The Retail Note - 21 February 2017
The Retail Note
4 minutes to read
- Official retail sales from the ONS showed that volumes increased by 2.6% and values by 2.9% year-on-year in January. Shame that most in the media picked up on the meaningless month-on-month numbers and the fact that ‘average store prices increased by 1.9%’, despite the fact that most of this rise came at petrol pumps, rather than in retail outlets.
- Asda’s miserable run as the weakest of the Big Four grocers continued. In the fourth quarter ended 27 January 2017, sales fell 2.9%; the tenth consecutive quarter of decline. Although an improvement on the 5.8% fall in Q3, these figures are still weak in the context of a soft comparable and an improving grocery market generally.
- Hotel Chocolat reported a 28% hike in pre-tax profits to £11.2m for the 26 weeks to 25 December, with half-year sales up 14% to £62.5m. On a proforma basis, accounting for the acquisition of Hotel Chocolat Estates Limited, sales rose 12%. During the period, Hotel Chocolat opened ten new stores which contributed to 4% year-on-year sales growth.
Stephen Springham, Head of Retail Research:
The hot potato that is business rate revaluations is finally being addressed. Or rather, retailers and the media are finally wising up to what has been a ticking time bomb for some time. The negative impact of rising sourcing costs / inflation on the back of Sterling’s depreciation has tended to grab most of the attention, when the effect of business rate increases is both more immediate and potentially more damaging.
Without going into the full whys and wherefores, all Rateable Values (RVs) nationally are being rebased to reflect rental values as of 1 April 2015 (as opposed to April 2008 currently). In a nutshell, the business rate revaluation and how much retailers (as well as all other property occupiers) have to pay will be determined by rental changes between these two dates. Simple on a paper, anything but in the context of a market that, in the intervening period, has endured a financial crisis and the worst recession in living memory.
The playing field could scarcely be less level. The first thing to stress is that in the vast majority of the country, retail rents have actually declined between the two revaluation dates. In many areas, significantly so – using IPD data as a proxy, retail rents in Wales have declined by 25%, the East Midlands by 23% and the North East by 20%. Even the South East has seen rents dip by 5%. Drilling down a geographic level, of the 75 Local Authority Districts covered in the annual IPD Index, only five outside London saw any positive rental growth (Guildford, Winchester, Harrogate, Oxford, Brighton) over the revaluation period. In theory, retail outlets in any other regional towns should actually benefit from the revaluation. Media juxtapositions of business rate hikes and images of failing town centres with rows of empty shops are completely disingenuous.
London is at the polar extreme. Across the capital as a whole, IPD shows rents have increased by 13%, but in the West End the figure is closer to 24%. And, of course, these figures are just proxies and are not asset-specific by any means. In certain hotspots, any increase may be substantially higher than this – there are plenty of 50%+ anecdotal horror stories. Almost every retail outlet across Central London will be hit by a substantial hike in business rates. This will obviously hit the international multiples hard, but will be financially crippling for many single-outlet independent traders. For many, it represents the ultimate double-whammy – the salt of business rate increases being rubbed into the wounds of historically onerous rental hikes.
Our politicians will of course point to the Transitional Relief System, which is designed “to protect ratepayers against significant and unprecedented increases”. For 2017/18, the maximum increase for a shop with a RV of more than £100k is a mere 42% (reducing to 12.5% for RV <£100k and 5% for RV <£28k). But robbing Peter to pay Paul, there are also caps on the potential decreases too – a full 20% for properties with a RV of less than £2k, 10% for those with a RV of less than £100k, but a paltry 4.1% for those with a RV of more than £100k.
Even the most unbiased, non-politically charged observer will note that the Max Decrease caps are set far lower than those for Max Increase. So, a £100k RV shop that has seen a 40% increase in rent will be hit with a 40% hike in business rates. A £100k RV shop that has seen a 40% decrease in rent will only see a 4.1% reduction in business rates.
There is an opportunity to challenge the new RV when the list goes live on 1 April (with a £300 fee for moving to the appeal stage and penalties for false information). Need help in navigating the minefield? Do contact my Business Rate specialist colleagues Bjorn Bowles (bjorn.bowles@knightfrank.com, 020 7861 1102), Keith Cooney (keith.cooney@knightfrank.com, 020 3826 0668) or Nick Ball (nick.ball@knightfrank.com, 020 7861 5138).