Perhaps more pertinent to landlords, what’s the future for their commercial property investments?
With shop vacancies in some locations surpassing 30% the immediate outlook looks pretty grim.
But, like all property markets, retail shopping has many parts, shapes and sizes, all with their own characteristics and local economies. These range from the small village, the urban neighbourhood shopping parade, through to the small, medium and large towns. Then there are the cities, out of town supermarkets, retail outlets, mill shops and large hyper shopping malls.
Whereas small villages are often down to one store, if they are lucky, most small urban shopping clusters are supported by large housing densities, so they can survive very well – their retail space is well supported for essential and convenience goods and services like hairdressers, chemists, newsagents etc.
But small towns are a different story, with some literally dying a death and others still surprisingly healthy. Some small, tired shopping centres are suffering almost as much as town centres, depending on their locations, whereas most modern out-of-town supermarkets and large destination malls seem to be where all the action is today.
It all boils down to competition: towns with other towns or out-of-town shopping in close proximity are more vulnerable than their rural counterparts, where people don’t have much choice as to where they shop. Once a town goes into a downward spiral it’s hard to reverse: shops start to close and the high street takes on that depressing run-down boarded-up appearance, with decaying upper parts, foliage growing from gutters, and a vista dominated by To Let or For Sale signs. Visitor numbers dwindle, profits decline and still more closures – the end is nigh!
In the wake of a spate of high street closures such as the big chain retailers HMV, Blockbuster, Jessop’s, Comet, Land of Leather, among others, there are mixed feelings about the way things will go in retail as we pull out of this recession.
Graham Ruddick, writing in the Daily Telegraph, recently says: [the] “High street’s death has been greatly exaggerated” and goes on to cite the growth of the bargain basement retailers and the investments that some leading developers are making.
However, we need to temper Ruddick’s view with that of Lee Manning’s (lead administrator for Blockbuster), when he says that the era of the traditional high street has sadly past. “It is just too late. There might be nostalgia for the high street, but it is too late now. It is over”
The challenge from the combined impact of the Internet and out of town shopping has put UK high streets under more strain than many of them can cope with. The figures now available show that around 9,000 retail stores closed for the year ending 2012, 78% of which were in small towns or smaller shopping centres. More are predicted to go over the coming years as more chains and the traditional high street butcher, baker, greengrocer disappear.
Obviously, retail can never die completely as we all need to eat and consume goods and services. Despite this fact of life, the current economic environment means that consumer spending is down, and a large segment of spending is going down-market. But, at the same time retailing appears to be going through massive structural change.
What seems to be happening is a polarisation of centres; a repositioning to a smaller number of high profile retail destinations supported by Internet multi-channel delivery. According to credible research the average large retail chain will reduce its store count by around one-third over the next 3 to 5 years. Those retailers that are really leading the way, Tesco and John Lewis, for example, have been embracing the all encompassing consumer experience for some time, creating a holistic destination shop, supported with Internet access and delivery – browse and buy in-store, click and collect, click and deliver.
This shift is creating something of a demographic divide: the “haves” with their own cars willing to travel some distance for a large shop or family-day retail and entertainment experiences, the “have-nots” who are usually limited to the nearest town that they walk to, or a hop on a local bus route.
But all that’s only half the story: government, both central and local, rely heavily on business rates (the equivalent of council tax for businesses) to provide around 5% of their total tax revenue. In addition, local authorities take an increasing slice of their income from in-town parking fees, fines and charges.
Government desperately need the income from a dwindling pool of high street retail activity and despite their insistence that they support the traditional high street, always want to take more. All commercial premises are now paying full business rates when they are vacant, despite that fact that many landlords have no chance of re-letting in the short-term. Rate rises are still tied to the higher Retail Price Index, as opposed to the lower Consumer Price Index, which government now insist is to be the basis for most other consumer linked price guides.
Despite retailers expectations that something would be done about Business Rates in the budget it seems the government is to press on with a third successive substantial business rates rise resulting in an estimated 2.6 per cent increase linked to inflation. This will add something link £175m to retailers overall bills which is on top of increases of more than £500m in rates over the last two years.
The British Retail Consortium has been calling for a change in the way business rates are calculated which would use September’s retail price inflation figure plus a 12-month average of the consumer price index.
Despite recent hints from Vince Cable of a major overhaul of the business rates system, retailers are frustrated the issue was not addressed in the budget. There is still no sign of a change of policy on empty business rates, long called for by the British Property Federation (BPF)
So, where are we at? We’ve got retailers struggling to attract customers to the high street against aggressive parking restrictions, continuing business rates rises and an increasing wall of competition from out of town shopping and the Internet. We’ve got local authorities who, in many cases appear not to care, and competitors such as shopping malls and Internet retailers like Amazon, who pay virtually no business rates or corporation tax and where parking charges are not an issue.
The retail scene in many towns continues to decline further, and a bleak boarded-up landscape prevails; more shops will close and the downward spiral will continue as the retail mix needed to attract shoppers to the destination is lost.
Large and small commercial landlords alike are faced with these extremely challenging conditions. With an economic environment which is unlikely to change for the foreseeable future, if you are in locations in terminal decline you need to be prepared to make some tough decisions.
Economic adversity always brings opportunities but the challenges ahead mean that as a commercial landlord you need to be pretty astute to read these changes to your advantage.
By Tom Entwistle, LandlordZONE®