I started my professional property career in the UK golf market back in 1991. I joined leading leisure property specialist, William Hillary Leisure & Co. To ‘learn my trade’ for the first two months I was tasked with putting together a comprehensive database of all the golf course development sites in the UK.
We bought a massive map of the UK and wallpapered it to a large wall in the office. I was then given a huge town & country planning register (paper version in those days) which listed, county by county, all the sites with planning consent for golf courses. Also plonked on my desk were stacks of 100 plus sales particulars of land for sale to build golf courses.
Our wallpapered map of the UK became absolutely covered with red and blue dots: red representing locations of golf course planning consents and blue representing sites for sale for golf course development. The UK had around 2,600 golf venues back then. About 80% were traditional private members clubs, 15% were municipals and 5% were proprietary venues (i.e. owned by companies or individuals).
We were in the whirlwind of the UK’s extraordinary golf course construction boom from the late 1980’s. Golf was seen as a massive growth sport in the UK. Our European professional golfers, led by Seve, began winning majors on a regular basis. They also started beating the Americans in the Ryder Cup. It was all very exciting. Such was the pent up golfer demand that private members clubs had membership waiting lists ‘running into years’. Some golfers had to sleep overnight in the club car park to be sure of a morning weekend tee slot at their local municipal.
What struck me as interesting at the time was that despite all this pent up golfer demand, historically land values for golf were really low – not much different to agricultural land values at the time. And it seemed to have been like this for around 100 years. It was a steady and stable golf property market. Things had moved at snail’s pacein the UK when it came to land values concerning golf courses.
Over 400 UK golf venues lease all or part of their properties
Whilst most golf clubs own their property outright (i.e. they own the freehold), a significant number are rented from a landlord. Today there are over 400 golf venues in the UK that lease all or part of their golf properties. Back in the 1970’s and 1980’s it was typical for fully rented 100 year old golf courses with a decent clubhouse to be paying a rent of just £10,000 a year (or less) to their landlord. Gross that up by inflation and in today’s money it is equivalent to paying £35,000 a year in rent now.
Rents were low for a century up until the late 1980’s because no one felt there was much money to be made in running a golf club. Rents therefore needed to be affordable to help the golf club tenant make ends meet. The pent up golfer demand and the late 1980’s golf course construction boom changed all that. Land and rental values rose very rapidly. Golf course developers and operators clamoured to outbid each other to secure a piece of the booming UK golf business pie. Rents started going from £10,000 a year to well over £100,000 per year for some courses. These were massive rental increases in just a few years.
Around 1,000 extra golf venues
Yet here’s the rub. Twenty three years on from plotting the red and blue dots on our wallpapered map of the UK and we now have around 1,000 extra golf venues actually built. The UK’s stock of golf venues has therefore increased by around 35%. We have moved from a position of huge golfer demand to one of general golf course oversupply.
UK golf venues now compete fiercely to entice golfers to visit their venue rather than their competitors’. More and more discounted green fees are creeping into the peak time playing slots, whereas historically they were a tool for only filling off peak periods. But this, over time, simply undermines golfers’ perceived value for money of full annual club membership, resulting in falling membership numbers. Falling green fee prices and falling membership numbers means falling annual golf revenues, often to alarming degrees for some golf operators.
Much harder for golf operators to make good profits
The result? It is now much harder for golf operators to make good profits from their golf courses today compared to the 1970’s and 1980’s; and it was supposedly tough then! Yet their rents today, in some cases, are still stuck at £100,000 per year or more. On a like-for-like inflation basis they ought to be no more than £35,000 per year.
Why are they stuck so high? It is because of ‘upwards only’ rent review clauses. These crept into most UK property leases once institutional investors started investing large amounts of our pension money in shops, offices and industrial properties.
Institutional investors liked the idea of rents not being able to fall. In a rising UK commercial property market the balance of power was with the pension funds and tenants agreed to upwards only rental payments. Few people thought rental values would ever need to fall to any major degree.
Hard to make ends meet
Probably 90% or more of all golf course leases now have upwards only rent review clauses. When golf landlords and tenants review their rents every three to five years, even though rents ought to fall due to tough market conditions, contractually they can’t.
Overly high rental commitments are pushing a number of tenanted golf clubs to the brink. They really are finding it desperately hard to make ends meet. For some, whose livelihood is dependent on running their leasehold golf club, it is somewhat demoralising and emotionally draining.
Each case has its own individual circumstances but I am aware of a number of pragmatic landlords who have reduced the annual rentals payable by their golf tenants on financial hardship grounds, even with a contractual ‘upwards only’ rent review clause. They take the view that they would rather have a reliable tenant paying some rent rather than seeing a previously reliable tenant go bust.
Thus, in conclusion, looking at the general structure of the UK golf rental market, by historic standards rental values ought to be falling sharply. But they won’t due to the tenant’s general curse of the ‘upwards only’ rent review clause, unless the momentum really builds for landlords to reduce rents on financial hardship grounds.
Smith Leisure www.smithleisure.com
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