Mon 5th Dec 2016 - Fleurets – rents in prime London locations break £1m mark, regions showing greater degree of consistency Fleurets – rents in prime London locations break £1m mark, regions showing greater degree of consistency: Property agent Fleurets has published its annual rent survey, reporting rents in prime London locations have broken the £1m mark while regional rents appear to have a greater degree of consistency. It said restaurants and bars would bear the brunt of most rent increases while the pub sector remained strong. The average annual free-of-tie rent in London was £107,674 last year (a 21% increase since 2011) and the average shell rent was £144,902 (an increase of 22%). By contrast, average free-of-tie rent in the north last year was £48,770 (an increase of 12%) while a shell unit’s average rent was £99,954 (up 1%). A report by Fleurets stated: “The London market continues to grow. Within Fleurets, the London team has dealt with the highest number of rent reviews and lease renewals. Not surprisingly the average rents for all sectors are the highest in London. In addition, they have also shown the highest average increases. It is interesting to note that London, for both free-of-tie and shell reviews, shows rental increases of 21% to 22%. This is significantly higher than the rest of the country, which has generally been in the region of 7% to 10%. With the current weakness of sterling we anticipate further overseas investment into the London market. Investor landlords are seeking to increase rents, which are being driven by operator demand. Restaurateurs in particular are seeking new outlets to grow their estates. With a restricted supply of new properties, rents have inevitably increased. We have also witnessed £1m-plus rents in prime locations further confirming London as one of the most expensive cities in the world to occupy space. Regional rents appear to have a greater degree of consistency. Free-of-tie pubs have shown increases in rent of between 8% and 12% over the period. This is in part a reflection of most free-of-tie leases having upward-only rent reviews. In addition, it also suggests they are in greater demand than tied leases. What is consistent across the regions is that overall tied leases have shown a reduction in average rents. The average tied rent for the properties we have dealt with has been between £47,000 and £55,000. We would consider that these rents are higher than the average tied lease rents throughout the country. Within the regions there are hot spots, particularly urban centres such as Manchester, Bristol, Birmingham and Leeds. There is evidence to suggest that new shell lettings that do not form part of this survey) are showing significant increases. These will impact on operators over the next review cycle. There could be some painful negotiations ahead for many existing operators. We have previously commented that there are concerns that London operators seeking to expand into the regions are taking space without fully considering local property values and have been outbidding the market to secure space. What has also been evident is that because a brand is successful in London, it does not mean that it will be successful in the regions. This could result in failure with an over-rented property being the legacy, which will have a detrimental impact on the local property market. The long awaited Pubs Code is now in place. These are still early days but there are mixed messages about the level of requests for Market Rent Options (MRO). Some companies are experiencing a significant number of requests, whereas others have seen a relatively low number. Tenants need to fully consider the implications of going free-of-tie. Not only will there be the loss of special commercial or financial advantage benefits, they are likely to have to sign up to a new lease based on typical commercial terms. The appropriate terms have yet to be determined by the adjudicator but this could involve a ten to 20-year term, a large rent deposit, three months’ rent in advance, completion of outstanding repairs, full repairing obligations and restrictions on alienation. The pubs that are likely to see the most benefit from MRO are those that have high beer volumes. Conversely those with low beer volumes and high food sales are less likely to benefit from the MRO; although it may be that these operators, with greater experience, are better able to cope operating under a free-of-tie lease. We are also seeing pub companies creating managed house divisions. For the better-quality, high barrelage outlets there is likely to be an increase in landlords taking back the property at lease renewal and converting them into managed houses, or operating as a franchised managed house; thus circumventing the need to consider MRO. In these circumstances tenants will lose their ability to renew their lease and will only be given statutory compensation. Over the forthcoming period we will see how the Pubs Code legislation will impact on the sector. In addition, the cloud of Brexit will continue to hang over the economy. The recent announcement that the government will be lifting its austerity measures should have a positive impact on the sector. With a greater flow of cash throughout the economy, some of it will end up in the leisure sector. In many city centres and in London in particular much of any potential gain will, however, be offset by a significant increase in the burden of higher business rates. Despite concerns in recent years the pub industry remains healthy, with continued new entrants into the market, particularly with the growth of private freehouses and the development of micro-breweries. Fleurets considers that the sector remains strong and with the benefits of tied lease rents being able to be negotiated to market rent (be that upward or downward), the market will continue to stabilise. Restaurateurs and high-street bar operators will bear the brunt of most rent increases, primarily as a result of the significant acquisition and development programmes by the private equity-backed restaurateurs. Given this growth there will be winners and losers.”