Empty shops auctions are a misread of the market

COMMENT It was a surprise to hear in the Queen’s Speech this week that the government’s levelling-up agenda includes potential legislation to compel landlords of vacant retail units to let such empty units by way of an auction. The detail of how these auctions will work is not clear, but it appears the government has misread the market. It is apparent the government believes that landlords are deliberately leaving properties empty and they view empty shops to be a blight on high streets up and down the country. It presumably thinks landlords are waiting for a time when rental values are at levels where they will do business before letting empty units. There appears to be a clear disconnect between government thinking and the reality of the retail lettings market. The reality is that, in addition to rent, tenants need to bear business rates and also insurance and service charges under most lettings. After rent, business rates are generally the most expensive of these outgoings. When occupiers look at renting properties, they look at the aggregate occupational costs when selecting properties from which to trade. While a tenant can negotiate to pay reduced rents, or perhaps turnover rents or inclusive rents including insurance and service charges, there is very little either landlord or tenant can do about the levels of business rates. Business rates reform Since 2007, after relief periods have expired, landlords have become responsible for the rates on empty properties. This means that, in addition to landlords assuming property occupancy costs for insurance and service charge for vacant units, they have been paying rates too. This has seen landlords be prepared to do very “soft” deals, often at very low rents or even nil rents, to see their properties occupied so their property holding costs are covered as a minimum. The inference that these shops are deliberately left empty flies in the face of what we have seen increasingly over the past 15 years. In fact, in certain parts of the country, the retail lettings market has been so challenging that landlords may be interested to see what would be the outcome if a local authority imposed an auction of a retail unit that had been vacant for a year or more. It is the rating system that needs overhauling in order to make occupancy of high street shops more affordable, rather than a new system designed to compel landlords to let shops which they are already more than happy to let. While shop occupancy rates vary from town to town and city to city, the average void occupancy rate is one in seven shops according to the British Retail Consortium. If the government want to redress these issues as part of the levelling-up agenda and breathe life into the high streets, they need to focus their efforts towards making it affordable and, critically, profitable for businesses to trade from high street shops. Reforming business rates, a heavy fixed occupational cost, is one obvious move for the government to make in terms of property occupancy costs. The promised Non-Domestic Rating Bill does not appear to go anywhere near far enough. Changing shopping habits Consumer habits were changing long before Covid arrived in 2020 and the lockdowns have impacted heavily on high streets that were already battered and bruised. While footfall will inevitably be increasing as we move back towards more normal times, at best that footfall will be at pre-Covid levels. There is no incentive for new traders to take leases of shops when they would be better off running a market-style stall without the fixed overheads a shop brings. We see in our towns and cities that new retailers principally operate by way of internet sales, save for appearances at Christmas markets and modern markets which are the only times that they can see value in a physical presence on the street. New retailers operate in such manner, not just because they do not see value in traditional retail methods, but because such approach is more affordable – and, critically, profitable – as their business grows, due to the lower fixed costs. These approaches will see demand for shops on traditional leases remain low and have a consequential impact on rents too. While the retail lettings market remains in the doldrums, such economic backdrop will act as a disincentive for landlords to invest in their retail stock as they will not see returns from such investment. Holistic solutions The concept of local authorities compelling landlords to let empty shops by way of auctions has been described as a “gimmick” by the British Property Federation. The reality is that the government must find a holistic solution to the issue of occupancy levels on high streets and not seek to coerce landlords into letting space, because the other obstacles to the high street’s recovery will remain. Local authorities have had some success in turning round high streets. Altrincham’s rejuvenation is a very good example of work that Trafford Borough Council has done in conjunction with local stakeholders (including property investors). Empowering local authorities to take control of the destinies of their towns and cities may well be a very good idea, but forced property auctions of vacant shop units does not appear to be a way of solving the high street’s woes. Darren Hamer is head of the Manchester real estate team at Hill Dickinson LLP Image © Jonathan Hordle/Shutterstock