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OPINION

High-street decline

High-street decline
February 15, 2013
High-street decline

High-street landlords go unmentioned in this blame game, presumably because it seems perverse to point the finger at those who have most to lose. But in fact they have much to answer for. A complacent, narrow-minded and inflexible approach to property ownership has made it hard for the high street to adapt and compete - as it surely could.

Commercial property used to be let on 25-year leases, without break clauses and with upward-only rent reviews every five years. This arrangement, which dates from the 1970s, was designed to turn property into a kind of long-dated bond that would match the long liabilities of pension funds.

These long leases are still sometimes signed for head offices in the most desirable London locations. But the days when they were suitable for shops - if ever they were - are long gone. The average high-street lease length in 2002 was 12 years; now it is under eight, according to IPD. Faced with an unpredictable market environment and an even less predictable shift in consumer spending from bricks to clicks to mobile touchscreens, retailers now cherish flexibility.

Landlords have had little choice but to accept their terms since the recession pushed up high-street vacancy rates. But the property industry still remains obsessed with lease length, not least because surveyors' would-be scientific valuation methods give huge weight to contracted future cash flows. That leaves it out of kilter not just with retailers, but also with consumers, who may not find the same brands fashionable now as they did five years ago.

Yet there are instructive examples of landlords who make a virtue of shorter leases. The most obvious one is Shaftesbury (SHB), the FTSE 350 real-estate investment trust that owns pockets of the West End. In Carnaby St, Soho, which it has turned back into a centre for youth fashion, it lets most shops on three-year leases. Brands that no longer appeal to its 16-25-year-old consumer market can thus be easily removed. On a recent tour of the estate, chief executive Brian Bickell guided me enthusiastically to Choccywoccydoodah, an eccentric chocolaterie set up by two women from Brighton, before stressing that Shaftesbury had to be "unsentimental" about looking for the next Choccywoccydoodah before tastes moved on.

Carnaby St is also distinctive because few shops can be dismissed as 'high-street chains'. Shaftesbury has achieved this in two ways. First, it is not afraid to take on independent retailers if they have strong ideas. This is unique among institutional property owners, which otherwise avoid small companies for fear of vacancies if they go bust - a mentality that has helped create homogenous high streets nobody wants to visit. Second, Shaftesbury encourages big retailers to try out new brands or concepts. It recently let two shops to H&M, but not for the H&M brand - instead the shops are called Cheap Monday and Monki.

This precise strategy is not replicable outside the West End, with its global catchment area. But another landlord, Unibail-Rodamco (UL), which owns glass and steel shopping centres across Europe, suggests it is possible to work with shorter leases - which are standard on the continent - in a mass-market setting. UK real-estate investment trusts like to stress how low their tenant turnover is, but Unibail boasted in its annual results last week that its turnover increased to 13.2 per cent. "There are lots of international retailers looking for space, and if you have turnover you have the flexibility to adapt and maintain the freshness," explains Robbie Duncan, analyst at Jefferies. It is one reason the company - a perennial stock market outperformer - managed to grow its like-for-like net rental income by 4.2 per cent last year, even as its markets were dogged by the eurozone crisis.

Of course, both Shaftesbury and Unibail control a number of shops in a concentrated area. Mr Bickell reckons the intractable problem with most high streets is the fragmented ownership, which makes it hard to define a strategy and thus compete actively with the internet, supermarkets and shopping centres.

Anyone who has studied economics will remember that street decorations are an example of market failure - they would benefit shop owners collectively, but no individual shop owner will pay for them in a competitive market. The textbook solution is government intervention. But market failure on the high street goes further than Christmas decorations, which most local councils can agree to provide. That's why central government appointed Mary Portas to conduct her review two years ago. She came up with intuitive high-level recommendations - including more flexible leases - but now it is up to local councils, together with landlords, to develop and implement locally relevant strategies.

All this will require work. So, too, will shorter leases, which require landlords to think ahead almost continuously. None of this is good for private investors, who should no longer treat shops as buy-and-forget investments. But it is necessary if shoppers are to be attracted back to the high street. Sadly, the alternative is terminal decline.