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Retail's future

Published:  01 July, 2007

Last month's 'Future of Retail' conference, organised by the free-market think tank the Institute of Economic Affairs, brought together three retail experts to give an occupier's view of the retail property market.

Geoff Robotham, property director at Borders, pointed out that a slowing market was good for retailers. "We're seeing an end to the period of growing rents and falling yields, so landlords are looking at falling capital values," he said. "And rising vacancy rates mean we're entering a more benign period for retailers than we've seen up to now."

And Nigel Duxbury, property director Superdrug and Savers owner AS Watson, broadly agreed. "It's a rather strange market. Prime is still strong but secondary is in a period of inactivity," he said.

However, British Retail Consortium director general Kevin Hawkins warned: "We're at a crossroads. The property outlook is encouraging for retailers but if you've got a 25-year lease and five-yearly upwards-only rent reviews you're stuck. The problem is the property industry moves slowly while retail moves quickly."

"The problem with open market rent reviews is that the level set by the last highest bidder allows landlords to ratchet up rents, and those rents can never go down," pointed out Robotham. "Competition in one particular sector can push up rental values for everybody else."

"That's only increasing costs at a time when retailers can't pass on those increased costs to the consumer," said Duxbury. "And so the range of choice on the high street gets narrower," added Robotham.

So what are the prospects for change in the rent review system?

"We've only ever advocated legislation as a back-stop," said Hawkins. "The government's said that if the property industry doesn't live up to the code of practice on leases it'll legislate.

"Now there has been movement, but that's due more to market forces than to the code. There's a hefty quantity of new space under development - as much as 50 million sq ft - at a time when we're projecting relatively low growth in sales and deflation in some products.

"Put all that together and the property market will have to change because there'll be too much property for the demand available."

"But the UK market is very institutional. It'll take many years for change to happen," warned Robotham.

"Some of our bigger members are already negotiating turnover rents and index-linked rents, and I think that'll gather momentum," said Hawkins. "But what we're seeing is polarisation between those who can squeeze better terms out of landlords and those - the majority - who can't."

Equally, all three speakers agreed that standards among landlords varied widely. "In airports our biggest landlord is BAA," said Robotham. "They like their pound of flesh but if things aren't going well at least you can talk to them. But a growing problem is that a lot of funds are emerging as owners and they can be very remote."

"We're seeing a lot of change in ownership of shopping centres," agreed Duxbury. "They're literally investment vehicles and they have very little interest in managing that environment."

"Not to mention service charges going up by 14 per cent per annum," added Hawkins.