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Rising rent costs puts London's restaurants at risk

24 October 2014
Rising rent costs puts London's restaurants at risk

Rapid rent hikes are putting London's restaurants at risk. When only the big players can afford a prime central spot, how can smaller restaurants hope to compete? David Harris reports

So when one of New York's leading restaurateurs, Danny Meyer, said this summer he was going to move the Union Square Café out of Union Square partly because of an imminent rent increase, many operators on this side of the Atlantic nodded sympathetically.

It's a cliché that London and New York are more alike than any two cities within their own countries, but London restaurateurs would probably wish that rents were an exception to that rule.

Meyer, who set up the Union Square Café nearly 30 years ago, and whose second 15-year lease expires in December, expressed his frustration in an opinion piece in The New York Times, where he said it "was hard to come to grips with the notion that our success has, in part, contributed to our inability to remain in our neighbourhood".

Meyer unfavourably compares the situation in New York with London, where he believes that landlords permit classic establishments to endure because some of them, at least, prize continuity over maximising profit. Well, maybe. Cynics might say that the reason classic establishments survive in London is not so much that they are given favourable rents - for which there is not much evidence anyway - but that they are so profitable they can usually afford to cope.

Besides, a lot of the oldest pubs, which Meyer included in his analysis, avoid rent increases because they are freeholds. In any case, nobody is suggesting that the historic London restaurants, such as Rules, J Sheekey or the Ivy, are under any threat, despite rising rents. What is vulnerable, say
some, are the family restaurants that have been part of areas such as Covent Garden and Soho for decades, rather than centuries.

End of an era

The Restaurant Association is certainly concerned. Richard Bradford, its chairman for the past five years, is in no doubt. He has just announced the closure of Porters English Restaurant in Covent Garden after 35 years, blaming the expensive lease. He says: "I think it is hugely damaging to the London restaurant revolution. Rents are rising everywhere - not just in central London, but in places [ further from the centre] like Chiswick. When you add in crippling business rates, which go up as rents rise, it makes it more and more difficult to run a reasonably priced restaurant."

Bradford says that almost all restaurateurs are concerned about rising rents and contrasts the not untypical 50% rent rises over the last five years with how much harder it is for restaurateurs to put up prices to cover the increased costs. Part of Bradford's argument - not unlike Meyer's - is that restaurants such as Porters pre-date the huge success of Covent Garden's late 20th century reincarnation.

He says: "I opened in 1979, a year before Covent Garden opened. I think that restaurants such as ours and others helped Covent Garden to become
the place it is today."

Bradford's fear is that the rising rents will eventually mean that the only restaurants that can afford to occupy sites in the more expensive areas of London will be the chains, thus diminishing the variety and character of those areas. But does he have a solution? He says: "I think landlords need to appreciate that restaurants in particular affect whether people come into areas, so they need to work out a way to make rents more affordable."

A possible answer is rents based on turnover, says Bradford. He adds: "I think that can work, but again, it depends on how it is implemented. In New York, for example, where they are quite widespread, they used to be based on 7% or 8% of turnover; now it is 15%."

Turnover rents are not uncommon for London restaurants, although property agents say they are generally in addition to base rents, rather than replacing them. One reason for this is that landlords often have mortgages on the properties they are leasing. Conditions attached to those mortgages routinely require them to be able to demonstrate a guaranteed income, and while a base rent is an acceptable guarantee, a turnover rent is usually not.

In the end, however, it is the amount of rent paid that is the figure that really matters, both to restaurateurs and landlords.

The high life

Nobody seems to disagree that some rises are justified. The real issue remains that in central London, and other desirable areas, that figure is becoming eye-wateringly high. Ross Kirton, a director at property agent Colliers International, says rents in Mayfair, for example, have seen a 50% increase in the past five years. This means that rents there are now around £125 per sq ft. He says: "Areas like Mayfair are usually far too expensive, unless it's a fine-dining, white tablecloth operation."

In one sense, this is simply another way of stating the obvious: that not everyone can afford to put their business anywhere they want. Kirton's attitude to restaurateurs who say they cannot afford rents is that they should move to somewhere they can. For restaurateurs who can't afford Covent
Garden or Mayfair, he suggests the fashionable East London, for instance. He says: "Places such as Shoreditch are a good choice. It's cheaper, it's uber-cool and more and more pitches are emerging."

Kirton points out that even the best-funded restaurant chains sometimes make this decision: "For instance, Carluccio's used to operate in Neal St in Covent Garden, but it couldn't compete on rent with the retailers and moved over to Garrick St, which is a little cheaper."

But moving is not always a realistic option, says Stefano Fraquelli, chief executive at Metropolitan Restaurants, whose sites include the two Gettis, in Marylebone and Jermyn Street. He says: "You can't move because of a rent rise. You can't transition business. You either live with it or die."

Closure is a possibility, concedes Fraquelli, and he did once close one of the group's restaurants, in Marylebone in 2008, partly because of an impending rise. But mostly he tries to negotiate as best he can, "preferably bypassing agents" and cultivating a relationship with the landlord.

Market forces

Fraquelli is among several restaurateurs who highlight the way the market operates as part of the problem. This is because what landlords use as their benchmark is the highest recent rent paid in the close vicinity of the restaurant being assessed. This is not quite as fair as it first sounds, not just because restaurants are not necessarily as profitable as other retailers, but also because the highest rents can be artificially created.

Brian Stein, founder and managing director of Maxwell's restaurant group, says that sometimes landlords agree a high rent with somebody on the basis that they will have a long rent-free period built into their lease. This means the tenant gets a reasonable deal, but the landlord has a higher rent to use as a measure when the rent review comes up.

To put it mildly, this is sharp practice. Even when there is no structured effort by a landlord or agent to raise rents, there can be increases based more on an ability to take losses, real or imagined,than commercial reality. Stein says: "Think of it as a guy escaping from an asylum who wants to open a restaurant and is prepared to pay a ridiculous rent. The landlords then hold up that rent as a comparable."

You can understand Stein being irritated by this, especially as all his restaurants are in the capital. He adds that part of the issue is that some restaurant groups are prepared to run a London flaghip, even if it is not profitable, because it provides useful promotion and exposure for a wider chain. This is fine for the chain, but not so good for independent restaurants in central London who cannot match those "comparable" rents.

Perhaps the most depressing thing for independent restaurateurs is that none of this is likely to change any time soon. Stein ruefully admits that there is no room for sentiment in the property market. The importance and ruthlessness of the rent review might be one reason why many restaurateurs not only fear it, but hesitate even to talk about it. Claude Bosi, for instance, who must have seen quite a rent hike when he moved his two-Michelin-starred Hibiscus from Ludlow to Mayfair, did not wish to talk about rents, even though his lease is not up for 18 months.

If there are chinks of light, it is in the tendency of the big landlords who control much of central London to think of their holdings in their entirety, rather than as individual buildings. Whether it is the big groups, such as Shaftesbury, or the landed estates, such as the Crown, Grosvenor or Cadogan, all want to maintain a good mix of tenants. That means they want a good selection of restaurants.

It's a small edge, but any restaurateur negotiating a lease with one of the big landlords needs to remember that just as they want to stay in their building, so the landlord might want them to be there. A small mercy perhaps, but much better than nothing.

It's not just London: Liverpool and Manchester operators feel the squeeze

The biggest restaurant rent rises are in central London, but other places are seeing sharp increases too. Colin Siebert, director for Colliers in the North West, says the new Liverpool One development has seen recent rents of £45 per sq ft and £52 per sq ft in an area that previously charged around £20-£25 per sq ft. This is exceptional, he admits, but in prime sites in Manchester rents are also up from £30 per sq ft to £40 or more per sq ft.

He adds: "For us, it's a welcome change. We have had years of stagnation with very few operators moving in, so it's an indicator of the overall improvement in the market."

Shaftesbury maintains a mix

Despite its name and its impressive holdings in the West End, Shaftesbury is not a landed estate but a PLC that has been listed on the Stock
Exchange since 1987. But it does behave a bit like a landed estate, and this is important for restaurateurs. It is committed to a balanced mix, so would never allow shops to push out restaurants.

This doesn't mean that Shaftesbury's rents are not rising (they are), but it does mean it wants restaurateurs as a significant part of its estate. This is why it is landlord to 95 restaurants in Covent Garden, 71 in Chinatown, 27 in Soho and 17 in Charlotte Street.

Julia Wilkinson, Shaftesbury's chief surveyor, who visited Danny Meyer in New York earlier this year, says that the landed estate approach was a key difference between the two cities.

She adds: "It's also easier in New York to chop and change from restaurant to shop quite easily. The planning regulations are different here."

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