How retail property is failing

Some say property is a great long term investment – and wonder why so few new shops are being built, despite apparently strong demand in certain locations. Others are worried about the future of our high streets, concerned about issues including ease of parking, and the impact of internet retailing. This salutory tale from the high street in Slough is instructive for both camps.

And my thanks go to John Barnett, of auctioneers Barnett Ross, for the following information, divulged in a letter to Property Week magazine.

He tells of a shop unit at 143 High Street, Slough, just two doors along from Marks & Spencer, so in a pretty good spot for passing shoppers, in a pretty average suburban town centre. It was let in 1991 on a 20 year lease at an annual rent of £62,500. Every five years there was a rent review; traditionally rent clauses in leases allow for “upwards only” reviews, and on each occasion – 1996, 2001 and 2006 – there was no market evidence to support a rise.

In 2004, the shop changed hands for £1.43 million – representing an immediate rental return for its buyer of just under 4.5%.

In 2010, with just a year of guaranteed rental income remaining from the current occupier, it sold for £745,000, auctioned on behalf of administrators acting for the property owner. Barnett estimates its current rental value at “not more than £40,000”; that will be established this coming September, when the lease expires.

So, a tale of one shop unit, unloved and unwanted – and worth significantly less than 20 years ago. But here’s the really scary bit, says Barnett: “How many 20 year leases of shops and offices from the early 1990s will soon expire, and the owners – and therefore the banks – will discover the substantial drop in rental value that has taken place.”

Suddenly, the shoe box under the bed looks a very sensible place for your money.


One Comment on “How retail property is failing”

  1. I’d take two things from this sorry tale. First, it undermines retailers’ complaints about upwards-only rent reviews: if the evidence isn’t there rents don’t go up.
    And second it shows how vulnerable investors in standalone shop units are. They can do nothing to influence investment performance and are effectively ‘buying the market’ for good or bad.
    Retail property investment is best left to the professionals who can afford retail parks or shopping malls, where they are in a position to manage the asset to achieve outperformance.

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