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Fleurets – delay in dealing with appeals following new business rates may be too long for some operators to survive

Property agent Fleurets has warned the delay in dealing with appeals following the introduction of new business rates this year may be too long for some operators to survive.

In its annual rant survey, Fleurets also said London-based operators were continuing to expand into the regions but many are paying inflated rents because of their perception of them being cheap relative to the capital.

London has also seen the largest level of rent reviews in the pub sector and 80% of those actioned have resulted in an increase.

The average annual free-of-tie rent in London was £113,267 last year (a 22% increase since 2011) and the average shell rent was £141,661 (an increase of 20%).

By contrast, average free-of-tie rent in the north last year was £39,821 (an increase of 6%) while a shell unit’s average rent was £69,500 (up 2%).

The report stated: “Within the leisure sector, managed house companies continue to be the main focus of business activity with companies such as Greene King, Marston’s, JD Wetherspoon and Mitchells & Butlers, all posting positive results despite the increase in the National Living Wage and the new rating list.”

“The latter has hit operators, particularly in the more affluent south east and London areas, as well as prime spots in regional city centres. It is likely to take at least another 12 months before any rating appeals are dealt with by HMRC and this maybe too long for some businesses to survive.”

“These two issues will affect trading profitability, which ultimately will impact on rental values. In respect of rental levels it has been seen, not surprisingly, that London has the highest rents in the county. Also from Fleurets’ perspective London has seen the largest level of rent review activity. London rents have had the biggest increase in numbers of reviews, where 80% of those actioned have resulted in a rent increase.”

“This compares with the regions where between 52% and 65% have resulted in an increase. Overall rents in London, on free-of-tie terms, have increased by 22% in the past five years, with an average increase of £22,788. Regionally numbers were significantly lower, with the average increase between 6% to 10% over the five-year period, equating to only £2,932 to £4,892. The trend for London-based operators expanding into the regions has continued; but many are paying inflated rents because of their perception of regional rents being cheap relative to London.”

“We have seen significant landlords incentives being granted, including large reverse premiums to assist with fit out, extended rent-free periods. Sometimes this is done to make a deal happen and sometimes to drive up headline rents. Any surveyor dealing with rent reviews needs ensure they are fully conversant with all parts of the deal, not just the headline figures. Within the regional market we see a number of hotspots, including regional cities such as Bath and Manchester, amongst others. We are also seeing hotspots within the city centres where rents have grown and new circuits evolved.”

“Despite this, however, there are areas within cities where secondary locations will be seeing no rental growth. London continues to dominate with average (shell) rents of £141,661. There has been a 20% increase in rents at review where over 77% of rent reviews actioned saw some form of increase. This was significantly above the average throughout the rest of the country and reflects the heated market in London. Regional shell rents are remarkably consistent across the country averaging between £59,000 and £69,000. Increases have been relatively modest between 2% and 7%.”

“In addition, only approximately half of all of reviews actioned have seen any form of increase. We have also noticed some properties have been subject to regearing or re-letting following closure. This has resulted in decreases in some rents; perhaps reflecting the secondary locations of the units, where business failure is more likely. Over the next 12 to 18 months the Brexit negotiations are likely to dominate.”

“Until we know the outcome of these negotiations there is likely to be continued uncertainty in the economy. With rising inflation there is likely to be an interest rate rise, which will start impacting on people’s spending power. This may have a disproportionate impact on those with bigger loans and mortgages and impact upon people’s spending power, particularly the leisure spend. We have already seen signs that the housing market is starting to slow. We are seeing retail price inflation outstripping wage inflation, again reducing the spending power of individuals. With these potential economic uncertainties there could be a knock on negative impact on, rental values as demand for leisure space may weaken. Despite this, Fleurets still consider that the licensed and leisure sector remains strong with the general quality of stock in the UK improving.”

“Closures of poorly located properties are being replaced by modern, better placed properties, more able to meet 21st century customer demand.”

 

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