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Mapping out the retail property horizon

With the economic outlook looking more promising, retailers are starting to feel positive. But what does this mean for the property market? Drapers investigates.

Drapers Property Special

Retailers with physical stores have had an uncertain few years, shaken by both the boom in online shopping and a slower economy. Yet, as the economy stabilises and consumer sentiment improves – in June market researcher GfK’s UK Consumer Confidence Index reached its highest level for 15 years – retailers are starting to show an increased appetite for taking space.

New and old factors, however, are still cause for caution. Calls for a full review of the business rates system continue, and the announcement of the living wage in July’s Budget has led some retailers to question the affordability of more staff. Although some high streets and shopping centres prosper, others are still struggling.

One of the key financial factors for a retailer considering taking on more property is rent. Property consultant CBRE’s MarketView Q2 2015 shows that rents for high street shops rose at their highest level for 10 years – 1.4% up on the first quarter.

This compares with an average of 0.85% a year over the last five years. However, these figures disguise a vast regional variation: in central London rents have risen by nearly 12% since the second quarter of 2014, whereas in all other regions they have remained largely static or have fallen.

Outside London there is not a significant variation in rental growth, says Martin Summerscales, head of retail strategy at CBRE. Increasingly, areas outside London are back to pre-2007/08 levels, he says, and some of the bigger cities that experienced steep declines are now recovering.

Mike Butterworth, chief operating officer at Intu, which owns 18 UK shopping centres including Intu Trafford Centre and Intu Lakeside, says rental growth hasn’t been as high as expected.

“As we have come out of the recession and the economy has picked up, I would have expected this to flow through to rents more quickly,” he says. “Retailers look at total occupancy – they have no choice on rates so choose not to pay the rent. No doubt landlords are being squeezed.”

The growth in London retail rents, however, is impacting some independent retailers.

“Rent has gone up massively, almost double, and rates have been growing by about £1,000 a year”

Michelle Anslow, Susy Harper

“I got rid of the shop because the lease was coming to an end and the landlord was whacking up the rent,” says Michelle Anslow, designer and founder of womenswear label Susy Harper, who recently moved from her store on Camden Passage to a studio above a shop on Upper Street in Islington.

“Rent has gone up massively, almost double, and rates have been growing by about £1,000 a year. Location is so important for a retailer, but maybe the best locations are too expensive now.”

When it comes to type of lease, those based on turnover rents are slowly on the way out. Duncan Costin, group head of acquisitions at retailer Edinburgh Woollen Mill, which is looking to open more stores for its value chain Peacocks, says half its leases are based on turnover rents.

“For Peacocks the trend is to go to value centres and high streets, so landlords are more likely to share the risk,” he says. However, this retailer appears to be in the minority.

“Turnover rents are out in my mind,” says Intu’s Butterworth. “There’s quite a lot of turnover generated by retailers online that doesn’t count towards it.”

Mark Bourgeois, executive director at retail property company Capital & Regional, which owns regional shopping centres including The Mall Wood Green, London, and The Mall Blackburn, agrees.

The landlord is seeing fewer turnover leases, as online sales have become more significant and retailers have a better understanding of what rent they can afford to pay when online sales are incorporated.

Business rates

There are currently two issues surrounding business rates. First is the revaluation that was due this year but has been postponed until 2017; second is the calls for a review of the entire system. Retail is a particularly huge contributor to rates as property is such a fundamental part of the business.             

Regarding the revaluation, there was a general outcry among retailers in particular when the government announced it would delay this until 2017 in Great Britain, although the revaluation took place last April in Northern Ireland.

This resulted in a 60% drop in rates across the region, according to the Northern Ireland Chamber of Commerce. However, rates did rise significantly in areas where rents had risen, such as Belfast’s Cathedral Quarter.

However, given that rates have been steadily rising for years, the market is already looking ahead to what it might mean for them.

“At a top level, we expect central London, and in particular the luxury streets that have consistently seen rental growth, will see a significant impact by any rates revaluation,” says Summerscales.

“Other centres, such as Manchester or Leeds, where rents are back to pre-recession levels, won’t see the same uplift.

“On a more positive note, in areas where rents have fallen, the rates bill will be corrected downwards. This will likely improve retailer demand.”

Retailers appear mixed in their expectations of how the revaluation might affect them.

“I don’t hold high hopes for the business rates review,” says Peter Ruis, chief executive at Jigsaw, which has about 70 stores.

“I hope there is some benefit, but like any tax if we get an upside it should be a bonus, not fundamental to a business model.”  

In contrast, Laura Tenison, chief executive of mother and babywear retailer JoJo Maman Bébé, which has 72 UK stores, says: “We’re quite excited about the rates review.

“One particular bugbear is when a regional high street has disproportionately high rates, such as in Cardiff”

Laura Tenison, JoJo Maman Bébé

“It’s a bit of a gamble on what they will be as it’s a mad law, but theoretically we expect some to come down, quite substantially in some areas.

“There will be a rise in some. It’s about time they flattened out. One particular bugbear is when a regional high street has disproportionately high rates, such as in Cardiff.”

Retailers and landlords are almost unanimous in their criticism of the business rates system.

“The rates system has been milked and milked to the point where they are no longer fit for purpose. They have altered so many times that they are damaging the businesses that are so important for generating jobs,” says Butterworth.

“Rates in the UK are out of step with the rest of Europe. Retailers now look not at which centre they want to go in but whether to go to Milan, Madrid or Manchester.

“This affects the amount that retailers can spend on other costs such as rent. The government says they need the money but they’re killing the golden goose.

“Rents aren’t growing as they should and people are reluctant to invest.”

Total occupancy costs

If rates are placing a squeeze on landlords and retailers alike, there are now more costs to add to the equation.

“Rather than looking only at rent in isolation, it is important to consider all of the elements that constitute total occupational cost. Retailers consider rent alongside rates, service charge, fit-out, etc when deciding upon whether to occupy a new location,” says Summerscales.

“Equally, when calculating affordability, retailers are increasingly looking at the benefit of opening new stores across all sales channels. Though the function of stores is still predominantly to sell goods, they are increasingly important in driving online sales and building the perception of the brand.”   

Ruis says that where Jigsaw opens a new store, it tends to see a 20% to 30% increase in online sales from that area. “The bottom line is if we shut half our stores tomorrow we would lose about half our online sales. We take into account online sales in total occupancy.”

Online income aside, Butterworth believes that other occupancy costs and lease terms are swinging in favour of landlords, although rents may be static. “We’re seeing a reduction in the types of incentives you have to offer to get retailers in,” says Butterworth. “They want exposure to our visitor numbers.”

Peacock’s Costin agrees that landlords are not offering the same “killer deals” that they might have done when the country was coming out of recession.

“What’s changed more is what they’ll do for you,” he says. “They’re being less flexible on terms; before you could get a break clause at three or five years, now it’s 10 years.

“Before they’d pay for basic fit-out costs and now that’s less likely.”

“Ultimately, the UK is over-shopped and there is no way landlords can fill all the space”

Peter Ruis, Jigsaw

JoJo’s Tenison says that, along with high rent and rates, the high service charge asked for by landlords puts the retailer off from opening in shopping centres, which wouldn’t be matched by increased sales for a niche retailer. However, for some mainstream fashion retailers, landlords may still be willing to offer a competitive package.

“We’re opening about seven or eight stores a year and we’re finding the market has switched in our favour,” says Jigsaw’s Ruis.

“Deals are getting better in terms of incentives and we’re being offered some quite prestigious places. I’ve been told that in 2015 50% of leases are up for renewal, which means there’s quite a lot of space available.

“Over the years we could continue to see more favourable leasing deals. We’ve got a lot of competition from food and beverage retailers that we didn’t have before but, ultimately, the UK is over-shopped and there is no way landlords can fill all the space.”

Living wage

Independent retailers are certainly going to be affected by the living wage, according to the British Independent Retailers Association. In the July 8 Budget the chancellor announced that the minimum wage for those over 25 will rise from £6.50 per hour to £7.20 from April 2016 and to £9 by 2020. Almost two thirds of respondents to a Bira survey following the announcement said they believed the pay hike would result in fewer jobs.

Andrea Ryan, marketing executive at department store Hoopers, which has stores in Wilmslow in Cheshire, Torquay in Devon, Harrogate in Yorkshire and Tunbridge Wells in Kent, says the retailer will certainly be impacted by the increase.

However, it is not yet clear how this will translate in practice: “The living wage will impact us, as staffing budget is the highest cost and it will be out of our hands.”

JoJo’s Tenison agrees, although she highlights that an even greater pay hike was on the cards pre-election.

“If the government had imposed the living wage at the level Labour was suggesting it would have been a disaster – we calculated that three quarters of our stores would have been non-profit-making. What’s currently imposed is much more sensible and has a gradual introduction.

“The government has [also] done it hand in hand with corporate tax reduction. We’re sure we’ll be above the Living Wage anyway as one of our priorities is to look after our teams.”

Not all retailers are perturbed by the introduction. Jigsaw’s Ruis says: “The Living Wage will have no impact on the number of stores we take. It will cause some changes, but we’re not hugely concerned. Overall, it will affect the debate around property because a big employer would have to take it into account.”

The impact on retailers of the Living Wage has not passed the landlord community by. “The Living Wage has got to be a factor when a retailer is weighing up its portfolio,” says Capital & Regional’s Bourgeois. “It will certainly have an impact, but it is balanced by people having more money in their pocket and spending more.”

As Tenison highlights, the government’s reduction in corporation tax may go some way to balancing outgoings.

Another debate that has recently begun may also make a difference: the relaxation of Sunday trading laws. This may generate more sales but would add to staffing costs.

However, some landlords are in favour. “Sunday trading will be very important,” says Butterworth. “Our centres are more than just centres; they provide a day out. The restrictions on Sunday trading limit their attractiveness. The jobs and activity generated by freeing Sunday hours will make business very different.”

Regional growth

Many regions of the UK are set to get more retail space over the next two years, according to figures from market information provider CACI, with more than 850,000 sq ft of new retail space set to come online.

“Looking at the pipeline by region, we estimate that 15% will be in the West Midlands, higher than both London and the Southeast,” says John Platt, principal consultant in CACI’s property consulting group.

“Yorkshire and The Humber (14%), Northwest (13%) and the East of England (10%) also have strong pipelines. These figures are driven by key developments such as [shopping centres] Grand Central in Birmingham, The Broadway in Bradford and Victoria Gate in Leeds.”

It’s more difficult to pinpoint which regions are seeing most sales growth. Both Butterworth and Bourgeois report that this is consistent across their portfolios, although Butterworth adds: “We’re a bit concerned about Scotland. We all thought the slowdown was due to uncertainty around the referendum, but recovery has been slower than the rest of the country.”

Retailers agree that growth in regions is tricky to pinpoint. “It’s fair to say performance is consistent across all geographies,” says Ruis, while Tenison reports: “We have found that our like-for-like sales in the Southwest and central areas have been better than in the East and the North. I’d generally say that coming out of the recession has been a little faster in the south.”

CBRE’s figures for the second quarter of 2015 show which regions have seen a rise or fall over the last year or five years, indicating that Wales and the Southwest have seen the biggest drop. However, according to the market, the biggest difference is between prime and secondary or tertiary shopping areas. 

“Smaller retail locations, which were previously of sub-regional importance, are those where the issues are more structural than cyclical,” says Summerscales. “In some of these markets, where there were previously two strong retail destinations they have now consolidated into one dominant centre, such as in High Wycombe.”

Butterworth agrees: “The polarisation between secondary and tertiary shopping centres is just beginning,” he says. “We put lots of resource into making a centre more than a centre, which a smaller centre can’t do.

“At the same time the bigger retailers are realising that growth can come from bigger shops, so they want a flagship in prime centres and won’t bother with the weaker ones.”

Like a prime shopping centre, the UK’s more popular high streets are also retaining their charm. Tenison says there are some UK high streets, such as in areas of London like Hampstead, where JoJo Maman Bébé has been looking to open a store for years but opportunities have not come up or rents have climbed too high.

As online retail has grown over the years, consumers have become more willing to visit a single larger shopping destination as an outing rather than for necessity. This means that although consumer confidence is on the up, some areas still won’t benefit. As Ruis say: “Consumers are willing to vote with their feet at the moment. Confidence is back, but we have a winner/loser economy.”

As various elements of property and staffing costs look set to both rise and fall over the next few years, retailers will need to put more and more effort into luring shoppers through their doors.

The political view: Miles Gibson, head of UK research at CBRE

Miles Gibson CBRE

The ongoing tenure of George Osborne as chancellor of the exchequer allows us to make a number of predictions about what will happen next.

Business rates is the biggest concern for retailers. Following pressure from industry, the chancellor is conducting a review of business rates and will announce his conclusions in his 2016 budget in March. Business rates rise each year in line with RPI, unlike other business taxes like corporation tax – which the Chancellor has cut.

But Osborne is under severe fiscal constraints. He has to cut the deficit, and tax revenues need to come from somewhere – which is why he has already said that this review of business rates will be “fiscally neutral”. So he is unlikely to make far-reaching reforms.

Furthermore, business rates will also be revalued in 2017, which could mean that retailers will have to pay more while other types of property pay less.

The chancellor’s proposals for greater powers for local authorities to set Sunday trading hours could also benefit fashion retail and strengthen town centres. Because fashion retailers tend to have larger stores that are prevented from opening for more than six hours than a Sunday, this reform is likely to disproportionately benefit them, compared with grocery retailers who have developed smaller convenience store offerings that are not caught by the same rules.

But does economic instability herald more difficult times for retailers? The economic situation in the UK is pretty benign. Real wages are now rising sustainably and oil prices have fallen substantially. These effects put more money in people’s pockets, so they can go out and spend. And while instability in Europe may have some effect, retail investment in the UK in 2014 was the highest it has been since 2007, at about £12bn. And 2014 set a seven-year record for foreign investment into retail (at about £3bn). Overall, we are optimistic about the prospects for retail after a number of very difficult years.

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