Fashion or finance? That is the perennial question in the City market. Any financial guru will say hedge your bets so that, when times are tough in one sector, you can ride them out with income from another. But the City, despite its reputation for monetary acumen, seems to be ignoring this important lesson.
Despite having one of the densest catchment areas of cash-rich but time-poor people, the Square Mile remains the natural habitat of the pinstripes rather than Prada. Retail and leisure outfits still struggle to find room, pushed out by a lack of stock and developers’ reluctance to accept lower returns on units.
But at a time when the corporate occupier market remains downbeat, should the Corporation of London be encouraging more mixed-use development? Should it be diversifying its tenant base, creating a more vibrant location and increasing the number of trading days for retailers and leisure operators?
The signs are good. The corporation claims it wants to encourage a vibrant community “where appropriate” and “in the right locations”. Around 6,000 people call the City home and 300,000 work there, making it an ideal location for shops. “We would like to beef up the shopping, especially around Fleet Street,” says the Corporation’s chief planning officer, Peter Rees. “That doesn’t mean a department store on every corner, but we don’t want block after block of sterile offices,” he adds.
City is resisting change
But many agents claim that making this reality is an uphill battle. “The City is seeking to resist applications for change of use, even when the office stock is substandard,” says Mike Lowndes, managing director of Bennett Urban Planning. This is despite the challenges from Canary Wharf’s ability to provide large floorplates and Westminster’s vibrant environment, he adds. In response, it has chosen to safeguard stock and wait for an upturn in the economy.
“But a lot of relatively poor-quality space remains in the City, and even if there was an upturn in the market, it would be unlikely to let quickly,” says Lowndes.
Others, such as John Forrester, head of central London agency at DTZ, see it differently. He believes the Square Mile will never change. “The City is a one-horse race,” he says. “When it’s up, it’s up, and it’s unlikely to change.”
Several factors prevent the City becoming a vibrant community. It struggles to accommodate any retailer looking for more than 25,000 sq ft of space and, despite a “lunch is for wimps” attitude among City workers, most do work office hours.
Lower returns and the yoyo-like nature of City bonuses have put many off. While a cooling in the City office market has provided a major opportunity for larger retail formats, the reduced number of suits in the Square Mile has cooled retail demand.
But a few landlords have been brave enough to let retail in, and some deals are now coming to fruition. September alone saw House of Fraser open the City’s first department store in Grosvenor’s property near Monument tube station, and Marks & Spencer open its doors at Standard Life’s Juxon House in Paternoster Square.
This sums up a report by FPDSavills that shows investment in mixed-use schemes outperforming single-use on crucial measures such as total returns, capital growth and rental growth (see opposite). Furthermore, rental growth in offices located in multi-use buildings has increased at close to 4% over a 10-year period compared with half that for standalone offices.
The weekly food shop
The City’s Rees is, for one, glad that the penny is starting to drop. “Finally, developers realise that the ground floor is worth more for retail,” says Rees. Pointing to the M&S deal, he adds: “I fought for years for M&S to come in. Now half of Islington comes to do its shopping at the weekend.”
This does not mean the City turning into a new West End. Rees is keen to keep the City’s financial identity and not make the same mistakes as New York. He believes that the Big Apple was too keen to turn its financial district into mixed-use, and has, as a result, ended up diluting Wall Street.
That said, Rees promises suitable compromises. “When there is a downturn, the planning policy can’t go out of the window,” he says. “People just want to make a fast buck and put up a quick residential unit. Then we are saddled with people living there permanently rather than crash pads for yuppies.”
With the addition of M&S and House of Fraser, the City is now questioning who will be next. Harvey Nichols is rumoured to be interested, and many agents claim to have had contact at some point with John Lewis. The retailer, however, vehemently denies this, claiming the City is not on its radar.
“Just because House of Fraser has gone down that route does not mean the Partnership will follow suit,” says a spokesperson for John Lewis.
Further retail opportunities are now available at Paternoster Square, the mixed-use scheme next to St Pauls that many hoped would become an extension to Cheapside, the City’s high street. Pedestrian flow through the development is steadily increasing, and confidence is growing despite a disastrous spate of subletting of prelet space.
Most commentators believe the level of vacant space is nothing more than a hiccup. “It’s only short-term,” says Chris Phillips, retail partner at Cushman & Wakefield Healey & Baker, which has been involved with Paternoster Square. “Of course we would prefer it not to happen, but retailers look long-term and it will not affect Paternoster Square.”
Phillips speaks from his experience with Royal Exchange. Although incredibly quiet to start with, more people are being attracted to the retail centre, helped by its recently opened Conran restaurant. “It has had a great impact on Royal Exchange, and has been a big boost to turnover,” admits Phillips, adding that it gives weight to the argument that a more rounded City offering can pay dividends.
The growing success of the Royal Exchange also adds weight to the argument for mixed-use rather than a scattering of shops. But while the retail market has remained healthy, the A3 market has cut back and restaurants are undoubtedly suffering. “A3 is a bit on the quiet side,” admits Harry Ward, director of retail and leisure at ATIS REAL Weatheralls. “The high rollers’ lifestyle of big lunches and the drink culture is not there.” This is echoed in the health and fitness market. “I don’t think we’ll see a new generation of health and fitness deals done in the City in the foreseeable future,” says Ward. “It is going to take a long time to soak up the existing capacity.”
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Weekday versus weekend opening |
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House of Fraser gave more than a cursory thought to the disappearance of the City bonus, and shortened trading hours when it opened its boutique-style store near Monument tube station last month. “The fact that firms are tightening their belts is probably bad for us,” admits Robert Hardie, House of Fraser’s property director. “But it’s a judgment call. You cannot rely on short-term trends. You’ve got to say this is right in the medium term.”The City store presents a more upmarket version of the retailer’s high street model. The 43,000 sq ft store, which boasts high-profile designer names such as Gucci, Boss, Armani and Stella McCartney, is pitching against the likes of Royal Exchange.House of Fraser found the location four years ago, and although Hardie is reluctant to give a number, he admits the company paid a rent “more related to offices than department stores at the time”. But, he adds, this was not as high as £50 per sq ft, the quoted rent for offices in 1999.Recouping this will be made all the more difficult given the City’s restrictive trading hours. Unlike Marks & Spencer, House of Fraser opted to close its doors at 7pm most nights and all weekend. Although this will be closely monitored over the coming period, Hardie warns that even a small store costs a lot of money to open, “and if the trade is not there, then you lose money, and we try not to do that”.He also remains blasé about a possible increase in people living in the City. “We don’t need them living there as well if they are there during the week,” he states.M&S has taken a different view. Its expansion strategy has been prolific, having opened an extension at its Liverpool Street store earlier last month, a new store in Paternoster Square in July and another at Cannon Street. It opted to open these Simply Food outlets until 11pm during the week and 10pm at weekends.Stuart Anderson, M&S’s head of acquisition, explains: “It put stores on customers’ travel routes.” The retailer extended its opening hours because “many people are working longer, and not preplanning their meals”. |
