High street rentals: challenges and solutions

Retail rethink

15 November 2018

Simon Rubinsohn and Jojo Cronin set out some of the challenges for the UK high street, as well as proposed solutions

Over the past few months, the debate about the future of the high street has intensified as the cries of pain from ailing retailers have reached fever pitch. And with the fierce structural and cyclical headwinds showing no signs of easing, it seems highly likely that the already long list of casualties, including many household names, will lengthen further as winter draws in.

It seems highly likely that the already long list of casualties [...] will lengthen further as winter draws in

The reasons for this sad state of affairs are familiar enough. The inexorable rise in online competition – which now accounts for around £1 in every £5 of retail spending compared with just 20p a decade ago – is responsible for much of the pain being suffered by more traditional bricks-and-mortar brands.

However, alongside this, the largely stagnant living standards that have prevailed since the onset of the global financial crisis, coupled with the revaluation of business rates, have exacerbated the pressure on the sector.

Research by Altus Group puts the scale of the latter in perspective, estimating that the average rates bill for department stores in England and Wales will increase by more than a quarter in 2018/19, while large high-street shops see more modest but nonetheless double-digit rises.

Clause for concern

One consequence of this has been the well-documented, if somewhat controversial, application of company voluntary arrangements (CVAs) in an effort to improve the viability of a number of struggling retailers. Data compiled by RICS as part of the second-quarter UK Commercial Property Market Survey 2018 suggests that something in the region of one-third of respondents had seen an increase in the use of CVAs over the past 12 months.

Intelligence gathered through the RICS survey provides overwhelming evidence of the challenges becoming more widespread and pronounced

More significantly, around two-thirds anticipated that this would lead to more retailers attempting to insert CVA clauses into contracts going forward. As a result, it is widely expected that landlords will probably become increasingly cautious about their future exposure to the sector – the lessons of the likes of House of Fraser, New Look and Toys ‘R’ Us among many others are unlikely to be quickly forgotten.

Talking about retail in this general way does, of course, mask significant variations in performance. But the intelligence gathered through the RICS survey provides overwhelming evidence of the challenges becoming more widespread and pronounced.

For example, the latest results show rent expectations for prime retail turning down for the second consecutive quarter, although the projected decline over the next 12 months for this segment is still relatively modest at 2%, compared with a figure of more than 6% for secondary retail.

It is also noteworthy that the rents indicator for either primary or secondary locations is not positive for any region of the UK, over either a 1- or 3-year time horizon. Alongside this, we are being told that landlords are having to be increasingly generous in most parts of the country to attract and retain tenants.

Evolving streets

So what does the future hold for the high street? Is it realistic to try to recreate what many of us are familiar with? Or do we need to recognise the need for it to evolve? The emotional attachment to the traditional shopping experience remains strong for many, but data on footfall and the visible signs of overcapacity suggest this is insufficient to maintain the status quo.

Is it realistic to try to recreate what many of us are familiar with? Or do we need to recognise the need for it to evolve?

In the recently published Grimsey Review 2, a rather different future for the high street is sketched out by retail expert Bill Grimsey (vanishinghighstreet.com). This is one in which:

‘there is a need for all towns to develop plans that are businesslike and focused on transforming the place into a complete community hub incorporating health, housing, arts, education, entertainment, leisure, business or office space, as well as some shops, while developing a unique selling proposition’.

This emphasis on mixed-use placemaking provides an attractive alternative to the current challenges faced by many retail centres. Realising it will, however, require both vision and a willingness to act on the part of central and local government. It is likely to require a reassessment of the best way to raise revenues to match desired public spending commitments, as well as a recognition that greater flexibility is required on use-class designations.

In the absence of these and other changes, it is hard not to see the picture outlined in the latest RICS survey continuing to deteriorate. Of course, even in this environment there will be winners who can take advantage of omni-channel distribution. But broadly speaking, the legacy for the high street is likely to be a bleak one. 

Simon Rubinsohn is Chief Economist at RICS and Jojo Cronin was on a work placement with the RICS Economics team

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