With retailers’ turnover rising alongside rents, London’s retail property market continues to defy gravity, but how long will it last? John Ryan takes a look at the findings of a new report

Whichever way you cut it, property may not be central to the business of shifting merchandise, but it has the capacity to take even the largest retail enterprise to the brink. After the cost of employing people to sell stuff is accounted for, rental cost is one of the outgoings that always seems to loom large on balance sheets and even larger for retailers under pressure as quarter day approaches.

And yet logic would say that it should be one of the more flexible elements in the retail cost equation. It may be near impossible to pay staff less (they have to contend with rising prices as well) and commodity prices do seem to keep spiralling, but the price paid to occupy a building constructed some years ago must be subject to market vagaries, surely.

In these stagflationary times (stagnant growth combined with inflation, if you weren’t around in the 1970s or are too young to remember), this line of thinking must be racing through the heads of financial directors across the sector. Perhaps this is the case in some locations, but a report from Colliers CRE confirms what many might have felt for a long time – Central London is a law unto itself.

The property advisory company has been monitoring 10 locations in the capital since January last year, examining the delicate balance between retail occupancy rates and voids. Although there have been small variations during the period, the general picture is one of a steady state. This would seem to counter the received wisdom – and, indeed, the figures that are emerging from retailers – that we are entering a slowdown.

However, consider for a moment the numbers from the London Retail Consortium. Last week, it issued a statement that said that, during April, “London sales up unlike UK fall”. That was March and things may have deteriorated marginally since then, but, at 2.7 per cent higher than the previous year, the UK’s largest city’s retail performance was dramatically better than the 15 per cent fall in the rest of the country as a whole. It’s a situation that is confirmed by Colliers’ report, which has taken 10 prime shopping streets in Central London, examined them on a six-monthly basis and assessed the health of the market in terms of the number of voids that are apparent on each.

Colliers director of retail agency Will Thomas says: “Over the past 12 months, the Central London retail market has proved remarkably resilient to a slowing consumer market and the onset of the credit crunch.

“The number of retail voids has remained broadly stable, while the proportion of retail floor space that is vacant has fallen.”

However, not everything is so rosy. The survey points out that, in January, the number of vacant retail units in Central London – as a proportion of total retail units – reached its highest level in 12 months. This sounds stark in light of the apparently benign trading that the city has been experiencing in comparison with the rest of the UK, but the figures mask the difference between what Colliers terms “hard” voids and those that are available but are trading.

According to the report, the reality is that voids may be at their highest level, but the 12-month high is not much ahead of the low for the period. At this point, it is worth considering the make-up of the streets that have been monitored, because Central London is not totally homogenous either in its population or in the rents that retailers are prepared to pay to take units.

The westernmost shopping area surveyed is Kensington High Street, while, to the east, it is the City’s Cheapside. Between the two are Bond Street, Brompton Road (aka the Harrods/Harvey Nichols axis), Victoria Street, Long Acre, Regent Street and the King’s Road. This adds up to only eight and omits London’s perhaps most important shopping thoroughfare: Oxford Street. The reason for this is simple. For the purposes of the survey, Colliers has cleaved the mile-long street in two, with a division being made at Oxford Circus. This makes sense, because it has long been acknowledged that the far east stretch of Oxford Street is a different animal from its western reaches, where icons such as Selfridges and Marks & Spencer’s flagship have been landmarks for as long as anyone can remember.

What the choice of streets shows is the sheer diversity of London’s shopping offer and how, mentally, each area is broadly associated with a particular type of shopping and shopper. And there is an equally wide diversity in the level of rents exacted in each location. All of the streets showed an increase in rents during the two-year period from June 2005 to June 2007, with the exception of Kensington High Street where June 2005 represented the high water point.

Interestingly, Kensington High Street also happens to be the second cheapest location in which to take a unit – only Cheapside cost less and here, rents are on an upward path. From a landlord’s perspective, it is Bond Street that takes the prize. Rents have risen from about£450 to£700 per sq ft (£4,844 to£7,535 per sq m), making it the survey’s most expensive destination – a fact confirmed by the preponderance of luxury retailers along the street and the relative absence of voids, the price being a direct reflection of the demand for space.

At the other end of the spectrum, rents do not look expensive by Central London standards in either of the geographical extremes covered by the survey, but for different reasons. Colliers makes the point that, beyond retailing’s golden acres in the centre of the city, changes are afoot and that the closer an area is to a new development – such as White City’s Westfield London – the more likely it is to be affected.

Practically, there are two large-scale schemes on the horizon that are likely to have an impact on existing arrangements: Westfield London, due to open at the end of this year and another development in Stratford, to the east, scheduled for 2011. Kensington High Street is only about two miles from White City and Colliers’ report observes that, if landlords are to arrest the erosion of rental value and the potential growth of voids along the street, something will have to be done about the retail mix, which is mid-market(ish). This might not seem too much of a problem, until the lack of parking and the fact that most of the retailers taking space at White City are also mid-market is considered.

The conclusion is that, for this area to enjoy a healthy future, a concerted move towards more exclusive retailing would pay dividends.

At the other end of the survey’s geographical ambit is Cheapside, which is under development as a retail destination. Questions will be posed about its future if the credit crunch continues and City workers are laid off, but for the moment at least – despite rental levels being comparatively low – this is not an area that is under pressure.

So what does all of this mean for London as a whole and for the broader economy? Colliers director of research consultancy Dr Richard Doidge says: “You have to accept that there are differences between London and the rest of the UK for a whole host of reasons. In London, the competition is international and tourism underpins a lot of the trade. We think rents should hold up reasonably well against the new developments.”

Doidge makes the point that London is, in many ways, a trophy city for retailers, somewhere that they will want to open a flagship as a kind of “mine’s bigger than yours” statement – even if it means taking a hit to profitability.

So, with void levels static and turnover rising alongside rents, surely things have to come to a stop? Ultimately, even London will have too many shops. According to Doidge, this view is to discount the fact that the capital continues to act as a magnet for incoming workers and is set to grow about 20 per cent, to close to 9 million people over the next 20 years.

The picture, therefore, is one of robust good health and Colliers puts the case forward for “cautious optimism” about the prospects for London retailers and landlords. It will be interesting to contrast this with the picture that will emerge when similar surveys carried out by the consultancy in other UK towns and cities are published later this year. Expect things to be rather different.