Retail
It was a disappointing Christmas for many businesses in the retail sector.
Retailers rely on the festive season to boost their profits. However, the Office of National Statistics reported an alarming 3.2% fall in sales during December last year - proof that consumers are continuing to exercise caution with their spending habits. While economic uncertainty continues, retailers will need to be agile with their portfolios and strategies to successfully evolve with changing market conditions and consumer habits. Short-term leases, break clauses and contracted out leases will remain the market norm for 2024.
But it’s not just economic pressures retailers must contend with. Decisions around their property portfolio will be further impacted by upcoming legislation, reduced resource, and increased pressure from consumers to prove they’re doing business responsibly.
Levelling up
The Levelling Up and Regeneration Act 2023 is part of the Government’s plan to deliver revitalised high streets and town centres. This wide-ranging Act gives local authorities the powers to force commercial landlords to let their property. The Act gives them the option to offer short-term leases for qualifying commercial units via an auction, if they are vacant for more than 12 months or for 366 days in two years. The finer details of the scheme still need to be fleshed out in secondary legislation, but will present an opportunity for tenants to acquire leases of previously unavailable vacant premises. The retail industry will need to see how some of the more complex practical issues are dealt with and whether it has a positive effect on town centres.
Warehousing
Warehouse space will continue to be a concern for retailers in 2024. Even though the trajectory for raising minimum energy efficiency standards is currently uncertain, warehouse space is anticipated to be in short supply by the end of the decade. Warehousing stock is being removed from the market as it fails to comply with ever increasing Minimum Energy Efficiency Standards. It’s estimated that 60% of the UK warehouse space will not achieve a B rating by 2030. Retailers need to consider their warehousing capacity and plan ahead, possibly making longer term rental commitments to premium warehousing to avoid significant rent increases.
Sustainability
With sustainability becoming more important to consumers, retailers will have to do more to make sure they are meeting their sustainability targets. They would be well advised to review of the energy efficiency of their property portfolio. The recommendation report attached to EPC certificates is a good place to start. Retailers should be able to substantiate any green claims in respect of their properties with robust, credible and up to date evidence. They must also ensure that future environmental goals are supported by a clear, verifiable and documented strategy to avoid accusations of greenwashing.
Opening hours
Shorter opening hours, either through a reduction in the number of days a shop is open or a reduction in daily opening hours, are likely to become prevalent. Retailers are looking to save on spiralling energy costs and salaries, as the minimum wage is set to increase to £11.44 from 1 April 2024. Those looking to reduce their trading hours will need to make sure they are not breaching any lease covenants to keep open. They should also check they’re not or exposing themselves to notional rents, payable under turnover rent leases for any hours the shops are closed.
Jennifer Ayris
Senior Associate, Real Estate +44 (0)780 345 3696
jennifer.ayris@irwinmitchell.com
Paul Henson
Partner, Real Estate +44 (0)788 132 5683
paul.henson@irwinmitchell.com