Rents and rentability: Venues closing

Claire Dodd

Claire Dodd

04 January 2017

Two and three-digit rent increases have decimated the balance sheets of many previously viable on-trade businesses. But why is it happening and what can be done about it? Claire Dodd finds out

Are we in the midst of a nightlife armageddon? Since the middle of last year, news of the closure of much-loved venues seems to have been reaching us on a near weekly basis.

Kicking off a slew of industry mourning, Casita, one of the most beloved and acclaimed bars in London, closed in early August. Soho's iconic LAB bar closed in September, though the silver lining here is that Bobby Hiddleston and Mia Johansson, together with Nightjar and Oriole's owners, Edmund Weil and Roisin Stimpson, have re-opened the space as Swift.

And while a heady combination of licensing disputes, changing consumer behaviour and brushes with the law may have closed some venues – furore surrounding Fabric’s closure in September (and subsequent reopening) is ongoing – there is another factor at play here.

It seemed that 2016 was the year that the full force of rising property values was felt by leasehold operators. Over a decade after Dalston nightclub Passing Clouds first opened its doors, the venue found itself in a terminal battle with developer landlords (Landhold Developments) keen to redevelop the site. It was, it seems, a victim of the gentrification of an area it had helped to prosper. And its story seems far from unique.

It's a cruel irony that the operators who helped transform unfashionable areas are falling victim to drastic rent increases

Victims of success

Kentish Town cocktail bar Knowhere Special was recently faced with closure after a quadruple rent increase, according to local rag The Kentish Towner, with the landlord eventually taking on the bar themselves. Renowned Maida Vale pub The Truscott Arms closed its doors suddenly last August following a rent hike from £75,000 to £250,000.

So, what exactly is going on? Why are these huge rent increases happening now? And how widespread is the issue?

There's no doubt that much of the issue lies in London. Why? Andrew Fishwick, landlord of The Truscott Arms, says: 'The trouble, especially with London property, is that the disproportionate variant between what a pub would earn if it was eight £1m flats, compared to what it earns as a pub is obviously so vast.'

Soaring property prices in the capital have no doubt been a lure to some landlords, keen to redevelop sites for housing. Though there are protections against this in some cases – The Truscott Arms, for instance, has asset of community value (ACV) meaning it is protected from any development.

Traders in danger
But the issue of rents is another matter. On the food front, a new report by restaurant property agents Cedar Dean Group, says 87% of central London’s historic businesses will be unable to continue business in current form if rates and rents continue to rise as forecast.

The company claims that rents in areas such as W1 and WC2 doubled in the past year – with those in Mayfair up by a colossal 400%, from £150 Zone A per square foot to £600 per sq ft today. It further forecasts that restaurant operators will pay 20% of turnover in rent by 2021, up from 10% in 2006.

Why? When it comes to the growth of casual dining, prime spots have been in high demand. David Abramson, CEO of Cedar Dean Group, says: 'While the new breed of "supertraders" like Five Guys and Shake Shack are adding much colour to the market, they have a negative impact on the incumbents, pricing them out of the market. We have reached a tipping point.'

Colliers International, looking at the growth of grab and go businesses such as Costa Coffee, Caffé Nero and Starbucks, says that the likes of Baker Street and Camden High Street have seen more than 30% growth in the number of grab and go outlets in the past two years, while top rents in those locations have increased by over 20% during the same period. If you’re a food-led business looking for A1 or A3 sites, it’s clear to see why prices may have risen so drastically.

But why have some of the recent increases for pubs and bars been so high? According to commercial property agent Fleurets, a limited number of prime pitches and fierce competition between occupiers mean that record rents are now being set for new open market lettings, something that existing occupiers are more than likely to feel at the next rent review.

Some of the area hotspots they name are long established: Berkeley Square, Trafalgar Square and Leicester Square. Others are areas that seem to have become a victim of their own success.

But, according to Fleurets, two of the areas in the capital experiencing the biggest increases at the moment are Borough Market (which has gone up from £30 per sq ft in 2005, to £85 in 2015) and Shoreditch. Both are areas that have experienced considerable gentrification in recent years.

It's a cruel irony, perhaps, that the independent operators who helped to transform unfashionable areas are themselves now falling victim to drastic rent increases driven by their new neighbourhood's success.

Moreover, this isn't a London-only issue. Simon Chaplin of commercial property agent Christie + Co says the likes of Manchester and Brighton have now reached over £100 per sq ft in prime locations. Leeds and Bristol are also rising, albeit not quite to the same degree.

Being prepared
For a number of businesses, timing is everything. Is it possible, for instance, that leases, taken out in the midst of the recession under favourable terms, have simply caught up with true market values?

Ian Mackenzie of commercial property chartered surveyors, Mackenzie Associates says yes, and it’s an issue that’s putting pressures on operators who have built up successful businesses in that time.

'We have come out of a fairly deep recession,' says Mackenzie. 'If you started renting in the depths of a recession at a low price because the landlord was desperate to get the property let and not pay the empty rates on it, you may find, come your first rent review, that it’s a totally different market, and you have to pay a lot more.

The likes of manchester and brighton have now reached over £100 per sq ft in prime locations. leeds and bristol are also rising

'A lot of our sites were failing pubs when we took them on. We had to go in and build them really,' says Phil Strongman, co-founder of Pubs of Distinction. The company opened in 2010 with the aim of providing a modern spin on a traditional pub. It now has four pubs including the Old Red Cow in Smithfield, the Dean Swift in Shad Thames and the Hack & Hop in the City of London.

'The rents were reasonable at the time, but then two or three operators couldn’t make them work before us. We’re in the process of negotiating some rent reviews at the moment. However, the upcoming increase in business rates is more worrying to be honest. That could double in some sites and that feels really unfair. You’ve invested in improving your offer and suddenly you’re penalised for it.'

Good news is the tide may be changing.

Rising costs
'There will be pressure on rents in marginal sites to be decreased or tenants will just walk away,' says Chaplin. 'Rents that have been agreed to over the last 12 to 18 months would have been driven by deals that were done two years ago. But things have been cooling off as the costs for operators have been increasing.'

The recent sale of Ed's Easy Diner to Giraffe restaurants owner Ranjit Boparan, for a much lower price than that floated on the market a year ago, and subsequent announcement that 26 sites are set to close, is a sign that in some sectors rents may have peaked. 'Ed's was the first sign of a crack in the casual dining growth, and [in 2017] there may be one or two groups who crumble,' observes Chaplin.

The simple truth is that with the cost of food, drink and staffing all rising – and with this year's new business rates – there will be a ceiling as to what operators can actually pay. Landlords looking to attract good tenants will find that competition for sites may dwindle, and rents may subsequently stall.

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