As real estate becomes more mainstream, rising prices in the traditional areas of office, retail and industrial are prompting fund managers to look farther afield for opportunities. The leisure sector may not immediately come to mind, but it is slowly attracting interest. UK investors have so far been the most adventurous - relatively speaking - while their European counterparts appear to be more wary of the market and its benefits.

In fact, the only two leisure funds that exist are in the UK - Capital & Regional's X-Leisure and Legal & General Leisure Fund. The former, which was started in 2003, is the largest fund, boasting £769m (€1,149m) in assets under management, while the latter was launched four years ago and now has £270m to invest.

So far, investors have not been too disappointed. Although its numbers lagged behind City and West End, overall, leisure as a real estate asset class still turned in a more than respectable performance. The IPD figures for the year to June 2006 show a 20.8% return compared to the 25.7% and 29.3% returns enjoyed by the respective City and West End and mid-town office markets.

However, despite the numbers, it will take time for the industry to develop and mature, particularly as other alternative asset classes such as commodities and hedge funds beckon. The London office market is also still very much flavour of the month in the UK.

One of the main problems, according to Pierre-Yves Gerbeau, the colourful chief executive officer of X-Leisure, who learned his trade as head of the Millennium Dome and Disneyland, is with the perception of leisure as a real estate class. "Leisure is considered risky," he says. "It is a much smaller market and is similar to where retail was about 15-20 years ago. The death of one operator in the industry could have long lasting ramifications and send everyone into a tailspin; this is not the case in retail. There are so many players that if one fails, it doesn't matter as much - another retailer can quickly fill the space."

Gerbeau believes that UK investors will continue to lead the charge with the continental Europeans trailing farther behind. "The case is not being made to the pension funds in Europe. The investment community, for the moment, is focused more on other assets such as equities, fixed income or hedge funds."

Another reason, perhaps, for the continental European's reticence is cultural, according to Kay Ashton, a director of PPM Capital, a UK-based private equity firm. Not surprisingly, each country has its own interpretation of what constitutes a leisure pursuit. For example, bingo is a uniquely British pastime as is going down to the local pub to have a drink. The French and Italians, on the other hand, may opt for a quiet meal in a restaurant to unwind. Also, the ownership structures and types of properties on offer are different in the UK from the continent.

Robin Goodchild, director of European strategy at LaSalle Investment Management in London notes: "There are not that many genuine leisure only opportunities on the continent," he says. "In Europe leisure tends to be a sub-set of retail, rather than a separate property type. Some properties are a mix of leisure and retail with a hyper/supermarket and cinema as anchors. In the UK, there are distinct leisure properties where the cinema is the key anchor supporting a range of restaurants, bars, bowling, family entertainment and health and fitness facilities, but no significant retail offer."

This might explain why for now, hotels, destination resorts and time-shares do not feature in the UK leisure real estate fund equation. This may change in the future but analysts believe they are driven by different factors that are often more susceptible to the vagaries of the economy or the horrors of a terrorist attack. According to Gerbeau, "studies have shown that leisure is much more resilient than tourism and retail in an economic slowdown. Even if overall consumer spending drops, people still tend to spend money on certain leisure activities such as going to the cinema".

The same applies to pubs although they are not currently on the traditional institutional investor's radar screens despite the hype surrounding the consolidation in the industry. There has been a wave of operating companies who have been busy developing investment opportunities. However, this has helped push pub property prices to the ceiling while also creating a bottom tier of properties whose future use is in limbo due to stalled planning permission.


ccording to Ashton, there are two types of investor looking at the pub game. One is the private equity group whose focus is on the managerial or operational side of the business. The other is in the real estate camp which sees pubs more as a property or yield investment. The traditional fund manager has so far not been a major player.

Steve Mastrovich, a managing director in JP Morgan Asset Management's Real Estate Group says: "We are not seeing a great deal of institutional interest in the high street or village pub. There is a lot of corporate activity in that sector of the market. What we are seeing is yield starved investors looking at leisure to generate extra returns and spread their risk. They are looking more at these so-called cluster centres which house a combination of activities that will drive rents forward. The attraction in the UK is that they offer quality covenants and long leases."

It is no surprise then that the two star property attractions in both funds - the X-Leisure's O2 Centre in London and Legal & General's Barbican Leisure Park in Plymouth - share many of the same attributes. They not only boast a household-named multiplex cinema chain but also a health club, a smattering of retail shops and a wide range of pubs and themed restaurants offering food from around the globe. Barbican is also home to a mega bowling alley and nightclub while O2 has a range of leisure activities geared for young children.

The name of the game is to have scale and diversification within the leisure complex itself, according to Gerbeau. "The single most important criteria for a centre is to have a strong branded multiplex cinema. You can't underestimate its importance. It will drive the whole leisure experience and attract the critical mass that is needed to make the investment a success."

Michael Barrie, director, property fund management of Legal & General, also believes that having a successful cinema is the key ingredient. "It is one of those things in leisure schemes that if the cinema trades well, it bodes well for the entire scheme. Due to consolidation, there are currently only three major operators - Vue, Odeon and Cineworld - who control about 75% of the market, and it is beneficial to have one of those in your complex. Other important tenants to have are restaurants. We are seeing an increase in the number of people going out to eat, especially to so-called fast casual dining restaurants such as La Tasca and Nandos."

The biggest challenge, according to Barrie, is "to keep fresh. It is a very fast moving sector and you have to ensure that your offering will not be undermined by the competition. You also need to be able to have a diversified list of tenants and to be able to manage the risk and create new occupiers."

Gerbeau also underlines the need to keep a steady hand on the consumer's pulse. "It is crucial to look at how their needs change and to ensure that you find the right operators who will add value. For example, we are currently in the process of modernising and refurbishing the O2 centre. It was looking tired and we are now taking it into the 21st century."

Part of the process has included adding furniture and retailer Habitat to the leisure mix. Although it is a retail outlet, it is of the specialist variety which may signal the wave of the future in leisure real estate. Barrie would also not be surprised to see more retail outlets but believes they need to complement the overall entertainment theme of a centre such as sports and lifestyle retailers.