In the first in a trio of articles focused on opportunities in retail property, Simon Porter, assistant in the real estate team at UK law firm Dundas & Wilson, focuses on UK high streets
Always open with a bold statement they say…how about this: now is a great time for retailers to pick up new stores on the high street.
Another month, another high street retailer slides into administration, leaving yet more empty shops and ‘to let’ signs in its wake.
In March it was the turn of Game, whose administrators closed 277 stores and laid off 2,000 staff in the face of an eye-watering quarterly rent bill of £21m.
There is no doubt life in the bricks and mortar retail economy is tough. As consumers increasingly shop via clicks rather than bricks, retailers that rely on traditional channels have been left struggling to cope with high rents, high rates, and high levels of both competition and consumer savvy.
Against this backdrop, the prevailing logic is it is time to adapt in order to survive. Retailers should retreat from expensive city centre space and instead focus on strategic moves deeper into online (and particularly mobile) retailing markets where there are bigger profit margins and better prospects for growth. So, as far as the high street is concerned, retailers should follow the herd and run to the hills… or should they?
The Socks, stocks and shops theory
US billionaire Warren Buffett is one of the greatest investors of the past 50 years. His investment strategy is steeped in solid principles of long-term thinking, quality products and opportunity for growth. Buffett offered up some simply irresistible wisdom when he said, “[w]hether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”.
This is a concept that every shopper on the high street worth their salt understands when on the hunt for a bargain. A quality, classic purchase will outlast trends and fads, booms and busts. Quality endures.
Bag a bargain in the high street’s reduced section
Just as boom time bullishness drove the market to dizzy and over-priced rental heights (which are now contributing to so many retailers finding trading difficult) the current bust time bear market is driving the market to be under-priced – and there is, therefore, value to be had for those who require high street space.
Landlords have been slow and understandably reluctant to shift from the lofty positions they occupied during the wider economy’s boom years, when quality tenants would be falling over themselves to commit to high rents for lengthy periods in order to secure decent high street space. Times, however, have changed and are continuing to do so apace. City centres are awash with ‘to let’ signs and retailers are reluctant to commit to new deals in such austere and uncertain times.
Trends in retail leases are now towards shorter durations, longer rent-free periods, more frequent tenant break options and other tenant incentive packages. Landlords are beginning to recognise they need to offer bargains to secure hesitant tenants. An average covenant goes a lot further than it used to these days and tenants can call the shots in negotiations a lot more than they used to. There is clearly a lot of mediocre – or just plain bad – space out there and the best prime space will always be in demand, even in a recession. But with so many big retailers becoming insolvent or systematically reducing their store network, there are definitely good deals to be had by savvy retailers in the high street’s very own reduced aisle.
It could, of course, be argued the value in a retailer having a high Sstreet presence will never return to its former levels as online, mobile and other channels account for ever higher proportions of sales. Only time will tell how the retail market emerges from this period of reshaping, correction and evolution but as Mary ‘Queen of Shops’ Portas knows so well: the British public love the social and tangible experience of real life shopping in the pleasant environment of the traditional high street and this is something that is not going to disappear any time soon.
I imagine if Warren Buffett ran retail operations rather than investment funds, he would currently be raiding Britain’s high streets for bargains and stocking up not just on socks but also on shops…