The Budget’s impact on the hospitality sector

The UK hospitality sector has had a tough time in recent years, dealing with the fallout of Brexit and the Covid-19 pandemic, and more recently, the cost-of-living crisis and greater energy costs.

It is therefore understandable that the recent budget announcement was met with much anxiety by those within the sector, who were hoping for positive news, but fearing the worst.

Business rates

Perhaps the biggest focus for the sector in the lead up to the budget was what the government would do regarding business rates. Ultimately, the decision was not as bad as many were likely fearing, with the business rates relief measures for the sector not falling away completely; instead, being reduced. Although this is a relief for some, it is likely that a lot of hospitality businesses may still feel the pressure due to the monetary impact of the reduction, and this is still a major costs concern for them, especially as it’s coupled with the cost rise for operators as a result of the National Insurance contribution changes. This particular change may have a profound impact on the sector, due to the staffing structure of their operations.

Positively, there is seemingly a light at the end of the tunnel. The Chancellor announced a promise of more sector specific targeted relief, which is on the way after the reduced rate period ends. The financial year 2026/2027 will welcome permanently lower business rates for retail, hospitality and leisure properties. This can provide some longer-term confidence for the sector, and may mean that, with the right combination of operator offering and investment, the sector will see growth, albeit at a slower pace. To supplement this, the government has also promised £1.96bn worth of support for operators classed as small businesses in town centre high street locations – which is another valuable introduction.

Commercial property

In the commercial property side of the sector both landlord investors and their operator tenants are taking the announcement into consideration, and we may see some vacancies for independent operators who are sensitive to staffing cost increases and rates liabilities more than larger chain operators. There is also likely to be more active landlord/tenant engagement to share risk on property operating costs – a trend kick started to mitigate the effects of the pandemic where properties were closed for long periods. .

We are already seeing an increase in landlord investors engaging with their hospitality tenants and coming to agreeing both temporary and more permanent deals or leases to alleviate pressure on property costs by way of rent payment waivers or temporary reductions and payment plans. Alongside this, there’s a shift towards turnover rent arrangements rather than traditional fixed market rents and rent reviews based on inflationary changes as opposed to open market rent reviews.

Landlord investors are also engaging with their operator tenants to consider more commercial alternatives including allowing chain tenants to sublet properties to independent franchisees that partner with the chain. There is a willingness to acknowledge that the stakeholders in these properties want to discuss options to deal with sensitivities on consumer demand and overheads.

For vacant properties, investor landlords are increasingly talking to new concept leisure and lifestyle led offerings such as games led hospitality venues. More concept-based offerings are being seen, and that is alleviating vacancy levels.

Looking ahead

Overall, the budget did not offer any dramatic or immediate assistance but taken in context there is evidence of the government considering that help is needed, and help is being promised. It is a case of ‘it wasn’t brilliant, but it could have been a lot worse’. The hope is that the overall government focus on economic stability and working towards real growth means those stakeholders in the hospitality real estate sector are not facing the cliff edge they were worried about. Hopefully, as the business rates changes kick in in the longer term, there can be a move towards growth in the sector.

This article was first published in CLH news in November 2024.