Could new disruptors undermine the long-standing investment appeal of cinemas?
Cinemas have historically been attractive for UK property owners; their long, typically index-linked leases, reliable footfall, and broad demographic appeal have provided the foundation for the sustained success of many leisure schemes across the UK.
However, 47% of UK households now subscribe to video-on-demand (SVoD) services such as Netflix, Now TV, Amazon, and DisneyLife, according to Ofcom. This has led to questions about the future of cinemas, which account for 16% of all leisure property income in MSCI’s index of the market.
Despite UK cinemas achieving modern-day record admissions of 177 million in 2018, the highest since 1971, the question remains: will modern disruptors prove A Bridge Too Far?
Concern around the future of cinemas is nothing new. In 1984, UK admissions slumped to one million per week, down from six and a half million just 20 years earlier. More recently, cinemas have faced challenges from high-spec televisions, economic recessions, and digital streaming.
In spite of these potential disruptors, the UK box office has grown by 3.9% per year since 2002, spend per head has grown by 3.1% since 2005, and the number of cinema screens has swelled from under 3,000 at the turn of the century to 4,400 today (according to the BFI, UK Cinema Association, and IHS Markit respectively).
We believe there are three structural characteristics underpinning the resilience of the sector:
1. Consumer desire for experiences
Over the past decade, there has been a structural shift in consumer spending towards experiences. Cinemas overwhelmingly fit into this category; the audio-visuals and food and drink range within cinemas cannot be matched online or at home. As a result, there has been no relationship found between digital streaming subscriptions and lower cinema visitation. Avid streaming subscribers tend to be regular cinema goers and vice versa.
Moreover, the relative affordability and escapism provided by cinemas means that admissions have historically risen during recessions, as shown in the first chart above, adding to their appeal as an anchor during challenging economic times.
2. Quality content
The non-cyclical trend in admissions is also testament to arguably the key driver of cinema performance: the slate of films due to be released. The UK benefits from the strength and innovation of English-language studios and Hollywood, with a consistently compelling roster bolstering consumer demand.
In contrast, the German cinema market provides a stark example of what can go wrong if the experience and content fails to deliver. Germany has seen admissions drop by 41% since 2001, off the back of weak domestic content and under-investment in cinemas.
Elsewhere in the world, though, box-office revenues continue to grow, with China set to replace the United States as the largest box-office market in 2020, stimulating competitive demand in Hollywood.
3. Enhanced viewing experience
As evident from Germany, investing in an enhanced consumer experience is vital to keeping cinemas relevant, maintaining the distinctive experience, and holding on to the competitive advantage over home viewing.
This is where property owners can play an important role. Through 2019, LGIM Real Assets has completed four cinema lease renewals, working in partnership with operators to invest in the physical and audio-visual experience. The new breed of cinemas provides more luxurious seating, improved audio-visual effects, and a broader range of amenities.
This suits all parties: consumers enjoy a more distinctive experience; operators attract increased admissions; adjacent tenants benefit from higher footfall; and investors gain from a longer-term, more secure income stream.
The struggles experienced by many town centres in filling the holes left by department stores is a compelling example of the challenges that consumer-facing destinations face in the absence of a secure anchor.
Cinemas do remain a stable anchor for owners as their ability to adapt is combined with the long income characteristics of these leases – often enabling new development around them.
With operators tapping into future growth opportunities in the form of improved food and beverage offers, e-sports, and new technologies, the cinema credits look set to keep rolling.
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