Friday, 12 July 2013

An intriguing example of how short term market considerations produce insane outcomes; what this means; and what we might do

(A blog that is too long and has a ridiculous title, because I want to put you off)

If you've walked along a British high street recently, it will come as no surprise to you to learn that ‘vacancy rates’ – the proportion of shops that are closed – are remarkably high.

Actually, if you live in London, you may not have noticed.  London, ever more de-coupled from the real world and fuelled by funny money from “high net worth individuals” and the  “financial and business services sector”, has a vacancy rate of around 7%.

Elsewhere, the years of austerity and falling real incomes have taken their toll.  Try Hartlepool, or Newport, or Dudley: a third of the shops are shut.

(It’s not just the high streets, either.  Once upon a time there was a narrative in which consumer spending was merely moving to those awful ‘out of town’ retail parks: no longer.)

It’s mainly to do with the fact that we all do all our shopping via the interweb, of course, which means that, despite the televisual insights of Mary Portas, the plangent efforts of her dozen pilots and the pronouncements from her state-gestated daughter the Future High Streets Forum, the hard-arsed evidence suggests that things are only going one way

There are, of course, genuine and uplifting efforts to do something about this: but they are not only small-scale, fragile and fragmented; they are up against a hidden and very considerable barrier.

To you and I, and so far through this piece, a shop is a shop is a shop: a rectangular space with stuff inside that you can, if you wish and you have sufficient credit, buy.

However, there are those for whom a shop is not a shop, but an ‘investment class’.  Someone, somewhere, owns the shop.  Or, to be more precise, an entity with an investment portfolio encompassing gilts, equities, commodities, futures and so forth, also includes property assets within that; and, within property, retail.

Now, I have to confess that I assumed that, since the kind of people who would do such things are likely to be either the aforementioned “high net worth individuals” and/or elite members of the “financial and business services sector” (collectively, and henceforth, the “crazies”, if for no other reason than it has been the relentless pursuit of their interests at the expense of all others that has brought about the current craziness) that it would be impossible to find out anything about what these people are up to.

But lo! A miracle! An august assembly – the Association of British Insurers, the Association of Real Estate Funds, the British Council for Offices, the British Council of Shopping Centres, the British Property Federation, the Investment Property Forum, the Royal Institution of Chartered Surveyors and the Urban land Institute (I just can’t be bothered with the hyperlinks I’m afraid) – have published the marvellous “Property Data Booklet 2012”, which contains some exceptionally useful ballast.

For example, all the commercial property in Britain has a value of £717 billion.  Who knew?

And, of this, £227 billion is retail property!

And, of this, about 5% is in the hands of private investors, about 4% in the hands of charities and old-school trusts; and virtually all the rest is in the hands of gigantic financial institutions (mainly pension funds) and listed property companies.

Now here’s a thing.  It is a general and simple rule in economics that if the demand for something falls while supply remains unchanged, the price declines.  In the case of shops, this translates as: if a landlord can’t lease a shop at a particular price, he or she should progressively reduce the price until he or she can, in fact, let it.

From the occupier perspective, of course, the rent is a cost that will need to be met out of income from selling whatever it is they sell; so, to be sure, they’ll need to sell something.  And it also true that the rise in – for example – the number of charity shops, who certainly pay lower rent than a commercial occupier might, is a sign that some landlords, at least, are showing some flexibility in rents.

But – and here comes the catch – a commercial property investor or pension fund expresses itself to the financial market through the value of its assets; and the value of its retail assets is in large part a function of the expected income stream over the lifetime of the asset; and is calculated not on the basis of the actual money it is receiving in rental income, but on the ‘rental value’ of the property, a presumed hypothetical value when everything is ‘normal’.

If you admit to the ‘market’ that your assets are worth, say, 11% less than you said last year (11% being the current vacancy rate on the average British high street) what do you suppose would happen?  Yes: your share price would crash, your investors would flee, your high-octane world among the crazies would come to a torrid end.

So – it is less costly for you to deliberately keep your row of shops on the high street empty, potentially for years, than it would be to allow independent traders and other local worthies and weirdoes to occupy those shops on lower rents. 

In short, a major reason for the current high vacancy rate and the major block on the transformation of Britain’s high streets into new areas of play, leisure and conviviality is the outcome of the perverse structure of the reporting mechanisms in the UK’s financial system and, yet again, the interests of those crazies.

They have to go.  Really.

1 comment:

Bladesey said...

Hi David. Long time no see.... Very interesting article which made me go away and read around property valuation! But I don't get your statement in bold at the end. Pls can you explain for the hard of understanding. Why does it cost the landlords less to keep their properties empty? From what I understand valuations are predominantly driven by book or asset value rather than cash flows from rental. So what does asset valuation ('cost') have to do with the opportunity cost from missed rentals due to keeping a property vacant? Am getting interested in this space so keen to build my thinking. Thanks