How valuers can support London's prime retail market

The latter half of last year saw a significant resurgence in the market for prime central London retail property – most evident on Oxford Street, where new overseas entrants and existing retailers opened flagship stores and online brands made their physical debuts.

IKEA, HMV, Dr Martens, Rituals, Pandora, Krispy Kreme, MINISO, the NBA Store, Paris Saint-Germain, Abercrombie & Fitch and Manière De Voir (MDV) are just a few of these new stores. 

The figures are impressive. According to the New West End Company, total West End retail sales were £9bn in 2023, with the total in Oxford Street at more than £3bn. There were also 250,000sq. ft (23,225m²) of new retail lettings last year with 35 deals done, many of these quality brands new to Oxford Street.

The candy and temporary stores that have seemed to dominate the eastern stretch of the street for years have also been reduced to 9% of retail units and less than 1% of trading space.

Several other prominent transactions have been agreed across prime locations in central London, and the area is on course for yet another pivotal and exciting year. Clearly, the West End continues to be a strategic location for new, national and international brands.

As a profession, we were in unfamiliar territory. Our usual metrics, such as pounds per square foot or rent in terms of zone A, became redundant. We had to figure out how to determine a new COVID-19 rental or interim rent, which would also allow for values to reflect the tightening and easing of lockdown restrictions. To do so, our focus shifted to more operational considerations such as footfall and revenue.

This was not easy, though. A common sentiment among surveyors is that the market finds its own value: in other words, valuers rely solely on the analysis of real-estate transactions to form an opinion on value. It is not in their remit to ascertain whether rental values are affordable or not. That decision and responsibility falls solely on the commercial tenant.

However, the pandemic meant experts had to do just that – namely, to ascertain that interim rents were fair and affordable. Property transactions during these unprecedented times could no longer provide suitable, comparable evidence when it came to valuation. Nonetheless, many experts in the sector started tracking live data such as foot traffic and rail passenger numbers.

The prime central London retail market has since the pandemic intensified its focus on curating attractive and unique destinations where people can eat, drink, shop and be entertained. This involves carefully scouting and placing retail brands and uses that complement one another.

The Crown Estate, Cadogan Estate, Shaftesbury Capital, the Portman Estate, the Langham Estate, British Land, Derwent London, Howard De Walden and Lazari Investments are all playing their role in adopting a discerning, patient and selective approach when it comes to leasing their prime commercial premises.

The days where landlords simply run with the highest rental bid are very much behind us. This is already becoming evident in prime central London, where the sight of multiple competing coffee shop chains within close proximity is slowly fading.

Valuers argue that this zone-A system, in which rents are measured by the value of the first 6m of a store from its entrance, is increasingly out of step because it no longer aligns with an ever-evolving retail landscape.

For the time being, the most highly valued shopping pitches in London still focus on using zone A to establish a rent. This method, which we have abided by for so long, may be described as traditional. However, analysing deals on a rate-per-square-foot basis is still important as it encapsulates supply-and-demand dynamics at a moment in time.

Since the COVID-19 pandemic, we seem to be heading towards a hybrid method, whereby retail premises are also considered from an operational model, provided there is transparency in trading performance.

Such insight offers a win–win for commercial valuers, as they can then value property as an asset class but can also adopt the tenant's perspective by looking at the subject premises from a revenue, cost and return perspective.

However, caution is required because a return does not necessarily mean profit. Arguably, not all retailers make profits from their prime flagship stores, and some consider such premises as a means of advertising or even a branding exercise.

This thought process is explained by Reece Wabara, owner of fashion retailer MDV, which recently secured its first flagship store on Oxford Street.

Surveyors must also determine whether a rental property is affordable. In essence, this hybrid approach allows them to assess worth and not just market value.

Recent statistics support this argument by indicating that an increase in footfall leads to rising rents. Table 1 illustrates, for instance, the correlation between increasing footfall and rental growth over 12 months.

This approach helps align expectations between landlord and tenant and eliminates the feeling of competition between them. It enables asset managers and valuers to assess and manage risk accordingly and proactively.

As an example, I recently acquired a retail space in a renowned shopping centre on behalf of a retailer where the rental reflects a percentage of my client's turnover. We contracted that my client reserved the right to break his lease should the footfall in the scheme drop below a certain point.

However, the landlord could likewise activate its break clause in the event that the agreed footfall is achieved but the tenant has not converted this into the required turnover.

Datasets such as footfall, for example, can therefore help manage expectations and set reasonable targets, which in turn pave the way for healthier landlord and tenant relationships.

For those who like to dig deeper into the data, then the discounted cash flow (DCF) method of valuation will certainly assist in taking strategic and insightful decisions. DCF can determine the worth of real estate by adopting forward-looking assumptions and variables.

For example, what if inflation drags on longer than anticipated or interest rates take a steady dip? What if foot traffic in the capital drops to a three-day week due to hybrid work but as a result net spend per visit increases?

At present, it seems as though the market and the valuation industry are reverting to their traditional ways, namely agreeing longer leases with fixed rentals and upward-only rent reviews, which are being valued using the zoning method.

Perhaps the transition is too challenging, and for now what the market needs most is certainty. Ask an investment surveyor or valuer what is more valuable: a ten-year lease on turnover only, or a three-year lease on contracted rent. The answer will undoubtedly be the latter.