3 - Marketing
In 1995, in my essay on the Future of Town Centres and Retailing, and for which I won a prize in a competition sponsored by Marks & Spencer, I reasoned the underlying problem at a macro-level is a conflict between whether the British economy is fundamentally capitalist or socialist. On one hand, the role of capitalism is to weed out; on the other, socialism steps in to prevent falling by the wayside. Consequently, the macro-economy suffers being driven with the brake on, with too much duplication and compromise, and not enough original thinking and consistency in direction.
In 1995, in my essay on the Future of Town Centres and Retailing, and for which I won a prize in a competition sponsored by Marks & Spencer, I reasoned the underlying problem at a macro-level is a conflict between whether the British economy is fundamentally capitalist or socialist. On one hand, the role of capitalism is to weed out; on the other, socialism steps in to prevent falling by the wayside. Consequently, the macro-economy suffers being driven with the brake on, with too much duplication and compromise, and not enough original thinking and consistency in direction.
Marketing - Introduction
Marketing is a function of business management: a means to an end. A generic term, embracing all forms of communication and promotion - for example, advertising, selling, direct mail, public relations - a market, together with the art and science of marketing, is anywhere business is done. An actual place - e.g., shop, auction room, car boot sale, via telephone, email, mail-order, TV, the Internet.
Marketing happens when we want to satisfy a need and are willing to exchange something with someone able to help us satisfy that need. The process exists to bring buyers and sellers into a market. In business, the transaction is reciprocal. Transaction is the carrying out or performance of an action. Transactions are usually for money, but may involve bartering goods and are conducted between sellers and buyers, or through agents, wholesalers, manufacturers, brokers, etc.
A market is a catalyst for connecting the subjective and the objective. A catalyst is something that remains inert or permanently unchanged during the process of increasing the rate of a reaction. Although people talk about a market changing, actually a market is 'inert' - a place where, or a means by which, people transact. It is not the market itself that changes, but the participants and attitudes. People come and go, everyone is different and different people have different ways about going about getting what they want.
A need is a state of 'felt deprivation' and arises through a lack of synchronicity in the relationship between one's physical, psychological and spiritual states, and the flow of energy for maintaining balance and harmony that enables us to function as human beings. In common parlance, a need arises whenever we should change but for whatever reason do not. Not changing when we should is a consequence of our ability to think "mind over matter": to carry on with whatever we are saying or doing regardless of how we might be feeling at the time: thinking mind over matter can lead to a disconnection from reality. Since change is a natural progression for maintaining balance and harmony in our relationship with ourselves and the outside world (reality), everyone has the same basic needs:
Physical and Physiological - for example: hunger, thirst, health, warmth, shelter
Safety and Security - for example: protection, belonging, social, affection
Individual - for example: knowledge, self-expression, recognition, status
Self-development - for example: self-actualisation, realisation, spirituality
People satisfy their needs through what they want, and to what they aspire. Wants are shaped by culture, individual personality, image and life-style. When we want to say or do something, we are aiming to satisfy a need of some sort. If a need is unsatisfied, then people will do one of two things:
i) look for an object or service that will satisfy it, or
ii) try to reduce the need
Whereas people have almost unlimited wants, they have limited resources, so they want products and services that provide the most satisfaction: value for money.
The total market is everyone who ever buys anything. A market sector is a segment of the total market. A monopoly serves the total market, but most businesses serve a market sector: individuals, or groups of people or other businesses, whose needs can be satisfied by their particular service(s). A target market is a specific group whom the business believes would benefit from the services and products. All markets are to a large extent specialised, so as to attract the sort of buyers and sellers for a particular category of product or service.
It is vital to appreciate that marketing is essentially about satisfying needs. The satisfaction of a need is a benefit. With a benefit, we gain or profit from the experience. Whereas, to a business, profit is about making more money than it costs the business to provide the product or service, to the recipient of the product or service profit is about overall satisfaction.
In practice, maintaining and reinforcing the connection offers three advantages: firstly, it engenders loyalty: the recipient is likely to use the same product or service and buy it from the same place as before; secondly, it is a measure of the success of the business's mode of business; and thirdly it enables the business to plan ahead with some certainty.
Marketing is a function of business management: a means to an end. A generic term, embracing all forms of communication and promotion - for example, advertising, selling, direct mail, public relations - a market, together with the art and science of marketing, is anywhere business is done. An actual place - e.g., shop, auction room, car boot sale, via telephone, email, mail-order, TV, the Internet.
Marketing happens when we want to satisfy a need and are willing to exchange something with someone able to help us satisfy that need. The process exists to bring buyers and sellers into a market. In business, the transaction is reciprocal. Transaction is the carrying out or performance of an action. Transactions are usually for money, but may involve bartering goods and are conducted between sellers and buyers, or through agents, wholesalers, manufacturers, brokers, etc.
A market is a catalyst for connecting the subjective and the objective. A catalyst is something that remains inert or permanently unchanged during the process of increasing the rate of a reaction. Although people talk about a market changing, actually a market is 'inert' - a place where, or a means by which, people transact. It is not the market itself that changes, but the participants and attitudes. People come and go, everyone is different and different people have different ways about going about getting what they want.
A need is a state of 'felt deprivation' and arises through a lack of synchronicity in the relationship between one's physical, psychological and spiritual states, and the flow of energy for maintaining balance and harmony that enables us to function as human beings. In common parlance, a need arises whenever we should change but for whatever reason do not. Not changing when we should is a consequence of our ability to think "mind over matter": to carry on with whatever we are saying or doing regardless of how we might be feeling at the time: thinking mind over matter can lead to a disconnection from reality. Since change is a natural progression for maintaining balance and harmony in our relationship with ourselves and the outside world (reality), everyone has the same basic needs:
Physical and Physiological - for example: hunger, thirst, health, warmth, shelter
Safety and Security - for example: protection, belonging, social, affection
Individual - for example: knowledge, self-expression, recognition, status
Self-development - for example: self-actualisation, realisation, spirituality
People satisfy their needs through what they want, and to what they aspire. Wants are shaped by culture, individual personality, image and life-style. When we want to say or do something, we are aiming to satisfy a need of some sort. If a need is unsatisfied, then people will do one of two things:
i) look for an object or service that will satisfy it, or
ii) try to reduce the need
Whereas people have almost unlimited wants, they have limited resources, so they want products and services that provide the most satisfaction: value for money.
The total market is everyone who ever buys anything. A market sector is a segment of the total market. A monopoly serves the total market, but most businesses serve a market sector: individuals, or groups of people or other businesses, whose needs can be satisfied by their particular service(s). A target market is a specific group whom the business believes would benefit from the services and products. All markets are to a large extent specialised, so as to attract the sort of buyers and sellers for a particular category of product or service.
It is vital to appreciate that marketing is essentially about satisfying needs. The satisfaction of a need is a benefit. With a benefit, we gain or profit from the experience. Whereas, to a business, profit is about making more money than it costs the business to provide the product or service, to the recipient of the product or service profit is about overall satisfaction.
In practice, maintaining and reinforcing the connection offers three advantages: firstly, it engenders loyalty: the recipient is likely to use the same product or service and buy it from the same place as before; secondly, it is a measure of the success of the business's mode of business; and thirdly it enables the business to plan ahead with some certainty.
Property Market
The property market, sometimes known as "real estate”, comprises the human-made surroundings that provide the setting for human activity, ranging from individual buildings, to villages, towns and cities with supporting infrastructure.
'Real estate' is a legal term that in outline encompasses land, improvements to the land, such as buildings and other site improvements that are fixed in location; 'real property' is normally considered immoveable property.
Property is product that is constructed of human-made and/or natural materials: for example, stone, clay, brick, slate, timber, steel, plastic, etc. Building construction disciplines include architecture, civil engineering, building contracting, surveying, energy performance advisers, interior designers and so on. For purpose of this website, the definition of property includes undeveloped land and parts of the building.
A property can last for years - built in the 1130s the Manor at Hemingford Grey is one of the oldest continuously inhabited houses in Britain and much of the original house remains intact; in Herefordshire, Hellens Manor was granted in 1096 and is a living monument to much of England's history - but whilst there are many ancient properties around the country still standing and in regular use, the notable building booms include the Tudor period (1485-1603) (on vast tracts of land following dissolution of the monasteries); Elizabethan (1533-1603) (early Renaissance); Georgian period (1720-1840); Regency early-19th century; Victorian (1827-1901) with expansion brought about by the Industrial Revolution, railway network, trams; Edwardian (1901-1918), and particularly in Greater London and provincial cities, during the 1930s, 1950s, 1970s-2000s, and the present day.
The individual character and street-scape of cities, towns and villages is personified by the dominant architectural styles and age of their properties. There is also sometimes a marked difference between the public sector and private sector properties, particularly in residential property. During the 1920s and 1930s, the demolition of old 'slum' properties and the moving of tenants onto new Council estates led to the construction of large tower blocks of flats for social housing. The development and expansion of towns and cities is reflected in the story of shopping throughout the ages.
The main attraction of the UK property market, particularly for overseas investors, is its organisation, sophistication and transparency: the choice of property available, the supply of buyers and the legal and property valuation system; also the UK is well served by domestic and international banks, creating a competitive environment for funding.
Although many reputable organisations carry out research into the state of the property market at any time, in fact there is no single property market as such. Since property is an illiquid asset, the market value of each property depends upon much the actual buyer would pay and saleability upon finding one buyer to become the legal owner (albeit the actual buyer is not necessarily just one person or entity). So, when you invest in the property market, it is wrong to try to assess the direction of the market as a whole, there is no level playing-field: property is not homogeneous, everything that can be known about a particular property is not necessarily available, all buyers and sellers do not have complete information on the prices being asked and offered in other parts of the market, barriers to entry or leaving are restricted.
The property market is not a ‘perfect’ market, and that is just as well, because the purpose of a perfect market is not to make profits, but to efficiently allocate resources. In a perfect market, profit is a sign of inefficiency, whereas in an imperfect market, profit arises in direct proportion to the imperfections. In a perfect market, there is a large number of buyers, a large number of sellers, the quantity bought by any individual so small relative to the total quantity traded that individual trades leave the market unaffected; the product is homogeneous (the same property for all buyers and sellers), all buyers and sellers have complete information on the prices being asked and offered in other parts of the market; and there is perfect freedom of entry to and exit from the market.
Although property transactions are independent of one another, the legislation, rules, regulations and the interpretation of transactions between owners/vendors (sellers), purchasers (buyers), landlord and tenants, and mortgagees, comes under property law, an area of law that governs the various forms of ownership in real property (land and immoveable property).
The property market, sometimes known as "real estate”, comprises the human-made surroundings that provide the setting for human activity, ranging from individual buildings, to villages, towns and cities with supporting infrastructure.
'Real estate' is a legal term that in outline encompasses land, improvements to the land, such as buildings and other site improvements that are fixed in location; 'real property' is normally considered immoveable property.
Property is product that is constructed of human-made and/or natural materials: for example, stone, clay, brick, slate, timber, steel, plastic, etc. Building construction disciplines include architecture, civil engineering, building contracting, surveying, energy performance advisers, interior designers and so on. For purpose of this website, the definition of property includes undeveloped land and parts of the building.
A property can last for years - built in the 1130s the Manor at Hemingford Grey is one of the oldest continuously inhabited houses in Britain and much of the original house remains intact; in Herefordshire, Hellens Manor was granted in 1096 and is a living monument to much of England's history - but whilst there are many ancient properties around the country still standing and in regular use, the notable building booms include the Tudor period (1485-1603) (on vast tracts of land following dissolution of the monasteries); Elizabethan (1533-1603) (early Renaissance); Georgian period (1720-1840); Regency early-19th century; Victorian (1827-1901) with expansion brought about by the Industrial Revolution, railway network, trams; Edwardian (1901-1918), and particularly in Greater London and provincial cities, during the 1930s, 1950s, 1970s-2000s, and the present day.
The individual character and street-scape of cities, towns and villages is personified by the dominant architectural styles and age of their properties. There is also sometimes a marked difference between the public sector and private sector properties, particularly in residential property. During the 1920s and 1930s, the demolition of old 'slum' properties and the moving of tenants onto new Council estates led to the construction of large tower blocks of flats for social housing. The development and expansion of towns and cities is reflected in the story of shopping throughout the ages.
The main attraction of the UK property market, particularly for overseas investors, is its organisation, sophistication and transparency: the choice of property available, the supply of buyers and the legal and property valuation system; also the UK is well served by domestic and international banks, creating a competitive environment for funding.
Although many reputable organisations carry out research into the state of the property market at any time, in fact there is no single property market as such. Since property is an illiquid asset, the market value of each property depends upon much the actual buyer would pay and saleability upon finding one buyer to become the legal owner (albeit the actual buyer is not necessarily just one person or entity). So, when you invest in the property market, it is wrong to try to assess the direction of the market as a whole, there is no level playing-field: property is not homogeneous, everything that can be known about a particular property is not necessarily available, all buyers and sellers do not have complete information on the prices being asked and offered in other parts of the market, barriers to entry or leaving are restricted.
The property market is not a ‘perfect’ market, and that is just as well, because the purpose of a perfect market is not to make profits, but to efficiently allocate resources. In a perfect market, profit is a sign of inefficiency, whereas in an imperfect market, profit arises in direct proportion to the imperfections. In a perfect market, there is a large number of buyers, a large number of sellers, the quantity bought by any individual so small relative to the total quantity traded that individual trades leave the market unaffected; the product is homogeneous (the same property for all buyers and sellers), all buyers and sellers have complete information on the prices being asked and offered in other parts of the market; and there is perfect freedom of entry to and exit from the market.
Although property transactions are independent of one another, the legislation, rules, regulations and the interpretation of transactions between owners/vendors (sellers), purchasers (buyers), landlord and tenants, and mortgagees, comes under property law, an area of law that governs the various forms of ownership in real property (land and immoveable property).
Town Planning
Town planning is a function of Central and Local Government and is a democratic process. Since 1948, planning permission has been required for all new development. The person wanting permission makes an application to the appropriate planning authority, the application is publicised, and interested parties notified and objections invited during the consultation period. The planning officer makes a recommendation to the planning committee which decides whether to grant the permission. Having obtained permission, the applicant does not have to implement the permission, but the life of a permission normally expires after 3 years. If the application were refused then the applicant may appeal, in which case the matter would be considered by the Planning Inspectorate for England and Wales, an executive agency of the Department for Communities and Local Government, under the auspices of the Secretary of State.
A planning permission attaches to the property and does not belong to the applicant personally, although the applicant may be the only person able to comply with any conditions attached, or to implement the permission. Anyone can make a planning application and they do not have to be the legal owner of the property.
As well as planning permission obtained or on appeal, the actual use of the property may be established use. An established use is a use that has been in continuing existence for a long period of time (at least 4 years and up 10 years depending upon the use) and the right to obtain a "certificate of lawfulness of existing use or development" is not something the planning authority can oppose, but the applicant must be able to prove conclusively the established use.
Certain types of development are excluded from the definition of development, such as routine building maintenance and repair. Many categories of minor development are classified by law as permitted development and that grants an automatic planning permission, rather than requiring any specific application.
Whether a property can be used as a shop, office, factory, warehouse, or for any other type of business depends on the planning permission.
In England and Wales, the legislation governing planning use is the Town and Country Planning (Use Classes) (Order 1987. [Applicable in England only is the Town and Country Planning (Use Classes) (Amendment) (England( (Order 2005) which redefined Use Class A3 as A3, A4 and A5] Some uses are considered to be sui generis, which means they are outside the existing uses classes.
The default Use Class for shop property is A1, but the type of business carried out by the occupant at the premises will determine the required use for planning purposes. For example, banks, financial services, and betting offices are Class A2 users, restaurants, cafes, take-away hot food come under Classes A3 and A5.
County Councils will have some sort of Core Strategy Plan that is updated every 10 years or so. For each town in the county, shopping areas are defined and there may be a quota of permitted uses. Generally, planning authorities oppose the loss of local shopping facilities (A1 users), even if there could be more demand from other use class businesses. Since planning permission for some uses can be more difficult or impossible to obtain, the existence of or potential for that use can enhance the value of the property. Also, the permitted use in the lease might include uses which would justify a greater rent, even though the tenant might not want to use the property for that particular use.
Town planning is a function of Central and Local Government and is a democratic process. Since 1948, planning permission has been required for all new development. The person wanting permission makes an application to the appropriate planning authority, the application is publicised, and interested parties notified and objections invited during the consultation period. The planning officer makes a recommendation to the planning committee which decides whether to grant the permission. Having obtained permission, the applicant does not have to implement the permission, but the life of a permission normally expires after 3 years. If the application were refused then the applicant may appeal, in which case the matter would be considered by the Planning Inspectorate for England and Wales, an executive agency of the Department for Communities and Local Government, under the auspices of the Secretary of State.
A planning permission attaches to the property and does not belong to the applicant personally, although the applicant may be the only person able to comply with any conditions attached, or to implement the permission. Anyone can make a planning application and they do not have to be the legal owner of the property.
As well as planning permission obtained or on appeal, the actual use of the property may be established use. An established use is a use that has been in continuing existence for a long period of time (at least 4 years and up 10 years depending upon the use) and the right to obtain a "certificate of lawfulness of existing use or development" is not something the planning authority can oppose, but the applicant must be able to prove conclusively the established use.
Certain types of development are excluded from the definition of development, such as routine building maintenance and repair. Many categories of minor development are classified by law as permitted development and that grants an automatic planning permission, rather than requiring any specific application.
Whether a property can be used as a shop, office, factory, warehouse, or for any other type of business depends on the planning permission.
In England and Wales, the legislation governing planning use is the Town and Country Planning (Use Classes) (Order 1987. [Applicable in England only is the Town and Country Planning (Use Classes) (Amendment) (England( (Order 2005) which redefined Use Class A3 as A3, A4 and A5] Some uses are considered to be sui generis, which means they are outside the existing uses classes.
The default Use Class for shop property is A1, but the type of business carried out by the occupant at the premises will determine the required use for planning purposes. For example, banks, financial services, and betting offices are Class A2 users, restaurants, cafes, take-away hot food come under Classes A3 and A5.
County Councils will have some sort of Core Strategy Plan that is updated every 10 years or so. For each town in the county, shopping areas are defined and there may be a quota of permitted uses. Generally, planning authorities oppose the loss of local shopping facilities (A1 users), even if there could be more demand from other use class businesses. Since planning permission for some uses can be more difficult or impossible to obtain, the existence of or potential for that use can enhance the value of the property. Also, the permitted use in the lease might include uses which would justify a greater rent, even though the tenant might not want to use the property for that particular use.
Residential and Agricultural Property
Although the residential property market (houses, flats, and residential land) outweighs every other asset class in the UK, and is approximately eight times larger than the commercial property market, I reckon the scope for successful investment in residential is limited, nowadays. The more obvious attractions are capital growth from depressed prices and rising rents as more people choose or are obliged to rent (because of stringent criteria for mortgages). Presumably others more experienced and knowledgeable of the residential property market would disagree with my reckoning, but I leave it to them to debate.
I have been involved in the commercial property market since 1967, and although my father was a chartered surveyor and managing agent of substantial portfolios of residential property owned by well-known landlords, the concept of buying an empty property just to let is alien to me. In my day, residential property investment comprised houses, maisonettes and flats let on controlled and regulated tenancies that could be bought at a substantial discount to vacant possession value. In the early days, vacant possession hardly ever figured; often the capital value of the investment was a multiplier of net rent (after repairs and management) and where either the rent was increased every few years via the Rent Officer and/or carrying out improvements, or vacant possession was ‘obtained’ either by the tenant leaving of their own accord or paid to go, and the property sold with vacant possession.
My on-going experience of residential property is in potential for redevelopment and/or capital and rental gain that can be obtained from residential accommodation attached to a shop, such as a shop and upper part. Generally, as I say elsewhere on this website, (and subject to the terms of the business tenancy) the rental value of residential property that forms part of premises let on a business tenancy is usually calculated by estimating the gross rent of the accommodation if let on an assured shorthold tenancy and then allowing a discount to take account of voids, management, etc.
Over the years, the break-up of parades of shops with flats above previously under single ownership has led to a separation of shop and residential. It has long been a moot point whether an investor would prefer to own the (freehold of) the whole building let on one tenancy, or be content with the shop alone, the residential part sold on long lease at a ground rent.
Whilst there is scope for capital and rental gain through the extension of what is known as “long leases” depends upon sophistication of the parties, and the advantage in the marriage value (the difference between the value of the property on its shorter term possibly unmortgageable term and the value of a mortgageable term) the potential in ground rent investment requires a ‘clean’ lease: residual responsibilities that fall upon the freeholder can wipe out the advantages. As for service charges, residential property is subject to consumer-oriented legislation, requiring compliance with legislative procedure. Obviously there is scope for profit otherwise the shrewd landlords would have sold out long ago, but you have to know what you are doing.
Agricultural property is in a field of its own - excuse the pun! The Agricultural Holding Act describes agriculture as including horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes. Open-farming activities, which the public are permitted to visit, have been held to be a nonagricultural use of land (albeit in the context of a tenancy requiring "agricultural use only" rather than the more permissive use "in substance" for agriculture of the 1986 Act).
Although the residential property market (houses, flats, and residential land) outweighs every other asset class in the UK, and is approximately eight times larger than the commercial property market, I reckon the scope for successful investment in residential is limited, nowadays. The more obvious attractions are capital growth from depressed prices and rising rents as more people choose or are obliged to rent (because of stringent criteria for mortgages). Presumably others more experienced and knowledgeable of the residential property market would disagree with my reckoning, but I leave it to them to debate.
I have been involved in the commercial property market since 1967, and although my father was a chartered surveyor and managing agent of substantial portfolios of residential property owned by well-known landlords, the concept of buying an empty property just to let is alien to me. In my day, residential property investment comprised houses, maisonettes and flats let on controlled and regulated tenancies that could be bought at a substantial discount to vacant possession value. In the early days, vacant possession hardly ever figured; often the capital value of the investment was a multiplier of net rent (after repairs and management) and where either the rent was increased every few years via the Rent Officer and/or carrying out improvements, or vacant possession was ‘obtained’ either by the tenant leaving of their own accord or paid to go, and the property sold with vacant possession.
My on-going experience of residential property is in potential for redevelopment and/or capital and rental gain that can be obtained from residential accommodation attached to a shop, such as a shop and upper part. Generally, as I say elsewhere on this website, (and subject to the terms of the business tenancy) the rental value of residential property that forms part of premises let on a business tenancy is usually calculated by estimating the gross rent of the accommodation if let on an assured shorthold tenancy and then allowing a discount to take account of voids, management, etc.
Over the years, the break-up of parades of shops with flats above previously under single ownership has led to a separation of shop and residential. It has long been a moot point whether an investor would prefer to own the (freehold of) the whole building let on one tenancy, or be content with the shop alone, the residential part sold on long lease at a ground rent.
Whilst there is scope for capital and rental gain through the extension of what is known as “long leases” depends upon sophistication of the parties, and the advantage in the marriage value (the difference between the value of the property on its shorter term possibly unmortgageable term and the value of a mortgageable term) the potential in ground rent investment requires a ‘clean’ lease: residual responsibilities that fall upon the freeholder can wipe out the advantages. As for service charges, residential property is subject to consumer-oriented legislation, requiring compliance with legislative procedure. Obviously there is scope for profit otherwise the shrewd landlords would have sold out long ago, but you have to know what you are doing.
Agricultural property is in a field of its own - excuse the pun! The Agricultural Holding Act describes agriculture as including horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes. Open-farming activities, which the public are permitted to visit, have been held to be a nonagricultural use of land (albeit in the context of a tenancy requiring "agricultural use only" rather than the more permissive use "in substance" for agriculture of the 1986 Act).
Commercial Property
The economy is the wealth and resources of a country or region, normally in terms of the production and consumption of goods and services. In England and Wales, the commercial property market is a major sector of the economy and provides the physical accommodation for almost all industries, places of work, shopping and leisure. As an asset class, the ownership of commercial property is a significant investment for the pensions industry.
In common with residential property, commercial property is transparent, with an established legal framework and recognised valuation system. However, unlike residential property, the commercial property market is largely unregulated. Commercial property is predominantly a business-to-business market, where the legal relationship between landlord and tenant is based upon a commercial contract: with a commercial contract the parties are deemed to know what they are doing.
The commercial property market is largely self-regulating. The majority of advisers are qualified, answerable to professional organisations and codes of conduct. A Code for Leasing Business Premises has been drawn up and which although voluntary (if only through fear of political intervention) is generally adopted by major landlords. Occupiers too have various representative bodies such as the Property Managers Association and the British Retail Consortium. And, although the value of the commercial property market has been estimated at £700Bn, of which approximately half is owned by occupiers and the remainder by investors/landlords, the number of different advisers and active participants in the market is relatively small so that in itself serves to keep things in order.
Unlike residential property, where transactional attitudes revolve around private life-style and aspirations regardless of the individual reality, in the commercial property market the relationship between occupiers (including tenants) and property is inextricably linked to marketing. Whether owner-occupier or tenant, the property is intended to complement the corporate image of the business of occupier or tenant at the date of the commitment. A corporate image is the public face of a business: often the generally accepted image of what the company stands for, it is a form of promotion to suggest a mental image to the customer; and generally where a company is concerned about image, the company will often spend a considerable amount of money and time to ensure the overall standard of presentation.
A corporate image is not just tangible, it also includes intangibles: for example, how it treats employees, customers, suppliers and advisers, and anyone connected with the business, including landlords. For many businesses, the required property will include a style of architecture, layout and design; and for retailers in particular, a feature specific to the retail sector is the trading position, including the impact of any changes in the locality on the tradition position
Commercial property continues to evolve. Unlike residential property where architectural styles and fashions of the time can come under the heading of 'heritage' to be preserved at all cost, and as listed buildings, commercial properties that have reached the end of their useful life or where the size, layout and configuration is obsolete are more likely to be refurbished or demolished and redeveloped, unless of historic importance. Even then, it is possible the external facade would be preserved, whilst all the innards stripped out and rebuilt to modern standards. Consequently, the age and construction of the property might not considered that significant between landlord and tenant because any onerous obligations for repair, maintenance and decoration could be circumvented by the provisions of a tenancy.
The commercial property market encompasses all property that is used or could be used for a business purpose. The business does not have to have a profit motive, but a fine-line exists between a hobby and a business. In the Landlord and Tenant Act 1954 Part II, one of the statutes governing tenanted commercial property, the definition of “business” includes a trade, profession or employment and any activity carried on by a body of persons corporate or unincorporate. That definition has been held to cover a sports club, but not to extend to a Sunday school as a spare time activity in the tenant's home, and taking in a few lodgers has been held to be outside the definition. Also, the premises need not be the place where the business is carried on. Although commercial property excludes residential property in itself, it is by no means unusual residential property to form part of commercial premises and so be subject to the law relating to commercial property and business tenancies.
The commercial property market is everything that is not residential or agricultural. Retail or shop property is a sector of the commercial property market and all buildings that are used or could, with planning permission, be used for any type of retailing including retail warehouses, retail showrooms, restaurants and financial and professional services and that fall into Class A of the Town and Country Planning (Use Classes) Order 1987 (as amended) are in the category of shop property.
The economy is the wealth and resources of a country or region, normally in terms of the production and consumption of goods and services. In England and Wales, the commercial property market is a major sector of the economy and provides the physical accommodation for almost all industries, places of work, shopping and leisure. As an asset class, the ownership of commercial property is a significant investment for the pensions industry.
In common with residential property, commercial property is transparent, with an established legal framework and recognised valuation system. However, unlike residential property, the commercial property market is largely unregulated. Commercial property is predominantly a business-to-business market, where the legal relationship between landlord and tenant is based upon a commercial contract: with a commercial contract the parties are deemed to know what they are doing.
The commercial property market is largely self-regulating. The majority of advisers are qualified, answerable to professional organisations and codes of conduct. A Code for Leasing Business Premises has been drawn up and which although voluntary (if only through fear of political intervention) is generally adopted by major landlords. Occupiers too have various representative bodies such as the Property Managers Association and the British Retail Consortium. And, although the value of the commercial property market has been estimated at £700Bn, of which approximately half is owned by occupiers and the remainder by investors/landlords, the number of different advisers and active participants in the market is relatively small so that in itself serves to keep things in order.
Unlike residential property, where transactional attitudes revolve around private life-style and aspirations regardless of the individual reality, in the commercial property market the relationship between occupiers (including tenants) and property is inextricably linked to marketing. Whether owner-occupier or tenant, the property is intended to complement the corporate image of the business of occupier or tenant at the date of the commitment. A corporate image is the public face of a business: often the generally accepted image of what the company stands for, it is a form of promotion to suggest a mental image to the customer; and generally where a company is concerned about image, the company will often spend a considerable amount of money and time to ensure the overall standard of presentation.
A corporate image is not just tangible, it also includes intangibles: for example, how it treats employees, customers, suppliers and advisers, and anyone connected with the business, including landlords. For many businesses, the required property will include a style of architecture, layout and design; and for retailers in particular, a feature specific to the retail sector is the trading position, including the impact of any changes in the locality on the tradition position
Commercial property continues to evolve. Unlike residential property where architectural styles and fashions of the time can come under the heading of 'heritage' to be preserved at all cost, and as listed buildings, commercial properties that have reached the end of their useful life or where the size, layout and configuration is obsolete are more likely to be refurbished or demolished and redeveloped, unless of historic importance. Even then, it is possible the external facade would be preserved, whilst all the innards stripped out and rebuilt to modern standards. Consequently, the age and construction of the property might not considered that significant between landlord and tenant because any onerous obligations for repair, maintenance and decoration could be circumvented by the provisions of a tenancy.
The commercial property market encompasses all property that is used or could be used for a business purpose. The business does not have to have a profit motive, but a fine-line exists between a hobby and a business. In the Landlord and Tenant Act 1954 Part II, one of the statutes governing tenanted commercial property, the definition of “business” includes a trade, profession or employment and any activity carried on by a body of persons corporate or unincorporate. That definition has been held to cover a sports club, but not to extend to a Sunday school as a spare time activity in the tenant's home, and taking in a few lodgers has been held to be outside the definition. Also, the premises need not be the place where the business is carried on. Although commercial property excludes residential property in itself, it is by no means unusual residential property to form part of commercial premises and so be subject to the law relating to commercial property and business tenancies.
The commercial property market is everything that is not residential or agricultural. Retail or shop property is a sector of the commercial property market and all buildings that are used or could, with planning permission, be used for any type of retailing including retail warehouses, retail showrooms, restaurants and financial and professional services and that fall into Class A of the Town and Country Planning (Use Classes) Order 1987 (as amended) are in the category of shop property.
Investment in shop property is, for many people, closest to home. Not literally, necessarily, but because shop property is only one step removed from residential property. Since everyone goes shopping - albeit not everyone likes shopping! - shops are more easily associated with than, for example, offices, factories and warehouses where occupiers may be relatively anonymous.
The market for shop property comprises investors (landlords), developers and occupiers.
Unlike investors and occupiers, developers look at the potential for an existing property: they imagine what the property could become. That potential might not be the property on its own, but in conjunction with an adjoining building or neighbouring properties. Assembling a site from a number of different properties can result in a large development, whose end-value far exceeds the existing use value of the individual properties.
Investors tend not to think like that, but they should. Investment is about considering all the angles, one of which is whether the property has development potential.
Development potential is not limited to demolishing the building and starting from scratch. It includes conversion, refurbishment, updating, improving and modernising the layout and configuration. It includes possibility for enhancing value by getting planning permission for change of use. For examples: a shop with a residential flat above where the flat could be converted into 2 or more flats; the shop combined with the shop next door to form a double unit for which there could be more demand, or demand from a different type of user and for which a higher rent pro-rata could be obtained; or a single-storey lock-up shop where it would be possible to construct another floor or more above. Even if you don't have the money to do the work yourself, that doesn't mean the development potential should be ignored.
The market comprises buyers and sellers. Property advice is the realm of the surveyor, assisted where necessary by lawyers. Surveying has been an essential element in the development of the human environment since the beginning of recorded history, approximately 5,000 years ago. Surveying is required in the planning and execution of nearly every form of construction, including transport, communications, mapping, and the definition of legal boundaries for land ownership.
With property transactions, although surveyors do not make the market, it is the surveyor's interpretation of the behaviour and attitude of buyers and sellers that will often have a profound influence upon the state and direction of the market. The reason surveyors have so much influence is that, unlike the seller’s or buyer’s opinion of value that is likely to be subjective, the surveyor's opinion is objective. With 'subjective' the person will assess the proposition in relation to that person’s individual requirements, whereas with 'objective' the surveyor will assess the proposition in relation to the market.
When investors are left to decide or fend for themselves, there is the risk that their assessment of the property's suitability as an investment is likely to include a host of subjective factors, ranging from personal requirements to observations on the market including media reports and commentary. Although observation and research have their uses, it is not until you know what is really happening behind-the-scenes that you can draw a reliable and balanced conclusion. Anything else is conjecture and speculation. In my experience, the main reason many private investors come unstuck is that they have failed to take account of the truth of the market.
Although the retail sector is approximately 8% of gross domestic product (GDP), the truth of the market is a reflection of the retailer business plan. A business plan is a set of parameters based on the cost and expectations for achieving a goal or objective. Essentially, a business plan will include a marketing plan, although the documentation may be separate. Basically, it is all about how to go about achieving what the retailer wants; and because how the retailer does that will often differ from how the property investor would do it if the investor were the retailer is why investors can go wrong.
The market for shop property comprises investors (landlords), developers and occupiers.
Unlike investors and occupiers, developers look at the potential for an existing property: they imagine what the property could become. That potential might not be the property on its own, but in conjunction with an adjoining building or neighbouring properties. Assembling a site from a number of different properties can result in a large development, whose end-value far exceeds the existing use value of the individual properties.
Investors tend not to think like that, but they should. Investment is about considering all the angles, one of which is whether the property has development potential.
Development potential is not limited to demolishing the building and starting from scratch. It includes conversion, refurbishment, updating, improving and modernising the layout and configuration. It includes possibility for enhancing value by getting planning permission for change of use. For examples: a shop with a residential flat above where the flat could be converted into 2 or more flats; the shop combined with the shop next door to form a double unit for which there could be more demand, or demand from a different type of user and for which a higher rent pro-rata could be obtained; or a single-storey lock-up shop where it would be possible to construct another floor or more above. Even if you don't have the money to do the work yourself, that doesn't mean the development potential should be ignored.
The market comprises buyers and sellers. Property advice is the realm of the surveyor, assisted where necessary by lawyers. Surveying has been an essential element in the development of the human environment since the beginning of recorded history, approximately 5,000 years ago. Surveying is required in the planning and execution of nearly every form of construction, including transport, communications, mapping, and the definition of legal boundaries for land ownership.
With property transactions, although surveyors do not make the market, it is the surveyor's interpretation of the behaviour and attitude of buyers and sellers that will often have a profound influence upon the state and direction of the market. The reason surveyors have so much influence is that, unlike the seller’s or buyer’s opinion of value that is likely to be subjective, the surveyor's opinion is objective. With 'subjective' the person will assess the proposition in relation to that person’s individual requirements, whereas with 'objective' the surveyor will assess the proposition in relation to the market.
When investors are left to decide or fend for themselves, there is the risk that their assessment of the property's suitability as an investment is likely to include a host of subjective factors, ranging from personal requirements to observations on the market including media reports and commentary. Although observation and research have their uses, it is not until you know what is really happening behind-the-scenes that you can draw a reliable and balanced conclusion. Anything else is conjecture and speculation. In my experience, the main reason many private investors come unstuck is that they have failed to take account of the truth of the market.
Although the retail sector is approximately 8% of gross domestic product (GDP), the truth of the market is a reflection of the retailer business plan. A business plan is a set of parameters based on the cost and expectations for achieving a goal or objective. Essentially, a business plan will include a marketing plan, although the documentation may be separate. Basically, it is all about how to go about achieving what the retailer wants; and because how the retailer does that will often differ from how the property investor would do it if the investor were the retailer is why investors can go wrong.
For a retailer, a marketing plan is all about how to go about attracting enough customers of the type that the retailer wants to help.
Once upon a time, the hub of economic and community activity was the town centre. On one or more days each week throughout the year, the townspeople and countryfolk would set up stalls and booths to ply their wares and exchange goods and services. Whether the exchange was in currency (money) or bartering, the principle was the same: people helping one another. To help and be helped is a natural human instinct and the degrees of help and the form the help takes are provided either directly or indirectly through products, goods and services.
The function of help is to satisfy a need. A need is a state of ‘felt deprivation’ and everyone has the same basic needs. I find a good way to understand what a need is to liken a need to the adjustable feet on a set of weighing scales. For a scale to do its job properly, it must be in balance and harmony. So too must the human being: people function at their best when in a state of balance and harmony. Whether the ground underneath is uneven or the scales themselves wonky, the first thing to do is to adjust the feet of the scales to make sure the relationship between the machine and whatever the machine is on is in sync. Maintaining a harmonious relationship keeps things in balance.
When, for whatever reason, a need is unsatisfied it will look for ways to be fulfilled. A need can become unsatisfied when we are supposed to change but for some reason do not. Change is not something we can resist indefinitely. Resistance to change leads to change being forced upon us whether we like it or not. Essentially, change is about progress, about experience with a view to developing understanding.
Although everyone has the same basic needs - for example, hunger, thirst, physical safety and security, individual self=development and spirituality - only each individual will know that they need at any one time so finding ways to satisfy your particular needs is what motivates you. We give priority to important needs. Once our most important or pressing needs are satisfied or generally taken care of, we set out to satisfy the least important.
We form relationships to help one another and be helped, in some way and at some level. The duration of a relationship depends upon the purpose of the relationship. With personal relationships where the bond that keeps the relationship together is intangible or emotional, such as friendship, companionship and love, the value of that bond may be free or priceless, but when the bond is tangible and the purpose of the relationship involves the exchange of money, it is known as ‘business’. In essence, business is the art and science of helping people their individual needs in exchange for money.
Business is about transaction and the ‘place’ (which need not be a physical place) where business is transacted is known as a market.
The development of towns is either organic or planned. An organic town is a place that evolves and grows up around the geography of the locality, such as by a river or a valley in the landscape. A planned town is where someone, often the church or royalty, started with a metaphorical blank sheet of paper, or a field, and designated spaces for others to put up buildings, and so on.
The origins of a town and its development depend upon history and heritage. In market towns, where the buying and selling of livestock and produce took place, originally, stalls would have been erected for the day and taken down at the end of each day, but gradually they became permanent structures, firstly booths and then a row of buildings, often down the middle of streets. Market encroachment is a feature of many market towns and in many places the whole of the built-up area began as market encroachment. By the end of the 1300s, official terminology had caught up with the change and the permanent structures were called shops. Basically, a shop is a place in or from which a shopkeeper can do business. Shops were the successor to the temporary and moveable structures of stalls and booths and in being permanent and under cover had the advantage of being open all day and in all weather.
Regardless of the social and community attractions of shops and shopping, retailing is not an extension of social services. Retailers make money from extracting profit out of the difference between the total cost to the retailer in buying the goods/services and the total cost of reselling the goods/services. The difference is known as the ‘profit margin’ and the margin will vary depending upon the retailer’s buying power, economy of scale and the volume of goods/services sold on a daily basis.
Once upon a time, the hub of economic and community activity was the town centre. On one or more days each week throughout the year, the townspeople and countryfolk would set up stalls and booths to ply their wares and exchange goods and services. Whether the exchange was in currency (money) or bartering, the principle was the same: people helping one another. To help and be helped is a natural human instinct and the degrees of help and the form the help takes are provided either directly or indirectly through products, goods and services.
The function of help is to satisfy a need. A need is a state of ‘felt deprivation’ and everyone has the same basic needs. I find a good way to understand what a need is to liken a need to the adjustable feet on a set of weighing scales. For a scale to do its job properly, it must be in balance and harmony. So too must the human being: people function at their best when in a state of balance and harmony. Whether the ground underneath is uneven or the scales themselves wonky, the first thing to do is to adjust the feet of the scales to make sure the relationship between the machine and whatever the machine is on is in sync. Maintaining a harmonious relationship keeps things in balance.
When, for whatever reason, a need is unsatisfied it will look for ways to be fulfilled. A need can become unsatisfied when we are supposed to change but for some reason do not. Change is not something we can resist indefinitely. Resistance to change leads to change being forced upon us whether we like it or not. Essentially, change is about progress, about experience with a view to developing understanding.
Although everyone has the same basic needs - for example, hunger, thirst, physical safety and security, individual self=development and spirituality - only each individual will know that they need at any one time so finding ways to satisfy your particular needs is what motivates you. We give priority to important needs. Once our most important or pressing needs are satisfied or generally taken care of, we set out to satisfy the least important.
We form relationships to help one another and be helped, in some way and at some level. The duration of a relationship depends upon the purpose of the relationship. With personal relationships where the bond that keeps the relationship together is intangible or emotional, such as friendship, companionship and love, the value of that bond may be free or priceless, but when the bond is tangible and the purpose of the relationship involves the exchange of money, it is known as ‘business’. In essence, business is the art and science of helping people their individual needs in exchange for money.
Business is about transaction and the ‘place’ (which need not be a physical place) where business is transacted is known as a market.
The development of towns is either organic or planned. An organic town is a place that evolves and grows up around the geography of the locality, such as by a river or a valley in the landscape. A planned town is where someone, often the church or royalty, started with a metaphorical blank sheet of paper, or a field, and designated spaces for others to put up buildings, and so on.
The origins of a town and its development depend upon history and heritage. In market towns, where the buying and selling of livestock and produce took place, originally, stalls would have been erected for the day and taken down at the end of each day, but gradually they became permanent structures, firstly booths and then a row of buildings, often down the middle of streets. Market encroachment is a feature of many market towns and in many places the whole of the built-up area began as market encroachment. By the end of the 1300s, official terminology had caught up with the change and the permanent structures were called shops. Basically, a shop is a place in or from which a shopkeeper can do business. Shops were the successor to the temporary and moveable structures of stalls and booths and in being permanent and under cover had the advantage of being open all day and in all weather.
Regardless of the social and community attractions of shops and shopping, retailing is not an extension of social services. Retailers make money from extracting profit out of the difference between the total cost to the retailer in buying the goods/services and the total cost of reselling the goods/services. The difference is known as the ‘profit margin’ and the margin will vary depending upon the retailer’s buying power, economy of scale and the volume of goods/services sold on a daily basis.
Regardless of the social and community attractions of shops and shopping, retailing is not an extension of social services. Retailers are in business and business is all about helping people in exchange for money. Retailers make money from extracting profit out of the difference between the total cost to the retailer in buying the goods/services and the total cost of reselling the goods/services. The difference is known as the ‘profit margin’ and the margin will vary depending upon the retailer’s operating costs and overheads, buying power, economy of scale, rate of stock-turn, cash-flow management, and the turnover of goods/services.
Footfall is pedestrian flow, the number of people that walk past the shop on a regular basis. In my opinion, there are two types of footfall: the first stems from fixed attractions, the second from what I describe as ‘magnetic’ retailers, perhaps more popularly known as ‘destination’ retailers, albeit destination retailers are not quite the same.
A fixed attraction is anything that is capable of attracting people regardless, for example a bus terminus, railway station, a public car park, library, a tourist attraction such as an historic building or museum, a church or cathedral, an office building or industrial complex where a large number of people work, a seaside resort, open countryside, national park, and so on. All built-up and many rural areas have their own fixed attractions and the popularity for footfall would depend upon the attraction.
All retailers are capable of creating and maintaining goodwill in their dealings with customers but a ‘magnetic’ retailer is so good at goodwill that the effect of the reputation and level of esteem will radiate and attract or draw customers to that retailer from far and wide. In retailing, a distinction may be made between dependent and magnet or destination retailers. Provided the location is accessible, it doesn’t usually matter where destination retailer is based, people will travel often long distance to shop there. For an ordinary retailer whose attraction is not especially magnetic, such retailers are more dependent upon the continuing existence of footfall generated by others. For such retailers, the trading position is therefore more critical. For magnetic and destination retailers the proximity of other retailers is unimportant.
Fixed attraction footfall may not be enough to support a retail business profitably because rarely would the retailer have any control over the type of people drawn to the fixed attraction. The potential to be obtained from a trading position that includes a magnetic retailer is easier to gauge because the type of products/goods/services offered by the magnetic retailer are likely to suit particular segments or sectors of the consumer market and determine the spending power of the target customer.
A difficulty for the non-magnetic or not-especially-magnetic retailer is whether the magnetic retailer can be relied upon to remain in the trading position for the duration of the non-magnetic retailer’s business tenancy commitments. A non-magnetic retailer that commits, for example, to a term of 10 without a break-clause will have to be confident that the attraction of the trading position would remain at least constant and certainly no worse for the entire period. If the trading position were to deteriorate during that period of time then it is possible the non-magnetic retailer could become stuck or locked into to an unprofitable trading position and unsaleable business commitment.
I have already said that an investor owns the property, not the tenant’s business so the fact the tenant may have got it wrong is in theory nothing to do with the landlord. In practice, the landlord can also lose out because of whether the property would let to another tenant for at least the same rent as the rent the failed tenant had agreed.
When appraising a trading position, the investor must be careful not to fall into the trap of jumping to the wrong conclusion ( a possibility made likely as a result of the actual tenant’s comments, for example) by confusing the planning Use Class for the shop, the permitted use in the lease to the actual tenant and that particular tenant’s style or way of going about running its business within that permitted use. It is important to recognise there can be and is often a difference between the actual tenant’s experience of the trading position based upon how that particular tenant has chosen to attract footfall, and the nature and quality of the footfall itself.
For example, it is by no means unusual for retailers to make pronouncements about the state of the market as a whole as if their subjective experience should be construed representative of shopper behaviour. No retailer has such a monopoly that it can ever be 100% certain that its own experience based upon how it goes about attracting and generating customers is necessarily representative. From the investor’s perspective, as owner of the property, the test of the trading position is not only the experience of the actual tenant but also the potential of the tradition for other retailers and different types of business.
Generally, a regional/national multiple retailer, a specialist destination retailer, a department store and a chain store are likely to be more magnet than a local or independent shopkeeper. Local and independent retailers and shopkeepers are often magnetic to a limited extent, depending upon their reputation in the local community but in the context of an investment proposition the competitive pressures on retailing generally are likely to be more burdensome for the smaller retailer.
When shop investments are offered for sale and whether or not the actual tenant is a multiple retailer, it is common for the particulars or details of the proposition to highlight trading names of other multiple retailers and large companies in the vicinity. Boosting the attraction of the investment proposition by reference to the nearby presence of well-known retailers is designed to trap the unwary. The question is how many of the nearby multiple retailers would be interested in opening a shop in that trading position if it or the other multiple retailers were not already there. What the investor is unlikely to know (unless exceptionally well-advised and even then not 100% sure) is how many of the multiple retailers in the vicinity are planning or intending to assign their leases or not renew on expiry. When the existing landlord gets winds of the tenant’s intention and depending upon the time-scale the more cunning landlord will sell the investment well before the tenant moves on.
I introduced a test of a trading position in decline when I applied what is known as the knock-on effect of comparable evidence. Basically, what happens is that when rent at review are increased to a level at which it becomes uneconomical for a multiple retailer that retailer will either assign or sub-let the tenancy and relocate to a better trading position (which on the face of it may not be cheaper but is more profitable for that particular retailer) or close down the branch. If when the tenancy is assigned or sub-let or the landlord offers the shop to let on a new lease and the new tenant is not a multiple retailer, often the rent that the new tenant agrees will exacerbate the rents in the trading position, and add to the uneconomical level. Also it is unlikely a tenant of lesser reputation will contribute much if anything to the creation of passing trade. As time passes, the number of multiple retailers in the vicinity drops until the trading position becomes the sole territory of non-magnetic retailers. Often the complaints by local shopkeepers about rents and business rates (business rates are based on Rateable Values in turn calculated by reference to rents) are a legacy of an ex-multiple retailer trading position.
Of course, the same applies in reverse. A trading position will often improve for all manner of reasons, such as a new fixed attraction, the entrance to a new shopping centre, or a letting to a magnetic retailer in the sector of the market where there is a lot of customer spillage or excess for others retailers nearby.
Generally, it is very difficult if not impossible to restore the popularity of a trading position once the rot has set in. It is vicious circle: once people get used to shopping elsewhere what remains of the footfall can give the impression of no shops worth bothering with. Moreover, and although it may not be politically correct to say so, there is nevertheless a reluctance amongst many people when shopping to want to mix and mingle for all and sundry.
Footfall is pedestrian flow, the number of people that walk past the shop on a regular basis. In my opinion, there are two types of footfall: the first stems from fixed attractions, the second from what I describe as ‘magnetic’ retailers, perhaps more popularly known as ‘destination’ retailers, albeit destination retailers are not quite the same.
A fixed attraction is anything that is capable of attracting people regardless, for example a bus terminus, railway station, a public car park, library, a tourist attraction such as an historic building or museum, a church or cathedral, an office building or industrial complex where a large number of people work, a seaside resort, open countryside, national park, and so on. All built-up and many rural areas have their own fixed attractions and the popularity for footfall would depend upon the attraction.
All retailers are capable of creating and maintaining goodwill in their dealings with customers but a ‘magnetic’ retailer is so good at goodwill that the effect of the reputation and level of esteem will radiate and attract or draw customers to that retailer from far and wide. In retailing, a distinction may be made between dependent and magnet or destination retailers. Provided the location is accessible, it doesn’t usually matter where destination retailer is based, people will travel often long distance to shop there. For an ordinary retailer whose attraction is not especially magnetic, such retailers are more dependent upon the continuing existence of footfall generated by others. For such retailers, the trading position is therefore more critical. For magnetic and destination retailers the proximity of other retailers is unimportant.
Fixed attraction footfall may not be enough to support a retail business profitably because rarely would the retailer have any control over the type of people drawn to the fixed attraction. The potential to be obtained from a trading position that includes a magnetic retailer is easier to gauge because the type of products/goods/services offered by the magnetic retailer are likely to suit particular segments or sectors of the consumer market and determine the spending power of the target customer.
A difficulty for the non-magnetic or not-especially-magnetic retailer is whether the magnetic retailer can be relied upon to remain in the trading position for the duration of the non-magnetic retailer’s business tenancy commitments. A non-magnetic retailer that commits, for example, to a term of 10 without a break-clause will have to be confident that the attraction of the trading position would remain at least constant and certainly no worse for the entire period. If the trading position were to deteriorate during that period of time then it is possible the non-magnetic retailer could become stuck or locked into to an unprofitable trading position and unsaleable business commitment.
I have already said that an investor owns the property, not the tenant’s business so the fact the tenant may have got it wrong is in theory nothing to do with the landlord. In practice, the landlord can also lose out because of whether the property would let to another tenant for at least the same rent as the rent the failed tenant had agreed.
When appraising a trading position, the investor must be careful not to fall into the trap of jumping to the wrong conclusion ( a possibility made likely as a result of the actual tenant’s comments, for example) by confusing the planning Use Class for the shop, the permitted use in the lease to the actual tenant and that particular tenant’s style or way of going about running its business within that permitted use. It is important to recognise there can be and is often a difference between the actual tenant’s experience of the trading position based upon how that particular tenant has chosen to attract footfall, and the nature and quality of the footfall itself.
For example, it is by no means unusual for retailers to make pronouncements about the state of the market as a whole as if their subjective experience should be construed representative of shopper behaviour. No retailer has such a monopoly that it can ever be 100% certain that its own experience based upon how it goes about attracting and generating customers is necessarily representative. From the investor’s perspective, as owner of the property, the test of the trading position is not only the experience of the actual tenant but also the potential of the tradition for other retailers and different types of business.
Generally, a regional/national multiple retailer, a specialist destination retailer, a department store and a chain store are likely to be more magnet than a local or independent shopkeeper. Local and independent retailers and shopkeepers are often magnetic to a limited extent, depending upon their reputation in the local community but in the context of an investment proposition the competitive pressures on retailing generally are likely to be more burdensome for the smaller retailer.
When shop investments are offered for sale and whether or not the actual tenant is a multiple retailer, it is common for the particulars or details of the proposition to highlight trading names of other multiple retailers and large companies in the vicinity. Boosting the attraction of the investment proposition by reference to the nearby presence of well-known retailers is designed to trap the unwary. The question is how many of the nearby multiple retailers would be interested in opening a shop in that trading position if it or the other multiple retailers were not already there. What the investor is unlikely to know (unless exceptionally well-advised and even then not 100% sure) is how many of the multiple retailers in the vicinity are planning or intending to assign their leases or not renew on expiry. When the existing landlord gets winds of the tenant’s intention and depending upon the time-scale the more cunning landlord will sell the investment well before the tenant moves on.
I introduced a test of a trading position in decline when I applied what is known as the knock-on effect of comparable evidence. Basically, what happens is that when rent at review are increased to a level at which it becomes uneconomical for a multiple retailer that retailer will either assign or sub-let the tenancy and relocate to a better trading position (which on the face of it may not be cheaper but is more profitable for that particular retailer) or close down the branch. If when the tenancy is assigned or sub-let or the landlord offers the shop to let on a new lease and the new tenant is not a multiple retailer, often the rent that the new tenant agrees will exacerbate the rents in the trading position, and add to the uneconomical level. Also it is unlikely a tenant of lesser reputation will contribute much if anything to the creation of passing trade. As time passes, the number of multiple retailers in the vicinity drops until the trading position becomes the sole territory of non-magnetic retailers. Often the complaints by local shopkeepers about rents and business rates (business rates are based on Rateable Values in turn calculated by reference to rents) are a legacy of an ex-multiple retailer trading position.
Of course, the same applies in reverse. A trading position will often improve for all manner of reasons, such as a new fixed attraction, the entrance to a new shopping centre, or a letting to a magnetic retailer in the sector of the market where there is a lot of customer spillage or excess for others retailers nearby.
Generally, it is very difficult if not impossible to restore the popularity of a trading position once the rot has set in. It is vicious circle: once people get used to shopping elsewhere what remains of the footfall can give the impression of no shops worth bothering with. Moreover, and although it may not be politically correct to say so, there is nevertheless a reluctance amongst many people when shopping to want to mix and mingle for all and sundry.