Calling Time on Landlords

Article excerpt

Get out of retail property before everyone else does; hedge funds should be trimmed in favour of manufacturing investment; stammer your way to success.

The tectonic plates are shifting in the retail property market, but I'm not convinced landlords have woken up to the consequences.

Online is now around 17% of all retail spending in the UK, and growing by as much as 25% per annum. Almost all major retailers will have to shrink their store portfolios in the coming years - some dramatically The enormous costs of rents, rates, staff, insurance, service charges, utilities, security and so forth are crushing many operators. This applies across almost all sectors - entertainment, electronics, clothes, furniture and the rest. The answer for every player is to go digital as fast as it can, and migrate sales away from physical showrooms and towards the internet. And the successful ones, like Argos, are doing this in a very major way.

Yet most institutional property owners and their agents act as if nothing has changed. They continue to insist on inflexible leases with upwards-only rent reviews and quarterly rent in advance, and generally treat tenants as if they are amateurs to be exploited at every turn. But, as if in the grip of a remorseless blight, more and more sites are becoming vacant, and many secondary high streets and malls are starting to become unlettable. Over time the disease will spread to posher shopping centres and more prime locations.

As the structural changes become apparent, I predict that many tens of billions will be permanently wiped off investment values in the property industry. Assumptions on growth, yields and returns will all be demolished. Lenders too will gradually wake up to the impaired security they hold. And, frankly, I will shed no tears for the lot of them. For it seems to me that they create almost no jobs, produce no exports, divert far too much capital into real estate and away from productive industry, and thanks to scarcity of land have had things their own way for far too long. Commercial landlords will be yet another batch of victims of the digital revolution.

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I have never understood why certain highly profitable industries are so straightforward and why other, much more difficult and technical sectors are less lucrative.

For example, hedge fund management appears to make more money, more rapidly than almost anything else. At heart it is a fancy form of stock picking. Yet manufacturing involves issues such as capital expenditure, research and development, work-in-progress, product warranties, environmental impacts, labour forces and hundreds of other complex concerns that hedge fund managers never need to worry about. Yet manufacturing generally is not an especially high margin, high return business. It should by rights be more financially rewarding.

Moreover, in many respects, manufacturing adds far more value. …