The Retail Maze

The performance of prime retail areas such as London’s Bond Street stands in  contrast to the rising vacancies and falling investment that characterises regional high streets across Britain. The widening differentiation between retail locations is creating a tiered retail market.

In prime areas of the capital it appears to be business as usual for high-end retailers who compete to pay inflated rents for prominent locations. Landlords of these flagship luxury stores remain insulated from the drop in consumer spending that has led to so many casualties on the British high street. Whilst the average prime retail rent in Britain now stands at £111 per square foot (psf) Zone A, 13.5 per cent lower than in 2008, Bond Street Zone A rent has risen consecutively over the last five years and now stands at £950 psf.

Demand for retail space on Oxford Street, Bond Street and Regents Street is currently outstripping supply. This of course pushes up rents in one of the world’s most expensive locations. Recently, Russian jeweller Maxim Voznesensky paid a substantial premium and committed to a 17-year lease on 249 sq ft basement on Bond Street at a rent of £225,000 pa, and Fabergé have just secured premises on nearby Grafton Street.

The regional retail landscape tells a profoundly different story. The fall in consumer spending is being felt acutely in the North where the public sector makes up a greater proportion of the economy and the Government’s austerity measures have had a depressive effect. Even the big players are squeezing profit margins and consolidating their outlets. Thorntons is to halve its store numbers in the next three years, Mothercare is to dispose of 121 of its branches, and Phillip Green has announced plans to cut 260 stores in his Arcadia empire. All of which lends credence to the view that Britain’s high streets have become second-class shopping areas. The retail property sector is becoming polarised and the few retail successes refer to those selling necessities and luxuries.

If the high street underpins the UK’s economic health then the patient is in a critical condition. One in seven shops on the UK’s high street already lies empty, and high street footfall outside Central London has fallen on average by more than 10 per cent in just three years. Jones Lang LaSalle’s ‘Retail Spotlight’ September 2011, quoted retail vacancy rates increasing to 40 per cent in some regional towns. The publication suggested that the next 12 months will see “the good survive and slowly get stronger and the bad will falter.” Whilst it is true that there is an element of the survival of the fittest in respect of retailers, the state of Britain’s high streets is more complicated than this.

Big retailers such as Marks and Spencers have realised that they can operate from fewer and better locations, with larger more profitable stores. The advent of mass online shopping has reduced foot fall and only benefits those retailers big enough to have an online presence.

The closure of the marginal stores means the attractiveness of a town centre declines. The availability of so many units has a negative effect on occupied rents and combined with the change in empty property rates this has had a major effect on the appeal of the high street to potential landlords. Most leases still contain an upward only ‘market rent’ review so in a falling rental market a landlord cannot guarantee that the rent will increase in line with inflation.

There appears to be a further distinction in the retail market between shopping centres and the high street. The high street is at threat from the increased choice and convenience of the outlet retailing model. Shopping centres have lower void rates than those found in town centres and benefit from a single landlord who can tailor the tenant mix to suit customers’ needs.

Over the past couple of years Westfield has entered the UK market, and with the opening of the Stratford City these centres have shown that effective management can buck the market trend. For example, landlords are prepared to spend big on associated facilities to attract the crowds – as with Bluewater and the new £60 million event space.

We will see whether Bond Street and the golden streets around it become victims of high rents. More widely, our high streets have perhaps to be re-considered so that there are not simply retail haves and have nots but a place can be found for the middleman too.

Henry Pinchbeck, solicitor with the real estate department, Manches LLP