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Drapers Property Report: Storm clouds gather over the high street

A post-Brexit economy, rising rents and rocketing business rates in some areas are casting a gloomy shadow over the coming year.

Dark clouds are forming over the UK high street. The implementation next month of the business rates revaluation is set to adversely affect property costs in London and the south-east, while the national living wage is expected to have a negative impact on retailers’ staffing decisions.

Both are set to have consequences for fashion retailers, as they weigh up their ability to afford and staff their stores, all in the context of economic and political uncertainty. This was the consensus among the real estate and retail experts we spoke to for the Drapers Property Report.

Tony Devlin, executive director at property agent CBRE, says: “There are a few headwinds we see from our clients at the moment, and number one is the changes to business rates. Clearly, there will be an impact on the potential rent retailers can pay a landlord because of that increase. This issue is definitely gathering momentum.”

The business rates revaluation comes into effect in England and Wales on 1 April. Rates will fall by around 6.5% in the north-east of England, but rise an average 26% in London and 1.4% in the south-east, the Valuation Office Agency indicates. Other reports suggest rises of more than 100% in the best prime London locations and falls of 50% in the north.

The government has earmarked £3.6bn for transitional relief for businesses that face large increases and communities secretary Sajid Javid has said he is working with chancellor Philip Hammond to provide further support. In his Spring Budget last week, Hammond announced a £300m fund for local authorities to let them to provide discretional relief. Yet some retailers question whether this is enough.

How this can play out in practice is a really big challenge for the government

Tony Devlin, CBRE

Peter Ruis, chief executive of premium women’s and men’s wear chain Jigsaw, says: “[Business rates are] tipping the balance. All of the nonsense about rents going down – I haven’t met anyone saying rents are going down. My rates are going up in something like 70 out of 80 properties, and I am completely national. It just means I won’t be able to open shops.”

Linsay Miller, head of real estate at footwear retailer Schuh, echoes this: “Rents have been rising in key locations and, together with the impact of the increase in rates bills in those same locations, the combined property costs in those locations will not be sustainable.”

Devlin agrees that rents are “shooting up” in some areas, such as Glasgow, but adds: “My biggest concern is that it is primarily a London and south-east issue, [whereas] the whole of the rest of the country is potentially benefiting from a reduction in business rates. How this can play out in practice is a really big challenge for the government.”

For some areas of London, where rates are doubling or tripling, landlords are likely to have to reduce rents on new leases to make the overall property costs affordable.

In London, several businesses, co-ordinated by the New West End Company, have written to the government to warn of the “severe damage” they say the revaluation will cause to thousands of companies.

Devlin warns this will be a huge challenge for retailers already up against squeezed margins and facing stiff competition from new market entrants: “We are seeing the likes of Missguided starting to roll out [bricks-and-mortar stores], which I think will be a reasonable challenge to the main players of H&M, Inditex, New Look, Topshop, and probably to a lesser extent Primark – those are the key space drivers.”

As for letting shopping centres, he adds: “They are the people who drive who else is coming to your scheme, outside of a letting to an M&S, or House of Fraser or Fenwick. If you can’t attract them, then you’ve not got a centre, basically.”

 

Rent issues

Devlin says big internationals such as H&M and Inditex are becoming very picky about what deals they will do, now wanting UK landlords to become more in line with their continental counterparts, where shorter lease lengths with more breaks are the norm: “It’s definitely a learning curve for UK landlords. They may have to soften their lease terms to get these international retailers.”

The challenge landlords face is that companies such as Inditex represent a portfolio of brands, so, if a landlord says no to one, they may lose the opportunity to do deals with the whole group.

“To do a deal with these [companies] – and outside of central London really – you are having to give a rent-free period and a capital contribution pretty much across the board,” says Devlin.

He adds that if a retailer has the opportunity to walk away after three or four years, the landlord will probably be in a position where it will not have received any real rent by the time break comes around. “And if they have that break, whether they want to exercise the break or not, they still have that leverage where they can go back to the landlord and ask for an extended rent-free period.”

Miller thinks it will take landlords time “to accept the inevitable change in rental values”, but that, in the longer term, secondary locations could benefit as retailers take advantage of falling rents.

Ruis agrees something has got to give: “Some landlords know Brexit has happened and there is economic uncertainty, and some are sticking to historical deals.

“Probably the biggest challenge is some of the shopping centres because the consumer is travelling out to some of the centres less frequently than they did five or six years ago. People are time poor, petrol is going up again and I think people’s lifestyles are now more about shopping little and often, and increasingly locally, as we have seen in the supermarket sector.”

Nonetheless, the shop vacancy picture is more positive than some people think, says Local Data Company (LDC) sales and marketing director Matthew Hopkinson. More stores opened than closed in 2016 and in December the retail vacancy rate fell to its lowest since 2010, reaching 12.2%.

“Overall, while we are going through a lot of transition, what is interesting is that while online retail sales continue to grow, the real factor is that the shop vacancy rate has continued to improve. More money being spent online and more occupied shops is the reality of what is out there, but it isn’t the case everywhere,” he says.

 

Wage concerns

Another challenge on the horizon is the rise in the national living wage from 1 April – up to £7.50/hour from £7.20/hour for adults aged 25 and over.

“That is possibly more impactful across the country than rates and potentially any other economic uncertainty,” says Devlin. If stores reduce staffing levels, it will take away from the service element that attracts consumers to the in-store experience in the first place, he says.

Brexit adds further pressure. With the fate of European Union nationals residing in the UK yet to be confirmed and the weakening of sterling, retailers are already feeling the effect of a diminishing foreign labour pool from which to staff stores.

“Post-Brexit we are struggling to fill some of the jobs. We’ve all got a huge amount of international people running our stores and there are fewer of those qualified people coming over, and we are not being over-burdened with British people applying for the roles,” says Ruis.

In the longer term, Devlin believes another factor that will cause problems is a lack of new retail space:  – only The Lexicon Bracknell and Westgate Oxford are due to open this year: “The likes of Primark, which are big drivers of footfall, are now getting pretty close to their capacity in the UK, as are a number of other retailers who may need to look out of town to some of the fashion parks to satisfy any form of growth.”

So expect bumps in the road over the coming year. Retailers will have to adjust to a new political and economic landscape, and landlords will have to adjust with them, as economic and political headwinds reduce the appetite for stores in London and the south-east in particular.

 

The year ahead: what the experts say

Peter Ruis

Peter Ruis, chief executive, Jigsaw: “The fact that we are just having business rates go up and to levels that are unprecedented, while there is no tax whatsoever on pureplay etailers, just makes no sense. The simple reality is we won’t open the shops, which means at every single level, fewer jobs, less investment, and less local investment. The reality of rents, business rates and a Brexit economy means something has to give.”

matthew hopkinson cropped

Matthew Hopkinson, sales and marketing director, Local Data Company: “There are a number of unknowns and uncertainties in the year ahead. One is around profitability. All of these landlords that have spent a lot of money in the last five years on new schemes are looking to increase rents. [Yet] you have increased business rates and the whole debate around that. You have the living wage. So you have a lot of pressures before you even consider you have to keep your website up to date, you have got to have a logistics hub, and you have got the fact if you are a fashion retailer you may have 30%-40% returns. That is a big challenge.”

linsay miller schuh cropped

Linsay Miller, head of real estate, Schuh: “In the UK, we continue to look at opportunities and in terms of our acquisition strategy it is business as usual and we continue to look at opening stores in key locations with a particular focus on growing the Schuh kids business. The uncertainty over Brexit is stalling our growth outside the UK, but we fully intend to further grow the business in both Ireland and Germany once the implications of Brexit are known.”

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