by Bob McKenzie
The effects on offices of the new Use Classes Order, brought in last year, have been much discussed but little has been said about its impact on the High Street — a lesser impact it may be, but none the less something which should be recognised and understood.
The old Class 1 was thought out-of-date and overtaken by modern conditions — which it had been — and that reclassification was appropriate, which it most certainly was. There is now clarification, but still a rigid separation of those various parts of the user mosaic that collectively make up the personality of the High Street.
Class 1 (now Class A1) users, which include retailing, post offices, travel agencies, hairdressing, undertakers, hire shops and launderettes, all attract the large numbers — the landlord would call it maximum pedestrian flow — and yet are inoffensive in terms of noise and smell.
The real difference, however, lies in the treatment of ancillary activities. Class A2 embraces uses which do not have quite such a heavy degree of public patronage but where the services are nevertheless principally for the visiting public, ie banks, building societies, estate agencies, employment agencies, betting shops and professional services (not medical). They were formerly either Class 2 offices, or sui generis, ie not falling within any specific category.
Increasing public sophistication and affluence has been reflected in an enormous expansion in the range of these services, yet the planning restrictions remain. These A2 users are interchangeable with each other without consent and an A2 user can become A1. But the reverse of this is not the case: an A1 shop cannot become, say, a Class A2 bank or building society.
The superficial objective is largely to preserve the visual appeal of Class A1 shopping frontages selling actual merchandise, or providing customer intensive services that a wide range of the public are likely to require. Although often disputed at planning appeals, the underlying rationale is to ensure that the strength of shopping activity is not undermined by supposedly less attractive uses.
The rationale is not yet perfect in my view because while, inevitably, the public will all eventually require an undertaker (Class A1), the likelihood is that they will in the meantime be making a more intensive use of the betting shop (Class A2).
Pubs and restaurants make up Class A3 — labelled, in the new Order, “food and drink”.
Some of these operations are a mixed blessing in terms of noise, smell, litter and appearance and this no doubt will be the underlying reason for not allowing indiscriminate change from the “pure” shops of Class A1 to this Class A3. Again, however, while an A1 shop cannot be changed into an A3 pub or restaurant, an A3 pub or restaurant can easily be changed into an A1 shop. This ability now to turn a pub into a shop without the necessity of consent (other than for physical development aspects), is one of the few significant changes brought about by the Order, and in many areas will frustrate planning policy.
Public house turnover and profitability and the relationship between the two is a highly secretive area — and always has been. The value of the licence as an outlet for the brewery is one of the earliest examples of vertical integration. Unless the license value is not profitable it has always been difficult to persuade breweries to part with pubs for development conversion to shops. Now, however, the signs are that with increasing predator pressure on breweries as a result of the decreasing amount of beer being drunk — and consequently a desire for breweries to look to exploitation of property assets combined with the planning hurdle now removed — it is reasonable to forecast that there will be accelerated conversion of pubs into shopping use.
A valuation factor that may concern breweries is their vulnerability to the new rating assessments on the grounds that with relatively little adaptation some of their outlets could be fabulously valuable shops.
The overall effect of the new classification, then, has been to tidy matters up. Should it, however, give anxiety as to a possible effect on values, and, if so, might this anxiety find expression for example in lease covenants and the drafting of rent review clauses? Has there been any actual change in the law of supply and demand and the structure of values that flow from it?
In the absence of any significant upgrading (with the possible exception of pubs) or downgrading, there appears — at present at any rate — to be no grounds for anxiety in regard to retail property, or a need to tie oneself in knots structuring user and alienation clauses for eventualities that are somewhat indefinable and may not occur.
It appears likely that it will be market forces, and not planning restrictions or classifications, that will continue to determine values in the High Street. There may, however, be one exception to this last comment — the well-known phenomenon of building societies (and occasionally banks), paying well over the prevailing zone A rates to acquire banking type premises. Like the scarcity of planning consent for superstores, restrictive planning policies in the High Street have, in the past, created premium values.
This situation is somewhat modified today as, generally speaking, there is saturation coverage by both banks and building societies and the merger rationalisation in the building society industry has also modified demand. Nevertheless, with the one exception of fast food chains, no quasi-retail activity with the power of building societies and banks to pay over the odds for the premises they really want has yet emerged.
In debating the whole issue of market realities of the quasi-retail user in the High Street there are two basic polarisations:
(a) The primary v the secondary location and/or the central v the local locations;
(b) The attitude of the owner/occupier as opposed to a landlord and tenant relationship.
Primary v secondary and central v local
While primary locations remain primary — that is to say not yet undermined by the advent of a new shopping centre or out-of-town scheme — the pure retailer, especially the fashion users, will always outnumber and outbid the quasi-retail user. The exceptions at various times have been banks, building societies, caterers of the McDonalds genre, and to a lesser (but increasing) extent at the moment, travel agencies. With some of these users, there remains a degree of potential planning conflict but, as indicated earlier, this conflict has weakened and the premium syndrome is less in evidence.
It is the secondary and local shopping locations that benefit or suffer, according to viewpoint, from the expansion not only of Class A2 financial and professionally related services, but which also house the quasi-retail operations in Class 1.
Here it is often the case that such users can equal or outbid pure retail use. Secondary frontage is, however, secondary or local, and any “public-drawing” initiative may actually add to amenities and sustain values. For example, a good-looking modern print shop, a smart building society or a bright house agents office may have more appeal from all points of view than an uninteresting or poorly operated shop, although planning control cannot operate in such very detailed terms.
Owner occupiers
Banks and building societies, the main potential villains historically resisted by planning edict, have the greatest capacity to buy. Rather like the superstores, they will pay not just for intrinsic site value but for the benefit of potential market share as provided by the superior location. However, this relates principally to the freehold acquisitions predominant with banks and building societies.
The property is regarded as a necessary tool of their trade, and any “diminution of tone” caused by their own non-retail presence is very much a secondary consideration.
Landlord and tenant relationships
On the other hand, the landlords whose first concern is maintaining and improving value may take a different view. They will be primarily concerned about impact on adjoining frontage — especially if they own it — and not seeing its retail quality debased, so reflecting unfavourably on their own ownership. Hence, the amount of rent they can immediately obtain will be conditioned by the more important consideration of reversionary or rent review value, and capitalisation yields.
There can be no generalisation as to the policy of drafting rent review user and alienation clauses. It all depends on the locality, the state of supply of shop property, and trends in shopping movement.
The only truism, perhaps, is that landlords of primary and very good secondary locations can be expected to take the narrow view, and insist on pure Class A retail user. If the property is truly prime the landlord might even want to limit the user to a specific trade; whereas the landlord of a lesser secondary or tertiary property may take the view that a good Class A2 or quasi-retailer offers an equal or better prospect of engendering trading vitality and maintaining value, and will draft the lease accordingly.
As far as development, out-of-town shopping and shopping centres are concerned, there is no discernable impact following the advent of the new Order, though some observations might be made.
Development
The developer is in the same position as the landlord of existing property — keen to obtain the best possible rent from the best possible covenant likely to sustain that level of value for both the subject and adjoining shops in the development. In the primary positions this is generally going to come from the pure retailer. However, even in primary positions, the developer will seek to obtain a planning consent, if possible, that also allows the Class 3 catering user. The reason for this is that the level of competition for high-quality development sites is such that values way ahead of current rates are frequently paid. In these cases it is comforting to be able to fall back on a major catering concern who — for reasons of territorial dominance, market share, possible difficulty of obtaining planning elsewhere, and profit margins — can, and will, sustain a rental higher than pure retail tone.
Another aspect of development is that owner occupiers, or a group of them who might operate for example in the legal and architectural fields, could very well combine forces and seek to develop a relatively modestly priced site in a tertiary shopping location, whereby they would be able to combine the benefits of having a public office under Class A1 and their own operation offices on the floors above, as covered by Class B1.
These are just two isolated instances but again I think it is valid to stress that there are no generalisations, and everything depends upon the circumstances.
Shopping centres
The large, modern, purpose-built shopping-centre idea and the letting policy offers a microcosm of the ideal world outside.
That is to say the promoters appreciate that there have been changes in the patterns of spending and saving, and that the increased sophistication of the public finds expression in the patronage of all kinds of new services and quasi-retail activities.
The tendency, therefore, is to accommodate these but, since they are generally less capable of paying higher rentals, require premises that are slightly smaller than the modern functional fashion user type, and are not so customer intensive, the accommodation is likely to be provided in secondary or upper-floor locations.
Unlike many of the misconceived shopping ventures of two or three decades ago, the presence of service trade users no longer denotes failure of letting pattern, but rather a conscious desire to fulfil a complete spectrum of the public’s requirement.
The sale of food to be consumed on the premises offers a particular manifestation of this — a food court is now regarded as the indispensable pre-requisite of a successful shopping centre.
In planning terms, this multi-class user has presented no problem and one might suspect that it is not likely to do so in the future, particularly where the planning authority also happens to be the developers’ ground landlord.
Out-of-town
Very similar considerations can be applied to the shopping centre, ie the provision of the homogeneous range of services.
It seems anomalous that now retail warehouse user is given appropriate status as part of Class A1 that the term “warehouse” — so suggestive of past planning battles — is nevertheless still in general usage.
To summarise, while the legislation has to date had a limited effect on the retail and retail-related user, we are without doubt now witnessing a better clarity of legislation, setting out precisely which planning permissions are required for which main users.