Says the headline on the front of the FT's Companies & Markets section.
This may seem surprising, seeing as retail sales might have only dropped by 5% or so overall (OK, they're down 100% at Zavvi, MFI and Woolworths, but they're up at the supermarkets), but this is because rents are just a balancing figure.
In round numbers, for £100 sales, the retailer needs to keep a net profit after rent and taxes (rents and taxes being more or less the same thing in practice) of £5, or else there's no point bothering. A typical retailer has turnover of £100 and spends £70 on staff and stock, so rents and taxes absorb £25, leaving the retailer with his net profit margin. If turnover falls by £5 and costs stay the same, the amount that can be absorbed in rents and taxes goes down from £25 to £20, i.e. down by a fifth, which is what the experts predict in the FT article.
We don't need no stinkin' objectivity
2 hours ago
8 comments:
If we're talking about rental on premises, in this area, a small chippy, for example, pays £4000 a month before he even begins. Add taxes to that and there's trouble.
How do retail rents in the UK compare to other countries?
I'm always amazed at the empty space in, say, Gap stores abroad; I assume it's because they need to make far fewer sales per square foot (given similar profit margins).
Rents must come down or else the premises will be empty as will all costs...Deflation tidal wave coming very soon.
http://www.telegraph.co.uk/finance/personalfinance/5548580/Real-inflation-falls-to-minus-10pc.html
Forget the QE....that money is not going to be passed on to the wider economy. The Banks have no intention of loosing that money in such a volatile financial environment....don't forget they are still trying to fill in the black hole from the write downs in property values.
Yes Deflation will come from every angle before long.....and forget oil prices fluctuating even...even oil must bow to demand and affordability....if they raise their profit margins too much then people will start to gear their businesses accordingly leaving the entrepreneurial to step in and make other transport arrangements away from a dependency to oil....(Sounds nuts I know).
I have long thought that the English have a bizarre and entirely misplaced love of property as an investment. Of course this has a lot to do with a wildly distorting pro-property tax system - as we have discussed before.
Looking around my Town (Ipswich) it is obvious that the vast majority of good quality retail and office property is owned by national groups, property companies, developers, insurers and the like. There is no connection between these landlords and the local people and businesses.
Contrast this to an eqivalent sized contintental town and it looks like many of the properties are locally owned or developed. I travel annually to Spa in Belgium and there are one or two little economic things that I do. One, go to the supermarket to check the local price of razor blades, as a proxy for purchasing power parity and also to look at all the property I pass. As far as I can judge a lot more of it is locally owned and run than in the UK. Particularly things like small hotels, restaurant bars and the like. I know that this local connection is crucial to viability. Local landlords will not kill businesses. Accommodations will be made.
In fact I know that this happens here as well. I have clients with businesses based in non prime locations that have negotiated reduced rents in recessions with local landlords. These are not simply marginal businesses seeking further subsidy but genuinely good businesses suffering exactly the same ratio changes as Mark illustrates. This never happens with the remote landlords. Lease terms are bordering on the confiscatory from national property managers, with zero flexibilty. This is almost certainly becasue they in turn have harsh funding covenants from their creditors.
So, I think something here is structurally Wrong. Which of course leads us inexorably to LVT.
The application of LVT might just help to break this national company stranglehold on local property. Which in my view would help local businesses no end.
WV = emone (eMoan) - precisely
Lola, exactly, but my point was, Ricardo's Law of Rent cuts both ways - landlords profit disproportionately in an upturn and suffer disproportionately in a downturn, especially if they were suckered in to buying at the top of the bubble (a bubble which wouldn't have arisen if we had less tax on .... and more tax on ....).
> Of course this has a lot to do with a wildly distorting pro-property tax system
Which has nothing to do with the expenses set-up for the people who rule the country.
/forthebenefitofthethickiwasbeingsarcastic
MW - Quite. I used to rent offices in a nice courtyard just off the town centre. In 2007 it was sold by the then owners, the Co-operative Pension Scheme Property Unit Trust, to a London based property outfit fronted by a Commercial agent. In discussion I learned that he had put money into this deal himself. From contacts and a bit of digging I have found out that he bought it on a 5% yield, or 20 years purchase. Our lease was up anyway and negotiating a new one with the slippery sonofabitch was like reading large newspaper in a high wind. So we departed. He reckoned that he could achieve a 20% increase in rental. Not from me he couldn't. And it doesn't look like anyone else'll pay the premium either - of the 8 office units in the courtyard, 7 are still empty.
Moral. Once the agents start selling deals to themselves, get out. (He also used to arrive ina series of flash fat blokes sports cars, Lambo's, Audi R8's and the like - not his of course - car club).
We have to find a way of dealing with these asset bubbles. LVT looks to be part of the answer, but running sound money is also crucial. McMental's huge loss of control of the money supply and the distortion of the relative costs between equity and debt cannot be allowed to happen again.
BTW did anyone read a little snippet in the Telegraph about McMental handing city regulation over to Brussels? I mean, just how much more damage can he wreak on us? Just how much of this can be allowed?
L, "running sound money is also crucial", correct - which means only borrowing what you can repay out of your own income and not out of hoped-for future capital gains.
As to governments running sound money, maybe it should be declared unconstitutional for a government to ever increase gross government debt by one single penny (which is merely bribing current voters with future generations' money)?
As to City regulation, don't worry about that. Whatever the clunkheads in Brussels do, some wide boy in the City will find a way round it. Do the EUrocrats know the fundamental difference between
a) short-selling
b) writing a call-option and using the proceeds to buy a put-option
c) opening a contract for difference, and
d) selling a future on a share?
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