Some of central London's best-loved restaurants could close as they run an increasing risk of succumbing to rising rents and business rates.
That's the warning from property agent Cedar Dean Group, which has released a report on the prime central London market on the day that the Government publishes new rateable values, used to calculate rates, for thousands of firms in England and Wales.
A total of 87% of restaurateurs in 100 sites in prime central London said they would be unable to continue business in its current format if rents and rates continue to rise as forecast.
Of that 87%, four in 10 (40%) anticipate shutting up shop entirely, while 57% said they would be forced to relocate to a cheaper area. Just 3% said they thought they could adapt their business model.
Cedar Dean Group warned that London's restauranteurs were facing up to the most challenging business environment in recent history. Rents in the W1 and WC2 postcodes have more than doubled in the past year, while rents in Mayfair have risen by around 400% over the same period, from £150 Zone A per square foot to £600 per sq ft today. By comparison, on average London restaurants coming up to their five-year rent review face an increase in rent of 50%.
Cedar Dean Group forecast that if the rate does not slow, operators will be paying an average of 20% of turnover in rent by 2021. More than a third (36%) of London's restaurateurs say they are paying 20% or more of turnover in rent already, despite the rule of thumb that restaurateurs can afford to pay 15% of their turnover on rent.
David Abramson, CEO of Cedar Dean Group, said: "London's well-loved and varied restaurant scene is a key piece of the patchwork of our city. But many of the jewels in the culinary crown in Prime Central London are threatened by relocation or closure. Rising rents have outpaced inflation and far surpassed growth in the rest of the capital. Looming business rate reviews are adding further to the cost pile. And whilst the new breed of 'supertraders' like Five Guys and Shake Shack are adding much colour to the market they are having a negative impact on the incumbents and pricing them out of the market. We have reached a tipping point where this crucial layer of London's identity could be about to peel away.
"To cling onto our family run culinary heritage independent operators, government, industry and restaurateurs must work together to call for change. It is time to adapt or die. While interventionist measures like rent caps or business rate relief could ameliorate restaurants' woes, business owners must also play their part. Having the confidence to adopt all-day dining models can boost the covers a restaurant can process, helping increase profits. This is just one example. Restaurateurs need to be more innovative than ever before to make their increasingly expensive central locations work hard for their money."
Commenting on the report, entrepreneur Luke Johnson, who has interests in a number of different hospitality businesses including Patisserie Valerie, Draft House, and Feng Sushi, agreed with the report's findings and said: "Given the hospitality industry has created more jobs since the downturn than any other sector, the government needs to treat the industry better. If not, the rates increase will be counterproductive: it will be bad for jobs, bad for tax revenues, and bad for the economy. The tax burden on licensed operators is wildly disproportionate - of the total turnover on a typical pub, 50% will go to the Government in terms of tax - and far higher than in France or Germany, for instance, where they pay a fraction of the taxes that the UK has to pay; we have to pay much higher taxes on alcohol and national insurance, for instance. Not only that, but operators are also having to deal with the National Living Wage which means a 6% pay increase and even higher costs. I'd like to see an overall review of the burden of taxation across the hospitality industry to make it more proportionate. At the very least, the Government needs to delay major increases in business rates. If not, the government is in danger of killing the goose that laid the golden egg."
Meanwhile, the British Beer and Pub Association today urged pub licensees to check their new rateable values and warned that they would need to have the necessary financial preparations in place for April next year.
Every five years, the underlying value of properties is assessed to determine their rateable value, which broadly represents the yearly rent for which the property could be let.
When rates were last set in 2010 when they were based on property values in 2008 (underlying property values that are used are from two years previously).
Today's revaluation is based on rentable values on 1 April 2015 and comes into effect in April 2015. It should have taken place two years ago but was postponed because the government wanted to avoid sharp changes to business rates.
BBPA chief executive Brigid Simmonds said: "Whilst we won't know the final shape of bills until the Government decides on the multiplier, which is effectively the tax rate, it is still vital for licensees to be aware of this major change. There will certainly be premises that will see an increase in their rateable value, particularly where the business has thrived over the past eight years, and we will be looking at ways to mitigate any sharp rise in bills for these premises. We will continue working for relief for pubs - industry pressure has already seen reforms that will mean pubs with a rateable value of £12,000 pay no business rates at all."
The Valuation Office Agency (VOA) with the help of five trade bodies, including the BBPA, has developed the 2017 Approved Guide to the process, which is due to be published, along with the new valuations, today.
The BBPA's guide to the process can be found here.
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