Fixed costs, such as the level of rent, can cripple a business if trading patterns change, writes property agent Peter Seymour
I HAVE been concerned for a few years now by the levels of rent being demanded in Edinburgh city centre for restaurants.
It started when someone was asking for £90,000 for a 4500 sq ft shell of a property just off the Royal Mile – a great location but the landlord was not even prepared to line the walls or provide flooring, heating or lighting.
Whilst there is a vibrant and very well-respected restaurant scene in the city, there is a distinct lack of heritable restaurant owners out there, with the vast majority of restaurant operators trading subject to a commercial lease. Whilst this is standard practice and nothing special, the levels of rent – a fixed cost – can cripple a business if trading patterns change.
Outside of city centre locations it is our opinion that rents be determined by the trading potential of the site as a fair division of profit (not turnover).
As my father used to say, “let the tenant prosper but not at the landlord’s expense”.
What does that mean in real terms? Well, we normally apply 40% to 60% of profit as rent depending on condition of the subjects, their location, size, layout, ease of use, etc.
How does this relate to bubbles in the property market?
Well, these rents are normally agreed at the start of a relationship – when things are good or expected to be good – but they are a fixed cost once agreed too.
For example, one chain restaurant in St Andrew Square has rent of circa £330,000 per annum and rates of £242,000; this means it has fixed costs – before paying for food and beverage, staff, light, heat, power, water, advertising, and all the other standard business costs – of £452,452 per annum or £8701 per week, which means the first 200 people a week it serves pay for the rent and rates.
Any experienced restaurant owner amongst you will know that this is normally less than 10% of the total running costs of the business. We are more than likely talking about a break-even point of around 1000 covers a week.
Now, in a city with the pull for tourists that Edinburgh has, this might not seem so difficult. But think of this: St Andrew Square has just announced another restaurant opening, and the St James Centre has 35 café/restaurants/bars.
At some point there will be too many restaurants, and when trade levels drop fixed costs will become very important.
This concern has nothing to do with macro-economic factors, either; if discretionary spend goes down, then restaurants will be one of the first to suffer.
Fingers crossed there is not a recession around the corner.
Oh wait, we’ve not had one for ten years now, have we?
I am not trying to suggest that market rents are not justified, as clearly the market feels the rents are justified, which is what the definition of market rent states. There’s more than one unit on St Andrew Square paying north of £300,000.
However, it would only be prudent to think about the fact there is a lot of supply about to hit the market, not only in the St James Centre; there is also a lot of discussion on Princes Street and the move of retail into leisure.
Leisure is definitely one way to go but it can not be the silver bullet to fix all the high street’s issues.
• Peter Seymour is head of Licensed Trade and Leisure Agency at Graham & Sibbald.