Could landlords be forced to rent empty shops to save the high street?

16% of commercial property on Britain’s high street currently stands empty.

The government’s Levelling Up and Regeneration Bill gives councils the power to force landlords to rent out commercial properties that have been empty for more than a year.

Will this help the high street and how does it work? This blog post explains.

What is the high street? 

The high street has been central to the British retail experience for hundreds of years. As well as shops, they also provide residential housing and offices for businesses, local services, accommodation, food and drinks and more.

The high street is defined as “a cluster of 15 or more retail addresses with 150 metres.”

Around 10.3 million people – 16% of the British population – live within 200 metres of a high street.

 

Why is the high street in decline?

 Whilst the number of businesses on the high street increased 15% between 2012 and 2017, this was lower (22% increase) than non-high street areas. The number of retail businesses on the high street fell by 2% in the same time period.

The factors contributing to the decline of the high street include:

Squeezed income: Rising shop prices and weak wage growth led to a decline in discretionary spending. Since Brexit there has been a 15% fall in the value of the pound whilst inflation is vastly above the Bank of England’s target.

Shift to online shopping: Online retailers have had significant impact on the high street. Consumers tend to view online shopping as cheaper and more convenient than visiting the shops.

Changing tastes: In the example of Toys R Us, the toy chain fell short in all three areas of value, convenience and experience. Consumers can enter a shop and look at a product, and then look at an alternative and buy it at a cheaper price.

Rising overheads: The labour costs for staff rises every year. Trade Body the British Retail Consortium estimates the National Living Wage costs the retail industry between £1.5bn and £3bn. Business rates have also risen, deterring investment.

Underperforming: The tightening conditions mean that many retailers cannot afford underperforming outlets. Many firms however have expanded during this period, leaving them exposed. Some retailers are now taking the approach of closing down underperforming stores. 

Debt: As a consequence of overexpansion, many retailers are shouldering high debt burdens. Prior to collapse, Toys R Us faced a looming debt payment deadline of £15m. It would have been unable to pay it without cash injection from an outside investor. This is affecting many small, independent businesses.

Reversing the trend is seen by the public as a number one priority for levelling up. Empty shops are often regarded as a wider barometer for an area’s economic struggles and can be symbolic of how people feel about their area. In places like Stoke, Bradford and Blackburn, more than a quarter of high street units stand empty and the large majority of them have been unoccupied for more than 3 years.

 

What is the levelling up bill? 

The levelling up bill gives powers to compel landlords of empty high street stores to fill vacancies. 

Qualifying properties will be those that have been vacant for over six months, however, landlords will be given a grace period to find tenants on their own terms. If they cannot bring in new occupiers themselves, then the local authority will be able to impose a compulsory rental auction for a lease of the property and the property will then need to be let to the highest bidder.

 

Will the levelling up bill and compulsory rental auction save the high street?

The plan to auction off the high street is known as the compulsory rental auction.

It gives local leaders more powers over how commercial space is used in their city centres and enables them to adapt the high street to the needs of the area and the changing nature of demand. 

This also means smaller businesses, charities and community groups have the opportunity to occupy empty units and therefore put buildings to good use and create a positive local impact.

Importantly, it also means that change on the high street can happen quickly.

The policy seeks to address investors, who are unwilling to write down the value of debt (and depreciate their assets), by reducing rent paid and therefore sit on empty properties.

 

Will the compulsory rental auction work?

According to Mark Webb, head of regional tax at Smith and Williamson and Alex Schlagman at Save The High Street, “(The current situation with commercial property on the high street) provides an opportunity to rethink what our town centres are for and how they can thrive once again. And the truth is that smart people are already engaging with the problem and coming up with innovative solutions.

“While a lot of former Debenhams and House of Fraser stores still lie empty, some are already being put back into active use. Ground-floor uses include indoor markets, while upper floors are being used for everything from last-minute logistics to residential, which has the potential to alleviate the UK’s well-reported housing crisis.

“However, what is clear is that the revitalisation of our town centres is not going to be led by international or national chains.

“Rather, it is going to be done by local entrepreneurs who know the local area and therefore know what goods and services are in most demand. And of course, that will vary from city to city and from town to town.

“Here, government has a clear role to play, alongside private landlords. On the public sector side, it should be easier and cheaper to change the use of a building.

“And when it comes to landlords, be they private or public, people need to sign up to the idea that it is better to have a start-up occupy space on a low rent than see no income at all.

“Ultimately, the point is that the old ways of doing things are no longer fit for purpose. The entrepreneurial spirit is alive and well in the UK. All the establishment has to do is to get out of the way and impose as few impediments as possible.

 

What does the levelling up bill mean for property investors?

The levelling up bill is likely to be a good thing for commercial property investors as it encourages investment in commercial space all year round.

Being more adaptable to the changing needs of the high street also has the potential to create more footfall, increasing business profits and helping commercial property go up in value over time.

The current nature of the market means that commercial property can be obtained cheaper, due to the effects on external factors on the current cost of living. 

In the free commercial property webinar on Sunday at 8pm, you can find out how to source, fund and profit from commercial property opportunities.

To make the first steps on your property journey, read this free Wealth Through Property e-book.

For more information call us on 01302 897131 or email office@touchstoneeducation.co.uk.