A new report has blamed so-called ‘supertraders’ for distorting London’s restaurant market, adding to challenges which are having a “toxic effect” on operators.
The report by the Cedar Dean Group says the aggressive expansions of brands such as Five Guys and Shake Shack and their willingness to pay huge rents are setting unsustainable precedents.
The report says that overall, London restaurants coming up to their five-year rent review face an average increase in rent of 50%.
It shows rents in the W1 and WC2 postcodes have more than doubled in the past year, while rents in Mayfair have risen by around 400% over the same period - from £150 zone A per square foot to £600 per square foot today.
The report says: “The current situation is unsustainable. We have reached a tipping point with restaurants now spending more than they can afford on rent. Restaurants are spending an average of 16% turnover on rent, up from a reasonable 10% in 2006, and 13% in 2011. If the rate of growth does not slow, we forecast that operators will be paying an average of 20% of turnover in rent by 2021. Worryingly, more than a third (36%) of London’s restaurateurs say they are paying 20% or more of turnover in rent already.
A poll by Cedar Dean showed that 63% of restaurateurs feel their commercial rents are “high” or “unsustainably high”. Furthermore, 85% described the forecast increase in rents and rates in 2017 as High or Unsustainably high.
The poll also showed that just 13% of operators are confident they will be able to carry on with business as usual if the rents and rates trends carry on as forecast. 87% said they would have to either move out of Central London to a cheaper area; evolve their business and change their business model; or shut up shop. The report points out that 40% of those recognising their need to adapt to survive see no alternative to shutting up shop, while 57% would move away from Central London to a cheaper area.
Cedar Dean also attacked landlords for not playing fair by their tenants.
It said: “Tenant security is diminishing, making it harder for restaurateurs to hold-on to their coveted central locations. Landlords are bypassing the 1954 Landlord & Tenant Act which includes a statutory code governing business tenancies and gives business tenants a degree of security of tenure by giving them the right to have a renewable lease on the same terms as the original lease granted. However, more than a third of leases (34%) now don’t fall under the Act, up from just 10% in 2006. The impact of this long term is actually phenomenal in its own right whereby investment into the whole restaurant industry may be under threat.”
The report predicts that if nothing changes, remote central kitchens – such as Deliveroo’s RooBox project – will become more prevalent. It also predicts reverse premiums becoming more common-place, i.e. businesses tied to the lease of a building may be forced to pay new tenants to take a lease off their hands.
Cedar Dean suggest a number of potential solutions, including:
• Establish government rate caps
• Extend business rates relief for smaller premises with a rateable value of £50,000 or less to £1,500 for 2016-17 and 2017-18
• Adapt business models to increase profits – for example all-day dining
• Require landlords to adhere to the Landlord and Tenant Act 1954 part (ii), which gives business tenants the right to have a renewable lease on the same terms as the original lease granted.
In his conclusion to the report, Cedar Dean chief executive David Abramson says: “Some people might argue it’s no great loss if the capital’s historic restaurants close. They could argue it’s not a huge problem if Supertrader chains continue their expansion across London.
“But a campaign to save the capital’s long-established restaurants is not just about supply and demand. As we have shown, the rises in rent driving restaurateurs out of central London are not being driven solely by normal market forces. The commercial property market has become temporarily distorted and the sector needs help to get over this hurdle before rents settle back to a more sustainable level – especially given the apparent dip in consumer confidence since the Brexit result.
“Furthermore, the capital’s restaurants are more than just businesses. They’re part of the social, architectural and social character of the city they serve.
“And, given that the success that Central London’s restaurants have – in part – contributed to their inability to remain there, it is not hard to imagine the consequences that their failure would bring.
“In this report we have outlined both interim and longer-term solutions. Now landlords, Local Authorities, the Government and restaurateurs themselves need to act. Having a real mix of restaurant operators is what makes London such an interesting restaurant revolution landscape – let’s not lose it over greed!”