Retail rent regime still outdated

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High street rents must match the new reality, not stay artificially high, says Simon Burke.

I am not a minor television personality with interesting hair, so in the eyes of the Government that probably means that I am not qualified to talk about the ills of the high street. But I have something to say nevertheless, about a topic hardly mentioned in the discussion so far.

The steady tide of store closures, so much in the news lately, is undoubtedly linked to a long-term trend of weakening store sales performance. There are many causes of this, most of them probably irreversible.

That said, when you look at retailers’ sales numbers, their actual declines, if any, don’t seem to be enough to cause such a widespread cull of shops.

The problem is that most shops operate on a very high fixed cost base. In good times, this can turbo-charge profits and has created some spectacular returns, especially when private equity debt structures geared things up another notch.

But it works in the other direction too, making profits fall out of all proportion to a sales decrease.

In many cases, if store sales fall (or merely fall behind cost increases) by more than 10%, it is enough to put the branch into the red.

The slow seepage of business online, into supermarkets, and otherwise away from shops has brought many of them to this point in recent times. If you can’t reverse the sales trend, however, there is another way to restore viability, namely reducing the cost base.

One of the biggest costs in a shop is the rent. Economically, rents are the market price of high street property and broadly they have reflected the sales potential of a location. In the past, as sales rose, so in due course would rents, retailers being prepared to pay more to realise the sales potential.

It worked on the way up, but it doesn’t work when sales potential is falling. In fact, the property industry has created a structure in which it is almost impossible for rents to fall in the short or medium term and in a worst-case they will merely level out at the highest achieved figure.

This high and inflexible cost, with the related additive of rates, is strangling many of our high streets and it will not be cured by the odd Market Day.

Long leases, under which somebody continues to be liable for rent, insulate landlords from the financial effects of all this, so they do not have to recognise that their product has become overpriced.

As retailers, we enjoy no such luxury and we know that long-term overpricing will kill our business. Good shopping centre landlords also realise the importance of keeping a vibrant tenant mix, even if short-term rent levels suffer.

If high streets are to survive as shopping places, then shops have to be priced to reflect their new economic potential. The archaic system of preserving rent levels should be abandoned now, and the market allowed to set them in all cases.

If we wait for all the current leases to expire, then time will have run out too.