Friday, March 27, 2009

Good advice Martin but ultimately flawed. The advice should be that Kim avoids this like the plague. The only way a licensee can make a living out of a tie now is if they are massively over trading a site. There's no point in considering a tied lease as a means of earning an income while watching your investment accrue value. It will not return what you put in - let alone return a meaningful profit. This is because the profit is all accounted for in the projected bottom line of the pubco and rent and supply prices are set accordingly. This, of course, doesn't work long term in the best economic circumstances and it's all falling apart now because, when licensees fail now, there's no one to take over the site and pump in more money to keep the system churning. The system is broken, the cogs have fallen off and it's grinding to a halt.

Tied leases are now virtually worthless. A dramatic and unremarked upon consequence of is that tied pub freeholds are in reality worth perhaps even less than 40% of current book value - no one in their right mind is going to buy property as an investment when it is clear that existing rental income cannot possibly sustain the status quo let alone the borrowing.

Pubcos HAVE to sell pubs to service their borrowing habits. Their estates are worth less now than the amount they borrowed against them. Pubcos NEED cash income to service their massive debts and income is drying up because so many pub businesses are failing or struggling to meet the financial demands placed on them by their freeholders.

Fact is the big pubcos are, to all intents and purposes, insolvent. Everyone knows it but won't talk about it because to admit this, on top of all the other sub prime disasters that have gripped the economy, will seem like a crisis too far for us to take on board.

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