Retail: The rents and rates scandal

Property & Construction | Reports | Retail

Business Leader investigates if rents and rates are the real issues for the high street.

The outlook for the British high street seems bleak, with numerous retailers, including Marks & Spencer, House of Fraser and Waitrose, announcing store closures and others going into administration.

In fact, this year has seen the greatest number of store closures since Woolworths collapsed a decade ago, with 1,500 retail units left empty.

While much has been made about online shopping causing the death of the high street, the impact of business rates and high rents for high street properties should not go unnoticed.

High rents

In a recent media interview, Debenhams chairman Sir Ian Cheshire urged landlords to wake up to the changes in shopping habits and, where appropriate, renegotiate leases which he compared to a ‘straitjacket killing more and more retailers’.

He comments: “Landlords haven’t changed their model, they are still stuck in a 19th century leasehold model, with business rates (a property tax) on top that are actually Elizabethan in how old they are, our tax system doesn’t reflect modern business models,” he said.

He also talked about how retail is evolving, by saying: “I think it is the reality. What you’re seeing is retail facing more change in the past three years than in the previous twenty…it’s a big structural shift, which is basically saying old models have to be reinvented. If you’re starting out now you’d have much less space, much more online and much more flexibility. No one will now be signing 20-year leases”

Business rates

Calculated according to the market value of property businesses own, business rates are the popular villain of the UK high street. This property-based tax raises £29bn a year for the Treasury, of which retailers cough up £8bn.

While business rates are not the only culprit, complaints from bricks-and-mortar shopkeepers is correct that these were introduced in a pre-internet age and seem somewhat archaic now.

As they are currently structured business rates add to an increasingly prominent problem for physical retail stores.

Business rates across the UK have increased by 3%, in line with inflation. However, research by independent retail advisors Altus Group found the average rates bill for department stores in England and Wales was up 26.6% in 2018/19, compared with 2016/17 and large high street shops saw average rises of 10.8%.

The online retailer conundrum

Online retailers have been accused of bending the system to allow themselves a loop hole against business rates.

Take Amazon, for example. The company operates warehouses from out-of-town locations in areas with lower property prices; whilst high street retail outlets occupying a piece of prime Central London real estate will pay higher rates.

Furthermore, Altus assessed rates paid on the 11 distribution centres owned by Amazon. It found that rates for the centres rose by just 0.7% in 2018/19 compared with 2016/17.

Amazon dismissed the findings and said the figures did not take into account rates paid on other premises, such as software development offices.

New West End Company, an alliance of central London retailers, revealed the most startling research.

It calculated that Marks & Spencer, a company with a turnover of £9.6bn last year, paid £184m in business rates, whereas Amazon, with a slightly smaller revenues in the UK of £7.3bn, paid substantially less in rates – just £14m.

New West End calculated that a 1% sales tax on online businesses could raise more than £5bn, which could go some way to levelling the retail playing field.

Business rates is something that Dave Lewis, Tesco chief executive, says needs a revamp, claiming that the charges that firms must pay on their buildings played a ‘large part’ in sending some retailers to the wall.

In a recent interview with the BBC, Dave said: “Are we allowing it to stay competitive or are we, by stealth, lowering corporation tax and increasing business rates to a place which is creating an uneven playing field and forcing people to think about how to avoid that cost and find other routes to the market?”

The Tesco boss said business rates was the biggest tax his company paid, adding up to more than £700m a year.

“You need a level playing field … between an online digital world and a traditional retail store base model like the one we have.”

Digital tax

To try to make this more equal the chancellor Philip Hammond has launched a £675m ‘Future High Street Fund’, alongside significant business rates relief for small retailers from April 2019.

In a Budget which Hammond said signalled the ‘start of the end of austerity’, he announced the treasury would provide £675m of ‘co-funding’ over the next four years “to support councils to draw up formal plans for the transformation of their high streets”.

Hammond also stated that the UK Government would bring in a digital services tax, which he expects will raise around £400m per year. Digital tech giants will be taxed 2% on the money they make from UK users.

Stephen Martin, director general at the Institute of Directors, said: “New taxes warrant a clear justification and careful implementation.

“The new proposed digital services tax may make political sense, but it has been announced with scant detail on how it will work apart from the revenue threshold, which is lower than even the EU has suggested. The Chancellor must proceed with extreme caution here.”

Company Voluntary Arrangements CVAs

Another issue impacting the retail sector are CVAs. Designed as a way to help save businesses in peril, CVAs are increasingly being seen as a way of bashing property landlords and protecting other creditors from losses.

The latest figures from the Insolvency Service show there were 94 company voluntary arrangements (CVAs) in the second quarter of this year, a 10.6% rise on the same period in 2017.

Entering into a CVA means retailers are able to close some stores and reduce the rents on others they wish to keep.

Certainly, measures to preserve jobs and keep businesses afloat are to be welcomed, but the fact should not be ignored that landlords often end up as victims of this process.

Russ Mould AJ Bell warns that entering into a CVA should not be taken lightly.

He added: “We have to be careful here, because CVAs are not free, or necessarily even cheap. Advisers and lawyers can receive several hundred thousand pounds in fees for their work, so CVAs are not necessarily the ‘get-out-of-jail-free’ card that they are always seen to be.”

CVAs have become a growing trend in the retail sector with Homebase, Mothercare, Carpetright, The Original Factory Shop and New Look – just some recent examples of store chains which have sought to ensure their survival by this method.

Steven Wiseglass, an experienced insolvency practitioner, director and co-founder of Inquesta, said: “A CVA proposal may involve negotiating a new lease on a retail unit with a rent reduction of, say, 30%.

“If it is passed, there is a real risk that highly-geared landlords will be unable to pay their mortgages.

“Yet if the landlord opposes the CVA proposal, there is a risk that the retailer will simply go bust and close.

“Yes, a landlord can at a later stage give the tenant notice to quit and seek an alternative occupant, but in today’s climate that is no easy task and a vacant shop will inevitably prove costly.

“Put simply, landlords are increasingly having to choose between the devil and the deep blue sea.”

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