London prime retail attracts international occupiers despite highest occupational costs

Colliers International shines a light of ‘the real cost of setting up shop’

 London’s prime retail pitches continue to attract international retailers despite demanding some of the highest retail rents and occupancy costs in all of Europe.

Colliers International’s latest research entitled: ‘The real cost of setting up shop’ looks at the varying nature of occupancy costs in retail locations across key European markets. The findings demonstrate that retailers are ultimately most influenced by the potential profitability of a site than the occupational cost, meaning that in the case of high profile retailing cities such as London, Paris and Milan, which can guarantee high footfall levels and retail spend, retailers are willing to shoulder higher tax burdens in return for potentially higher profitability.

Paul Souber, head of retail agency, Colliers International, explains: “It is clear that retailers consider total occupancy costs relative to the actual and potential amount shoppers spend in a specific market, in order to focus on where they can derive the best value from their physical retail presence in relation to cost. So, despite the high occupancy costs incurred by retailers in key tourist and business cities such as London – which was the world’s most visited city in 2015, generating a total annual spend by international tourists of over US$20 billion – it remains the top destination of choice for international retailers, given the potential for high volumes of retail spending.

“When comparing competing locations, the property industry tends to look at rental levels while retailers consider total occupancy cost – the true annual bill for ‘setting up shop’. Retailers, however, also consider the flip-side of this cost; the actual and potential amount shoppers spend in a specific market. In essence, they focus on value in relation to cost. As such, many retailers consider that having a presence in a particular key market generates value in itself, courtesy of improved branding and visibility, despite the lower localised profits and high cost base. While this might be the case for the mainstream fashion brands, however, high occupancy costs can be a serious obstacle for other retailers.”This is very common on the Bulgarian market, where the number of retailers ready to invest in imagelocations with unjustifiably high rents is limited”, says Boryana Peneva, Manager Retail Services, Colliers in Bulgaria.

Colliers’ report shows that occupancy costs are being driven up by local taxes, yet these taxes differ widely from country to country. In Russia, for example, sales tax on rents are charged at 18 per cent, compared to 27 per cent in Hungary.

Depending on the market, additional occupancy costs that need to be taken into account by the retailer include the service charge, marketing fee, VAT, property tax, other taxes, contents insurance, lease registration costs, deposit and/or bank guarantee and so called ‘key money’ – a premium that must be paid to take control of an existing lease in some markets.

Paul continues: “In some markets, the percentage of total occupancy costs made up by these additional costs is startling, so it is clear that retailers need to consider many factors before embarking on building a retail operation in a new market. In addition to the large number of local taxes that need to be factored in, retailers also need to consider: labour costs, which make up a major chunk of retail operational expenses; the lease structure; and, the degree of flexibility of occupancy, which can all differ significantly from market to market.

“In any location, it is the profitability metric which retailers are ultimately guided by. In terms of total retail occupancy cost, it would be interesting to see where rents in cities with high occupancy costs would rise to, if they were freed of the burden of additional local costs and taxes.”

Download the official report HERE