Bingo worth a gamble for real estate investors

Copyright: David Lawson– appeared Property Week Feb 1998

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Eighty-eight;  one fat lady. On his own; the player in the front row. Forty-four; the size of the audience.

  Bingo callers should be learning this cut-down version of their traditional patter if the impact of the national lottery is as severe as some observers believe. Big names are pulling out, casting a shadow over  the nation's Saturday night gambling fever.

 First Leisure wrote down its bingo assets by half to 30m pounds and is  selling to management. Bass shaved a massive 177m pounds off the Gala chain after operating profits plunged by a quarter and has also sold out. Vardon has done the same with its 19 Ritz clubs.

  Bingo looks increasingly like one sector of the leisure market not worth a gamble for investors. But that could be a mistake. 'This is still a 2bn pound industry,' says John Harrison of Marylebone Warwick Balfour, which runs two specialist  leisure funds.  'You cannot write off something which still draws in half a million customers a night.'

  The property industry also appears to be out of sync with voracious venture capitalists which have put up millions to support the buyouts. 'They are no soft touch, so there is plenty of money to be made somewhere,' says one analyst.

  The sight of big  names in flight may  soften yields, says Neil Richmond of Conrad Ritblat. 'But it would be wrong for institutional investors to let them drift too far.'

  The sector is going through massive upheaval to cope with competition - not just from the lottery but other demands on leisure time such as theme pubs, clubs and restaurants. But most bingo halls have not closed; they have been bought by the people on the front line.

 First Leisure raised 45m pounds from its management. Vardon's   clubs were sold the same way for more than 30m pounds and Bass pocketed a chunky 280m pounds for Gala.  The moves carry echoes of the debacle when building societies and banks bought chains of estate agencies and then had to bale out. Like housing, bingo  works better when  run by those close to the action.

 'The best clubs are not just  the right location and the right building,' says Richmond. 'They are ones with the best management.'

  And amid the retreat of big names, one of the biggest,  Rank,  is still in there fighting. Its Mecca group, making profits of  around 100m a year,  is rapidly being updated through  the addition of massive 2000-seater, flat-floor clubs - often on retail and leisure parks.

  'We have opened 27 clubs in the last five years and have another eight on the cards this year,' said a spokeswoman for Mecca.

 She bridled at the impression of gloom overhanging an ageing industry. Audiences are increasing, getting younger and spending more, she said.  Forget little old ladies rifling through pension books and collecting penny prizes. A third of Mecca's members are under 35, a quarter are male and some take home winnings running into thousands.

  The industry is set to welcome even more punters after being freed from anachronistic controls on advertising set during the puritan Sixties. 'We can actually tell people about the prizes available,' said the Mecca spokeswoman.

 These are booming because sessions are bigger. A nationally syndicated competition linking halls around the country will aim to compete with lottery big bucks. There are also hints that the government may ease taxes to provide a more level playing field with the lottery and other kinds of gambling.

   The prospects sound sweet for investors: modern, new leisure boxes with a gilt-edged covenant would make an appealing target if an operator like Rank wished to release capital. And a host of debt-free new firms run by experienced managers is looking for new outlets, often on prime sites. Ritz aims to develop 1,000-seaters in secondary centres where it will not be going head-to-head with competitors.

  Buyouts should not hit yields on existing premises because  the business should become even more profitable when run by dedicated local teams, says Richmond.   Not all advisers are convinced, however.

 'Everyone thought bingo was practically a licence to print money three or four years ago, with big boxes letting  at around 8 pounds/sq ft,' says Helen Turner of Knight Frank. There were promises of improved  customer profiles, as higher-spending players came in  would also use other leisure activities inside or around these clubs.

 But this has not happened. 'Rank has been clever about buying into strongholds rather than aiming for the affluent leisure parks. But I can't see options for property investors elsewhere because there is no growth,' she says.

  Venture capitalists have no such doubts. PPM Ventures put up almost 280m pounds to back the Gala  management buy-in because it sees custom recovering from the initial impact of the lottery. Add the advertising boost and relaxations such as payment fro games with plastic cards and the deal looks more enticing.

 Hambro European Ventures, which was behind the 30m pound Vardon buyout, believes  past difficulties were due to weak management rather than structural problems. The sector will now have Rank, a leading name,  at the helm plus a series of stripped-down, dedicated management specialists to lead the charge.

  Once older, weaker buildings like converted cinemas are stripped out, there is more potential for drawing income from the restaurants, bars and other facilities bundled into flat-floor clubs.  Rents are being set at between 6-12 pounds/sq ft with yields at around 8%, says Richmond.

  How property investors can tap this market is debateable. A bingo club might  not sit easily on a greenfield park if regulars are not keen to travel out of town, says Harrison. But the best parks are well served by public transport for older players and flat-floor developments have the extra entertainment attractions for younger members.

  'I would buy bingo clubs, although I would need a yield play to work with,' he says. Richmond thinks he will get this on current prices - particularly if investors ride the change from old names to  new ones.

  Bingo is a gamble - but  so is every punt in the leisure sector, which has not yet matured enough to give reliable performance figures. The fact that experienced managers with a personal stake in their businesses are involved probably makes it a better bet than some newer ideas.

  The flat-floor boxes  replacing converted cinemas also have a flexibility for alternative  uses that provides more residual value if the business goes bust. Certainly, the new  operators will be keen to show that this is one bet with better odds of success than playing the lottery.