British pub owners and tenants are weeping into their beers. Pub beer sales are down about 9 per cent as cash-strapped drinkers switch to supermarkets, which sell alcohol as a loss leader. An evening with a few cans in front of the telly is becoming increasingly appealing - especially if you are a smoker.

The leased estate of large pub operators such as Punch Taverns and Enterprise Inns has historically been viewed as low risk. Lease out lower-quality pubs, watch the value of the property soar and at the same time collect a few bob in rent. While this appeared a sound business model for the pub-owner, it is now clear that these tenancy businesses are more vulnerable than once thought. Yesterday's decision by Punch, Britain's largest pubs operator, to scrap its dividend to conserve cash suggests that it fears there is worse to come. Punch's shares fell by 12 per cent.

As sales suffer, pub groups are having to provide more support to licensees, with Punch announcing yesterday that rent concessions had increased to £6 million. In the company's leased estate, which consists of 7,560 pubs, the like-for-like contribution from outlets fell 3.4 per cent over the financial year to August 23. Explaining the dividend decision, the company said that it wanted to keep the cash to repay some of its heavy borrowings early to shore up its balance sheet. Although repayment of the company's convertible bonds is not due until December 2010, Giles Thorley, chief executive, said that the credit squeeze made it uncertain whether it would be able to refinance them at that stage. He added that the company also wanted to conserve cash to invest in its pub estate.

On top of the squeeze on consumer budgets, the property downturn has given pub owners a headache. Not only are pub valuations affected by the wider commercial property market, but a pub's profits are also taken into account when assessing the building's worth. With analysts forecasting that pub tenants could see a fall in profits of up to 90 per cent next year, property valuations don't look good.

Four pubs are closing a day and there is little demand for many of the sites. But some will surely be attractive to other operators looking to sell booze from small, well-positioned sites. Who's for another Tesco Express?

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