Pub companies: follow-up - Business, Innovation and Skills Committee Contents

Supplementary memorandum submitted by Mark Fearon

  I have looked at the evidence to the Committee on 8 December. I am particularly struck by the evidence from Mr Rusholme in response to Question 32 from Miss Kirkbride, where he states:

  "There are perhaps two separate issues here. First, the question is whether it is information that can be captured in a benchmarking system. Clearly, it can be. I suspect that the second part to the IPC's argument is whether in rental calculations allowance should be made for a manager's cost or a salary cost. I think that is a little more difficult. If it is included the consequences may be a little more than we wish because it goes back to the basis of valuation which is to establish what someone would pay in the market. What variables you put into the hypothetical calculation are only a way of getting to that answer. I am unsure whether it will add a great deal to that process."

  I have suggested in previous correspondence that the "profits" method of valuation is a sham. This is about as direct an admission as you could get from the RICS that I am correct in that conclusion. Mr Rusholme is admitting, (and I have the same in writing from Robert May when he chaired the RICS valuation Committee for licensed premises) that the market rent is what people will pay. The profits calculation, he rightly states, is "a way of getting to that answer". In other words it can and will be manipulated until it reaches that point. Fair enough in a free market—but the pub business is an oligopoly. The power of landlords to determine rent is not the power which would be available to them in a free market. I doubt whether RICS members wish to discontinue their existing practice of dividing the market into artificial sectors of which tied leased pubs are one, or of ditching the profits method of valuation. If existing practice continues, tenants of leased pubs will continue to pay rents which are significantly in excess of those paid by occupiers of retail premises in the same locality, with no evidence that there is a justification for the differential. They will also continue to have poor returns for their time and money, and many will become failed businesses.

  I continue to maintain that the RICS should compare rents paid by tenants of retail premises in an open market with those paid by public house tenants on a square footage basis. At present most public house tenants pay far more, because of the use of the profits valuation, which has no foundation in fact or logic, but enables RICS members to pretend that it has.

28 January 2010

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