The debate as to whether premiums or rents are better has been going on in London for decades. It’s as timeless an argument as whether the chicken came before the egg, whether The Empire Strikes Back is better than Return of the Jedi or indeed whether people actually like the taste of tofu. This same punch-up takes place in cities such as New York, Paris, Tokyo and Hong Kong – all cities with a lack of good prominent space.
What is certain is that higher premiums normally indicate larger demand for a specific location and this demand is typically driven by the potential to have a higher turnover, hence a larger profit. We at CDG Leisure believe (with pretty water tight evidence) that this is the driving factor behind most restaurant and leisure operators across western civilisation today.
In London, the key eating and drinking areas have always been and continue to be located around Soho, Covent Garden and Mayfair. Over the years new areas have emerged and matured such as North of Oxford Street, Victoria, Bloomsbury, South Bank and in recent years, Shoreditch. Emerging areas always require more risk for the brave operators that take sites early on which in turn give these guys the reward of lower rents and lower premiums. However, within the more mature markets, demand heavily outweighs supply from operators big and small looking to gain representation in these flagship locations.
When operators find out that this is the case they tend to either look for a riskier emerging location or they try and find a landlord that will be suitably impressed with their concept. On the understanding that the operator will have to fit out the unit from shell condition, the hope is that the landlord will give them a superb space where no premium will be required. We usually see a couple of outcomes from this - the operator takes a fantastic concept into an emerging area that simply isn’t ready or they spend years waiting for a landlord to choose them ahead of the other established operators for a prime site in the maturing areas. The basic reality is that in London’s busy restaurant market, the greatest portion of our transactions take place within the locations mentioned previously and we believe that this is exactly where operators should focus their energies if they want to be in London.
The Natural Burger Company wanted to open in one of London’s prime locations. They opened in two fringe locations in St. Johns Wood and Earls Court. Within 18 months the businesses folded. Five Guys on the other hand, burst into the market all guns blazing with a fantastic site in Covent Garden and due to its phenomenal success have been able to expand into over20 locations. They are now a brand that have established themselves as a leading force in London’s restaurant scene and undoubtedly are making superb profits as a result.
We understand that operators need to be careful as there are risks with paying premiums – if the payback is so long then an operator may never see their investment back – and we appreciate this. Therefore it may be that doing deals, paying premiums and acquiring sites in London is for those with a long terms strategic plan. Additionally, we understand that paying the premiums doesn’t ensure lower rents as rents are reviewed every five years as to market value. However, we do find that landlords in London – as much as they are keen to see rent increases – are keen to see tenants actually being able to pay their rents. We feel confident that most of the estates in London will be reasonable and would alter the market accordingly if it were to get to a stage where large swathes of tenants were unable to pay their rents.
For those who are ready to enter into London’s superb and exciting restaurant scene, we encourage them to take a longer term strategic view, pay an up-front premium, get that perfect site in the bag so that you can do the turnover, make the profit and impress investors that will without a doubt follow you into sites two and three. Just ask those Five Guys guys...