savings. Reduction in kitchen size is
something that needs to feed through to Whilst CVAs only add further negative sentiment into
other restaurant concepts.” PIZZA HUT the market, there are many successful examples e.g.,
Azzurri (who own Zizzi’s). Problem assets are often
removed from portfolios through this process, which
can bolster stability and strengthen balance sheets.
“Apollo [backers of Casual Dining Group] fully back
the existing core business and want to see continual
investment into the existing portfolio.” CASUAL
DINING GROUP
“It is the operators who cannot respond and change,
or reinvigorate their offering quickly enough that have
suffered and will continue to do so. Underpinning this,
if brands expand too quickly into unfamiliar territory,
taking large units on long-term financial commitments,
they are exposing themselves to far greater degree of
risk and inflexibility.” PIZZA HUT
Source: Pizza Hut
262018 The Future of Leisure
Source: Nando’s
Growth hotspots “We believe there is still plenty of room for growth in
the casual dining market. The best operators are aware
•• There is always going to be a place for chains of the demand ceiling within a micro-location – where
in the market. Those that get it right with timing, if you add just one more restaurant then it will start to
marketing, fit-out, price and offer will continue to cannibalise sales from other units.” NANDO’S
be successful
“We are planning another 20 openings in the UK this
•• Smaller, branded groups are anticipated to be the year.” FIVE GUYS
most expansionary; brands such as Turtle Bay,
Honest Burger and Franco Manca “We have a very strong country pub business that we
are looking to expand and are still acquiring for our
•• Further expansion of the “grab and go” market, core brands.” THE RESTAURANT GROUP
particularly in high street locations where
convenience is key “There is a lot of R&D going into developing meat-free
options, which speaks to both the healthy lifestyle and
•• A resurgence of the pub sector, led by those with environmental consumers agendas – these options
strong food offers, strong brands and a distinctive complement the existing core menu. No move away
fit out (New World Trade, Living Ventures, Brewhouse from chicken being planned!” NANDO’S
and Kitchen etc.)
•• Local talent; regional owner-occupiers with a
unique or high-quality offer that know their local
market. These can often be more nimble than larger
operators, making quicker decisions
27Legal & General Investment Management, Real Assets
Health and fitness
The “here and now” The economic recession of 2007-2010 was the catalyst
for the polarisation of a number of consumer markets,
The health and fitness market has experienced strong including health and fitness. Budget operators started
growth in demand. This is illustrated by the number to offer low-cost membership with minimal or no
of gym memberships in the UK; having held relatively joining fees, 24-hour access or drop-in sessions.
static at around seven million people from 2007 to 2012, This format has been scaled up across the country,
membership rates started to rise sharply from 2013 particularly in high-footfall locations.
onwards (Chart 12). This translates to a penetration rate
of around 15% for the UK, of which 10% is private club Four of the top ten operators in 2017 are a budget
membership18. Between the top ten private operators format. This compares to only three small-scale
there are 3.6 million members, an increase of just under operations in 2009. Pure Gym, with 176 sites across
20% on the previous years’ top 1019. the UK, is the top private operator. The total number of
budget gyms is expected to pass the 1,000 mark over
The rise in gym membership and participation in the next 12 months as their success brings more people
exercise classes has been attributed to: into the market.
•• Greater levels of disposable income At the other end of the spectrum is the premium, full-
service offer (mostly in London or large city centres).
•• Promotion of benefits of healthy lifestyle by public These operators must provide a level of service and
sector bodies experience to justify the high fees, often focusing on
just one type of activity such as cycling or yoga. The
•• Increasing variety of clubs and concepts, in polarisation has led to a squeezed mid-market, with
convenient locations previously dominant operators such as Fitness First
being acquired by DW Fitness alongside the disposal
•• Popularity of low-cost models with 24/7 access of sites to other operators, whilst Virgin Active has
disposed of sites around the country.
•• Greater uptake of premium “lifestyle” offers 20
Life on the ground
UK gym membership has risen strongly
In 2017 there were thought to be around 62 gym brands
since 2013
operating across 4,430 locations in the UK, a significant
Chart 12 increase from the 33 brands across 1,100 sites recorded
in 2009. If smaller, independent units are included this
12
rises to around 6,70021.
10
In 2009, the sector was dominated by Fitness First with
8 a tail of other brands owning fewer than 70 sites (Table
Millions
9). In 2017, the composition of the market has changed
6 dramatically: six of the top ten operators are relatively
recent entrants to the market, with the top four
4
operators managing over 100 sites. The top 10 account
for just under a quarter of private gyms, but have over
2
half of total membership and generate 60% of market
0 value. This compares to 22% of the market and 56% of
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
market value a year ago, suggesting that the strong are
Source: LeisureDB getting stronger and dominating the market22.
18 Source: LeisureDB
19 Source: Savills 21 Source: Savills
20 Source: LGIM Real Assets 22 Source: Savills
282018 The Future of Leisure
Gyms on leisure-specific schemes account for only Gym operators are an important occupier
around 8% of the national supply, but are the location on leisure schemes
for around 20% - 50% of the sites of the top-ten
operators. Around half of in and out-of-town leisure Chart 13
specific schemes include a gym or health club, which 70
rises to around two thirds of locations that contain
a mix of retail and leisure units (Chart 13). A large 60
number of gyms can also be found on the high street,
50
outside of the leisure investable universe.
% of schemes with gym
40
The composition of the gym market has
30
changed dramatically in eight years
Table 9 20
Clubs Clubs 10
Brand Brand
2009 2017
0
Fitness First 153 Pure Gym 176 Leisure scheme In-town leisure Out-of-town Standalone
with some retail scheme leisure park leisure units
Virgin Active 69 DW Fitness* 133
Source: Savills
LA Fitness 65 Anytime Fitness 111
David Lloyd 64 Nuffield Fitness 111
Implications for owners
Bannatyne 54 The Gym Group 91 Vital statistics
Esporta 50 David Lloyd 83 •• The average size of a gym in the investable universe
is around 28,000 square foot
Marriott 45 Energie Fitness 74
Livingwell 38 Bannatyne 67
•• There are distinct size requirements by location
and format of operator (Table 10). Larger clubs are
situated out-of-town, ranging from 25,000 square
Energie Fitness 23 Virgin Active 61
foot up to 40,000 square foot
Total Fitness 18 Xercise4Less 47
•• Gyms in more urban locations can be a quarter to a
*Includes Fitness Firsts acquired by DW Sports but still trading tenth of the size, down to just 2,000 square foot on
as Fitness Firsts.
some high streets
Source: Savills
29Legal & General Investment Management, Real Assets
There is a variety of size requirements across the health & fitness market
Table 10
Brands Typical size requirement Location type
Out-of-town parks, single
Health & fitness clubs David Lloyd/Virgin Active 25-40k sq ft
units
10-18k
Budget gyms – larger EasyGym/Pure Gym Retail parks, town centres
(but also 6-8k) sq ft
Budget gyms – smaller Anytime Fitness 4-5k sq ft High streets
Boutique fitness clubs F45/Psycle 2-4k sq ft High streets
Source: Savills
Rent (Franchised) fitness for all
The rental tone for gym or health clubs within the The franchise model has allowed operators to scale up
leisure investable universe has remained static at quickly. Gym groups continue to expand strongly in the
£10 per square foot since 2009. This is not reflective regions; growth has not just been London-centric.
of trends within the wider market where gym rents
increased to £11 – £12 per square foot in 2017 on Squeezed mid-market
regional retail schemes. Anecdotally, rents have Budget operators are expected to expand rapidly
reached £50 per square foot on prime London high alongside the boutiques, which means the pressure on
streets for smaller floorplates23. the middle market is not going to ease soon.
Near-term trends
Property
Smaller formats
New budget/super-premium brands are expanding but
taking smaller units. The focus of the latter is on shorter
classes rather than the provision of large gym floors.
Source: LGIM Real Assets
23 Source: LGIM Real Assets
302018 The Future of Leisure
Operations
International target
Many of the newer brands opening in the UK are
international; Barry’s Bootcamp, Psycle, F45.
There are some commonalities:
•• Flexible use: pay-as-you-go model allowing urban
consumers to be flexible and avoid annual fees
•• Sense of community: positioned not only as places
to work out, but hubs to socialise with like-minded
people
•• Strong lifestyle message: marketed as physically
effective and socially desirable Price ceiling
Whilst super/premium brands have relatively small
estates in the UK at the moment, the number of units
in the US suggests there is substantial headroom in
the UK. The challenge will be to provide an overall
quality of experience that is considerably superior to
that offered by low-cost rivals (and justifies their fees).
Budget bubble
Low barriers to entry mean that the expansion of
budget brands has been rapid. Whilst budget business
plans may include strong expansion plans, some
locations are now becoming saturated. Areas of the
mid and even premium market have already been
cannibalised, with budget operators now fighting for
the same customers on the same sites.
31Legal & General Investment Management, Real Assets
Traditional “big box” leisure
The “here and now”
Falling under the D2 planning use classification, these per head of population are also low, suggesting there
operators are long-standing legacy occupiers; family- could be significant room for growth if operators are
orientated social pastimes such as bowling, bingo able to attract more customers through the door.
and gambling that have a sustained history in British
culture. Whilst many thought that the smoking ban “Customers are generally brand agnostic when it
would pose a huge threat to these types of operators, comes to bowling, so it’s important that a USP is
the opening of new leisure parks and shopping created with a modern fit-out, investment in team
schemes, extensive capital expenditure on existing training and additional services. Wifi is also critical.”
schemes and an increased focus on the consumer HOLLYWOOD BOWL GROUP
experience has resulted in many original names still
present in the UK today. These types of operators are also an important occupier
group within the leisure universe. Whilst the cinema
Activity pricing is often very competitive, relative to operators and restaurants may attract the headlines
other leisure experiences. However, these activities are and headline rents, Table 11 illustrates how prevalent
often low frequency; almost 70% of consumers have not these operators are across leisure schemes and thus
participated in ten-pin bowling over the past 12 months, are still important footfall drivers – particularly bowling
compared to 32% for cinemas24. The penetration rates operators.
Traditional operators can be found across all types of scheme
Table 11
% schemes % schemes % schemes
with bowling with bingo with casinos
Out-of-town leisure park 49% 32% 6%
In-town leisure scheme 16% 6% 17%
Standalone leisure units 5% 8% 2%
Leisure scheme with some retail 28% 16% 16%
Source: Savills
Life on the ground reduced as other ancillary activities increased. Despite
recent corporate activity, it remains a fragmented
BOWLING: ten-pin bowling is estimated to account market broken into four types of operator:
for less than 1% of leisure market share by value,
but grew by 6.7% in 2016 – the fourth consecutive •• Major multiples (c71% market share): five or more
year of growth25. The sector has enjoyed a recent schemes, with the top three controlling 50% of all lanes
resurgence due to corporate consolidation, significant
refurbishment activity and the opening of new schemes. •• Other multiples (c5% market share): fewer than five
Branded operators such as Hollywood Bowl Group have centres
also focused on greater consumer engagement and
re-orientating its proposition towards being a family •• Urban bowling operators (c7% market share):
activity. Ten-pin bowling has also benefited from being catering primarily for professionals in city centre
a highly-accessible form of family entertainment, with locations, with an emphasis on food and beverage
little reliance on alcohol sales.
•• Independent operators (c17% market share): single
The number of centres has remained relatively static centres that are typically smaller and in tertiary
over the past decade, whilst the number of lanes has locations
24 Source: Hollywood Bowl Group
32
25 Source: Hollywood Bowl Group2018 The Future of Leisure
“We have an intentionally
family-focused offer; household
expenditure on bowling has
proven to be more resilient
during economic downturns.
We represent good value
for money, with the average
adult game only £6.00 and
people prioritise family time”
HOLLYWOOD BOWL GROUP
The bowling market is comprised of 145 branded The casino industry has consolidated
locations within the leisure universe, up from 122 in
2009. It is led by Hollywood Bowl Group. In 2017 the Table 13
Group operated 319 schemes across the UK, of which 2009 2017
43 are within the leisure universe (Table 12).
Rank Group 32 63
Genting UK 45 41
The bowling market is led by
Hollywood Bowl and Tenpin Others 28 33
Table 12 Caesars 11 9
Gala Coral Group 27 0
Schemes in investable universe 2017
Total 143 146
Hollywood Bowl 43
Tenpin 40 Source: The Gambling Commission
MFA Bowl 28 BINGO: “In-person” participation in bingo increased
AMF Bowling 11 by 2% between 2013 and 201626, but growth has been
driven by use of machines rather than hall-based
Namco Futurescape 8
games. There are thought to be 583 bingo halls in the
Superbowl 6 UK. It is a fragmented market outside of the main
brands, with approximately 365 operators in places
All Star Lanes 5
such as working men’s clubs and holiday parks27. There
Bowlplex 4 are thought to be only 99 bingo halls located within the
leisure universe.
Source: Savills
CASINOS: there are thought to be 146 casinos in Great
Britain, 22 of which 45 are within the leisure universe.
The number of casinos has held relatively static since
2009, dominated by Rank Group and Genting UK
(Table 13). The casino market is heavily regulated and
gambling rates in the UK are falling. If the National
Lottery is excluded, only around a third of the adult
population gamble on a regular basis.
26 Source: Gambling Commission
27 Source: Gambling Commission
33Legal & General Investment Management, Real Assets
Implications for owners
Vital statistics
•• Bowling operators require units sized between
15,000 – 30,000 square feet
•• The more “traditional” operators are usually located
within leisure schemes and shopping centres
Source: Hollywood Bowl Group
•• Urban operators require units in prime shopping
centres and high streets, with character buildings Operations
preferred
Online threat
Participation rates for bingo and gambling are rising in
Rents aggregate – but this is due to the increased popularity
•• Bowling rents within leisure schemes average of online platforms.
around £8 – £9 per square foot and have been
consistent since 2009 Ancillary income
There is a greater focus on catering, retail and
amusement arcades from operators; all forms
Near-term trends of ancillary income. This is important if all the lanes/
tables are full; it keeps people spending!
Property
Experience Operational efficiencies
As the development of new schemes slows,
Like other leisure operators, bowling operators are
operational strategy is focused on increasing visit
attuned to consumer demand for experience and are
frequency (which can be very low when compared to
segmenting their offer to make it more relevant to
eg. the cinema) and spend per visit.
distinct groups and wide market appeal.
Value for money
“We believe there is room for growth in the bowling
Many operators are positioning themselves as “value
market from those operators able to capitalise on
for money” rather than “value’, arguably making them
the consumer preference for experience. We enhance
more defensive against economic instability.
experience through upgraded seating, bars, a great
food offer and VIP areas. We are also focusing more
on leveraging social media to promote our product
eg. people can directly upload photos and scores onto
their social media pages.” HOLLYWOOD BOWL GROUP
Service on demand
Cashless payment systems can speed up transactions
and eventually allow for loyalty-driven variable pricing
or customer loyalty incentives.
Source: Hollywood Bowl Group
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