With rents only going one way, retailers such as Sports Direct are leading the charge in snapping up the freeholds on prime locations. Drapers finds out what this means for the property sector.
Anyone who has ever rented has become frustrated with their landlords and wished they could own their own property. Well it turns out that frustration also applies to fashion retailers – and some are now beginning to act on it.
Perhaps the biggest example was Sports Direct owner Mike Ashley paying £108m to buy an east-side Oxford Street location for his Flannels brand in April 2016. Sports Direct has been typically tight-lipped about the deal, but CBRE head of retail tenant representation Graham Barr believes it is a case of “if he buys the building, there’s no one who can tell them what to do”.
“Mike Ashley wanted to buy a bit of Oxford Street real estate and was turned down by the Crown Estate. He then tried to put a bid in for a bit of Austin Reed and again was knocked back, but now he’s put down his roots and that’s that,” he says.
“It’s one way of getting round some of the more selective landlords. On top of that, that area to the east of Oxford Circus has seen rents increase by around 50% in the past few years. So why would you tie yourself into a lease?”
Ted Baker secured a similar deal in December 2015 when it bought the freehold of its 79,000 sq ft King’s Cross headquarters in London for £55.25m. Although it is not used for retail, chief executive Ray Kelvin says that buying the freehold for the so-called “Ugly Brown Building” was important as it is “an important part of our history and unique personality”. He adds that the move will protect the retailer from further rent hikes.
And it is not just the big players who are starting to consider this option. Moda Rosa is an independent store in Hampshire that predominantly sells formal womenswear. Owner Rosie Wild told Drapers she has an unusual set up – she leases the lower floor, but owns the freehold for the upper floor.
“It’s been handy because we wanted to do things upstairs like put in an extra fitting room and we’ve been able to do it without any fuss,” she explains.
Retail landlords will need to shape their thinking … offering flexible configuration and leasing options.
Eleanor Jukes, property strategist, Legal & General
Even when retailers aren’t buying freeholds outright, some are looking to expand their existing premises, often into adjacent office or vacant space, to scale up their operations. This can be for a variety of reasons, says Legal & General property strategist Eleanor Jukes.
“Retailers will focus more and more on the function of a unit rather than its format,” she explains. “Retail landlords will need to shape their thinking in this way, offering flexible configuration and leasing options.”
Women’s clothing retailer Roman has recently gone through a large period of property expansion, growing from 34 stores in 2010 to 150, spread across Great Britain and Northern Ireland, today. Co-founder Peter Christo told Drapers that when it comes to planning the new premises, it is important not to rush.
“We’re waiting for the right location and it is now about being more specific,” he explains. “We’re at that stage where it’s not a race, but about getting it right for the brand and the business.”
Deryane Tadd went through the process of expanding her St Albans womenswear boutique The Dressing Room from 1,500 sq ft to 2,000 sq ft in August 2016. Although she does not have the freehold of the property, she admits it is something that would have helped with the refit: “We didn’t want a second location but it was quite tough not having the space here or the option to extend physically so we ended up having to reconfigure, which was quite complicated” she says. “Owning the freehold is something we’ve always thought about, but right now we have a settled landlord. The idea is never far from our minds though.”
Steve Cochrane, owner of Middlesbrough luxury independent Psyche, is expanding his premises. He needed more space for six new employees – taking the total staff up to 70 – after online sales boomed by 36%, increasing total turnover to £7.1m. He owns the freehold of his three-storey building and is adding an extra level to add a further 5,500 sq ft of floor space to its existing 35,000 sq ft. It will officially open in October 2016.
“It cost more than I hoped. But ultimately people and stock are under one roof, which is more efficient than taking out a second location. And it adds value to the building,” he explains.
Adding value to retail premises is something some owners see as part of a wider financial strategy, believes Jeremy Cooper, head of retail and consumer brands at accountancy firm Crowe Clark Whitehill.
Outside of the premium real estate locations he sees this, more so than rising rents, as the main reason freeholds are being snapped up.
“I think it’s a case of entrepreneurs being opportunistic and if the right property comes up at the right price – for example, a residential property above the shop – they’ll go for it,” he says. “There are some who have brought properties and sold them on for a higher value without ever using it as retail space.”
Clearly, there are advantages to snapping up a freehold on a property rather than continuing to pay rents and face the potential risk of one day losing your spot to a retailer willing to pay a higher premium.
In the longer term, the question will be how much will you have to pay to do so, and what this will mean for rents when some of the prime leasing locations see a reduction in the space they are able to offer.