The contrast between two reputable research reports into retail has cast a long, ominous shadow over the sector. Massive time-bombs are ticking, not just under high streets, but under all of commercial property.
First, the good news
The first report, from PwC and the Local Data Company, tells us that retail store closures across the UK during 2015 were at their lowest level for five years. The report also said that the churn rate, comparing closures versus openings, likewise was at its lowest level since 2010.
This is partly explained by changing shopping habits and customer preferences. People are looking for experiences and convenience rather than simply somewhere to buy socks. It reflects the evolution and revolution created by internet shopping. Stores and chains that fell behind the times have closed or evolved into something different. More banking, for example, is carried out online rather than in branches, decreasing their numbers on the high street. Thus, more coffee shops and food outlets are opening.
The shutter coming down at BHS is well documented, as too is the demise of Austin Reed. Rescue bids are still not ruled out but are increasingly unlikely in any meaningful way across the whole portfolio. The outcome for staff and, in particular, pensioners will be reached over the next few months but much is being debated and discussed. The irony is that politicians are working hard (and rightly so) to find a solution for a company that has failed while doing little for the companies that are still trading.
Despite these significant exceptions that prove the rule, according to PwC and the Local Data Company, the retail sector is coming out of the choppy water and heading for calmer times. The report indicates that it has the potential to prosper and create jobs.
Now, the bad
But – and this is a pretty gigantic “but” – another report turns this comfort on its head. A study by the British Retail Consortium predicts more than 80,000 shops face closure by 2017 unless the government drastically overhauls the business rates tax system.
This is based on the number of leases up for renewal over the next 18 months or so. Many of these are 25-year deals struck back in the 1990s. Even though prospects for retail as a whole are looking up, business rates could still be the straw that breaks the camel’s back. When it is time for renewal, business rates unduly influence the decision, meaning retailers close (or downsize) rather than renew. Significant job numbers could be at risk as a result.
Put these two reports together and the conclusion is clear. Retail is returning to health, but business rates threaten to seriously damage that recovery. Amplify that across the commercial property sector as a whole, and the potential impact is pretty horrifying.
The monster on the horizon
The government and, especially, the chancellor George Osborne, have promised reform and undertaken a strategic review with many in the property sector submitting well thought-out evidence based on insightful work paid for by themselves. And the end result? Well, frankly, not a lot. The government, in various budgets and statements, has tinkered around the edges to the benefit of some small businesses (one cheer for that). Meanwhile, the lumbering monster that is the 2017 revaluation comes ever closer. The overbearing burden that has brought down many a business could still bring down a sector. The government’s unwillingness to do anything about reducing the 300,000 outstanding appeals or improving the transparency of the system suggests that they understand little about the burden that paying – and occasionally challenging – business rates is for retailers.
Given that retail is the most real estate intensive sector, it feels a disproportionate amount of the pain meted out to the property industry. Business rates for prime retail space in Dover Street, off Piccadilly in London’s West End, for example, are expected to rise by over 400% next year. Similar space in Newport, South Wales is likely to fall by 79%. The widening gap between expensive business rates areas, on the one hand, and more economic regions can become a key part in the decision-making process for whether to renew leases, open new stores and where to locate them. Vitally, this means business rates have a major impact on customer choice, geographic spread and retail jobs.
The law of unintended consequences means that business rates can transform the trading landscape, not necessarily in a good way. Charity shops can get 80% relief from business rates. The unintended consequence is that landlords will charge them a higher rent because overall costs for these tenants are still lower. Property owners get higher income, charity shops still get a good deal and mainstream shops (especially independent stores) get priced out. In run-down retail areas in a downward spiral with few prospects, this creates a major incentive to do nothing and allow the area to decline more. Since retail is frequently the beating heart of a healthy community, the impact is most felt within the nearby society.
Solving the multiplier
Despite warm words over the years from government, business rates remain a burden rather than a route to provide support. In 2014-15, rates brought in £22.9bn, representing 3.5% of total UK tax income, so a not-inconsiderable revenue source. Hence the government’s reluctance to change. This tax is calculated by multiplying the rateable value of a property by the uniform business rate (called the rating multiplier; or poundage in Scotland).
Since retail is more dependent on places and spaces than other industries, a different multiplier for retail would help address unfairness, and help create healthier communities. The government should consider this urgently – if there are some spare civil servants not involved in Brexit planning. After all, it could be that a well-negotiated Brexit will remove the shackles of state aid rules from local councils to allow discretionary rate relief, freeing them to be more business friendly and help if there is a downturn and uncertainty.
John Webber is head of rating at Colliers International
