The Future of the High Street
On 16 October 2018 Howard Kennedy hosted our regular economic breakfast briefing on "the future of the high street", although this was a misnomer as our knowledgeable panellists treated us to an enlightening discussion about the future of retail.
It will come as a surprise to no one that the discussion started with a general consensus that a demographic, social and technological shift has led to massive structural change in the retail industry, but it is not all doom and gloom. Despite the negative press there was a lot of positivity, in the room, as our own panellist Julian Hindmarsh said, "we are a nation of shopkeepers, we will find a way to survive".
A readjustment is needed and coming
It quickly became clear that the strongest theme for the discussion was the need for a readjustment in the retail industry. Sean Gillies, Head of Retail at Savills presented the statistic that 80% millennials would choose to spend their money on experiences rather than goods. Whilst our panellists generally agreed that the shift to experiential space was more of a rent saving method than a conscious shift in the market practice, these types of changes in consumer spending patterns along with an increase in the number of retailers has led to an over-supply of physical stores.
One of the key suggestions was government intervention. This can come in many different forms, planning, licensing, abolishing upwards only rent reviews and changes to business rates. But it is clear that, as a policy, the needs of the high street must be put first.
Another suggestion from the floor was putting millennials on boards. Whilst this suggestion didn't go down too well with our panellists, we were in fact reminded that even though over 50s make up just 30% of the population they control 80% of the wealth, there was recognition that millennials were changing the spending pattern particularly online and that could not be overlooked.
The Landlord Tenant Relationship
Another suggestion to ensure the readjustment of the retail market related to the landlord tenant relationship by way of a greater level of collaboration. The "master servant" relationship model is no longer working; Mark Robinson, Property Director at Ellandi encouraged landlords to move towards a "space as a service" model, recognising that landlords have something more to give and should be providing something "a little more interesting and delightful". At the end of the day, both landlords and tenants want the same thing, a busy high street, so there needs to be a push to work together to achieve this.
The two main suggestions for change in the relationship were greater flexibility and changes to the leasing model. One topic raised was the importance of turnover rents and how this addressed online sales, as according to Sean, 30% of online sales touch physical stores. The introduction of a turnover rent immediately aligns the landlord and the tenant's interest and provides the protection for the tenant that whilst they are not doing well, they won't have to pay that top up rent. The second key element of turnover rent is seeking to rebase the balance between bricks and mortar and online; landlords must be discouraged from seeking to grab further rent by including click and collect orders in the turnover which could have a seriously damaging impact on physical retail.
The overseas model
The introduction of the turnover rent model needs some sort of trade off from tenants and it was considered that a fair trade was with the tenant's rights of longevity. It was generally agreed that we could learn lessons in flexibility from the US and Hong Kong leasing models where turnover rents are fundamental and the lease terms are between 3-5 years. There is no Landlord and Tenant Act 1954 (which was generally referred to as an outdated model, as Mark pointed out "the clue is in the name") and rents are generally renegotiated at the end of term rather than relying on rent review clauses.
The issue was raised, with a lot of lenders in the room, that to properly embrace a new leasing structure banks would also need to get on board. Mark, as the landlord on the panel, raised the point that banks were lending on these short term leases on the continent and recognised that the model worked better for landlords as there was the flexibility to get rid of under-performing tenants; there is a part to play for everyone.
With such an important topic there were of course other suggestions raised including residential development in town centres, the importance of independent shops and even the abolition of Sunday Trading hours; but the key take home message is that it is not all negative. Whilst the shift in retail spending is changing the nature of the high street, there are ways to tackle this and retail will survive.