The Challenges of the West End18 Dec 2018 // Insights
Seddons' West End Business Monitor examines the challenges faced by businesses based in the West End.
Despite its many advantages and attractions, the West End does pose challenges for businesses who call it home. Property cost is the biggest concern, cited by over a quarter of those surveyed (27%). Underlining this, the survey also shows that, of the businesses planning to move from the West End in the next five years, a fifth of respondents (22%) cite the cost of property as the biggest reason.
As well as high property costs, a lack of availability when it comes to office space is also a concern, as Alexander observes. “The office market in our area is very healthy. There’s a lot of demand, but not enough space to satisfy it. There’s arguably an oversupply of outlets serving the ‘grab and go’ lunchtime market, although these outlets are well used.”
Recent figures from CBRE show that amongst Central London’s thriving commercial property market, the West End is one of the most favoured areas for takeup, having seen a 25% rise in space under offer during Q3 2018. This quarter also saw the highest level of overall takeup since 2015.
Office design specialist Oktra reports that in 2018, the rent for Grade A office space is £110 – £120 per square foot in Mayfair, £75 – £90 in North Oxford Street or £80 – £95 in Soho. By comparison, prices in other employment hubs like the City are £55 – £70 per square foot, £40 – £50 in Canary Wharf and £75 – £82.50 in Kings Cross.
Haddon concedes that rent for the area can be expensive. In fact, over the last few years, British Land has seen a divergence away from the core area of the West End, which he recognised as a consequence of high rents. However, Haddon says businesses can — and have — adapted to this, observing that “the demand for more flexible leases is a response to the expense of the area.” The divergence of businesses moving further out from the core of the West End around Berkeley Square has transformed the area and brought a new vibrancy to the West End, with more retail, leisure and residential spaces opening in what was traditionally an area reserved for offices.
Tessa Naylor, Head of Seddons’ Commercial Real Estate Department notes that the growth of retail or leisure spaces in traditionally office-centric locations indicates a growing appetite for investment in mixed-use property developments. “Fortunately, support for more flexible use of heavily-rated and rented high streets is coming from the Government. The Autumn 2018 budget announced a consultation on changes to use classes and an extension of permitted development rights so 21st century uses can be reflected and facilitated,” she says. “This is welcome news for clients whose projects are constrained by existing planning restrictions on users.”
Forte Financial Group’s Sandro Forte sees the increase in residential development as a concern. “My office is in Berkeley Mews (very near Marble Arch) and over the last few years I’ve seen a huge increase in the amount of property development work going on in and around the area,” he says. “I’m not necessarily sure this will be a good thing for the West End because there’s a danger it will lose its identity.”
Tim Haddon has seen other changes as a result of high property costs —this time involving leases. “Fewer businesses want long term leases – a majority demand more flexibility in this,” he explains. “[At British Land] we’ve responded to this change with our Storey offer, which provides flexible workspace for ambitious and growing businesses, as well as larger organisations seeking additional space on flexible terms. We are starting to see many larger businesses looking for more flexible spaces for certain projects – the market has had to respond to this change in working and the West End.”
This is reflected in the survey findings, with 23% of businesses planning to increase their floor spaces with leases of less than five years. 15% are planning to do this using flexible working space.
Naylor confirms that, in her experience, “short-term leases with early breaks have been around for some years now, and we’ve observed that tenants averse to long-term commitments are indeed meeting little resistance from landlords. Previously I may have had to advise tenants to push for more flexibility, but now it’s common to see heads of terms where flexibility is offered upfront.”
Our survey found that business rates are the second largest challenge facing the West End, listed by a fifth of respondents (20%). Combined with the cost of property, this is also the reason why some are planning to leave the area in the next five years, cited equally by 22% of respondents. Although retail is a major part of the West End business community, generating over £9bn in sales a year, the average London shop is facing a significant 14% rise in business rates next year.
The struggles of bricks-and-mortar retailers have been widely reported in 2018, and the burden of business rates is one of their main challenges. Retailer John Lewis is set to pay £10.5m in business rates for its flagship Oxford Street shop from April 2019 — a 60% rise in three years. Meanwhile, Selfridges’ flagship store also faces a 60% hike, with a bill of £17.5m. The New West End Company, which represents over 600 retailers in the West End, reports that last year’s rate revaluation led to an average 80% rise in business rates, while some stores experienced rises of over 130%. The 2018 Budget offered some relief for smaller high street retailers, introducing business rates relief for premises with a rateable value of £51,000 or less, but this does not affect most of the well-known shops in the West End.
We couldn’t talk about The West End’s challenges without talking about Brexit. Perhaps unsurprisingly, it’s the third largest challenge for businesses, according to our survey. There’s a lot of uncertainty in the West End, as Penny Alexander points out: “we have not yet seen businesses leaving the Baker Street and Marylebone area of the West End because of Brexit, but it could ultimately mean a change in the type of businesses in the area.”
In September this year, Shaftesbury Group’s Chief Executive Brian Bickell complained to the media that tight visa restrictions and uncertainty around EU migration rules were deterring Chinese and European workers from finding retail jobs in the West End. The FTSE 250 property company specialises in shops, bars and restaurants, and invests exclusively in the capital’s bustling West End, with holdings in Carnaby Street and Chinatown, as well as Soho, Covent Garden and Fitzrovia. He claimed the West End’s retail economy was under threat from staff shortages and cited recent experience which saw a prospective new restaurant in Chinatown pulled after the company was unable to appoint a Chinese chef to run the kitchen.
Ahmed Ajina, Associate in the immigration department at Seddons, recognises these problems, advising: “some of our West End clients are reporting difficulties filling employment vacancies, and a contributing factor to this problem for many is certainly the current decline in the number of EU nationals coming to work here, and increasing numbers of EU nationals opting to leave the UK. However, companies face significant obstacles in filling vacancies, even when looking beyond UK and EU workers under the current work permit system. Currently, businesses can’t sponsor non-EU nationals to fill vacant positions that are not classed as highly skilled roles. As a result, many businesses are struggling to meet their employment needs.”
Meanwhile, although Brexit is acknowledged by the survey respondents as a significant challenge, most don’t expect it to have a huge impact on the makeup of their workforces. 29% of businesses surveyed had significant numbers of EU nationals in their workforce (a minimum of 30% of their employees). 23% of respondents expect lower numbers of workers from outside the UK in the next five years, however 53% of businesses expected the level to either increase or stay the same.
Worryingly, 47% of businesses say that accessing finance has become more difficult since the Brexit vote in 2016. However, only 3% of respondents are dependent on European public funding, with bank lending (60%) and private equity (21%) still the preferred sources of finance.
To read the full report, click here.