The agent’s professional body NAEA Propertymark has raised concerns about the running of the scheme. It is recommending to those councils concerned and the government that they address the risks surrounding the auctioning of high street rentals to avoid making matters worse.
The organisation’s commercial advisory panel has suggested that the government should seriously consider the potential “unintended consequences” of the high street rental auction powers being given to local councils.
NAEA Propertymark has expressed the concern that in areas where there are a high number of vacancies, by auctioning off property where supply outstrips demand, this could only result in rents being driven down further. This is something that could kill-off further investment in town centres where returns would become too low, creating the opposite effect to that intended.
“When a commercial rent review is due, are the results of high street auctions going to be used as evidence of market price by tenants’ surveyors? In which case commercial property investment and lending on commercial property could become problematic, given the heightened risk. There needs to be protections in place to avoid this downward spiral,” Michael Sears, a NAEA Propertymark Commercial Advisory Panel member has said.
The agents body also wants councils to guarantee that properties that are subject to a rental auction have a reserve price put on them to safeguard market prices and to ensure the rental price covers the costs of any mortgages on the property.
The UK High Street continues to diminish, and as this long-term trend persists, the high street in many towns, as we’ve always known them, may eventually become obsolete. Both the larger chain leading stores and the small independent retailers have felt the effects of declining footfall and takings, this decline having accelerated somewhat during covid.
The reasons for this decline are multi-facetted: online shopping has had a big part to play, especially through covid and beyond. Retailers such as Amazon have had a massive impact on the UK high street. They have vast ranges of stock which no high street retailer could carry; they are often cheaper, and they offer fast and convenient home delivery. As the internet has become more accessible to the masses, so Amazon’s business has grown apace.
High street retailers also suffer from the showroom effect. This is where shoppers view and try the products and then go online to buy at a cheaper price. This trend has been exacerbated by the cost-of-living crisis. It means the rising shop prices and the general level of inflation have cut the amount of spare cash available for retail therapy and the discretionary spending consumers may once have had.
As trading conditions got tighter, many retailers found they could not afford to have too many underperforming shops, and they realised they had over-expanded during the good years - hence the trimming of retail estates and mass closures. Retailers now take the view they should be focusing on a smaller number of profitable locations, many confining themselves to big cities and high performing affluent towns.
Rising overheads have also been a factor, particularly for small independent retailers. Business rates and rising employment costs, the National Minimum Wage and the National Living Wage, as well as the recent rises in employers' National Insurance Contributions (NICS) have had a big impact.
Business rates
There has been continued discussion within the business community about reforms to business rates and while successive governments have adopted concessions, especially for the smaller retailers, there’s been no root and branch reforms, for example imposing more changes on the online retailers.
There have been several studies, reviews and schemes over the years aimed at rejuvenating declining high streets. One such scheme, famously promoted by the Cameron government, was run by Mary Portas, the queen of retail. Her schemes, with limited government funding, were tried in selected towns across the country but none it seems met with lasting success.
With a serious number of gaps appearing in some high streets, particularly in areas of economic decline and deprivation, where employment prospects are at their lowest, the Johnson government, under the guise of its levelling up strategy, came up with the idea of taking the re-letting of vacant units out of the hands of their landlords.
Under the Johnson government and now under Labour, The Ministry of Housing, Communities, and Local Government (MHCLG) has confirmed its commitment to using legislative powers to auction off vacant shops and empty premises, which their landlords have failed to re-let, after a given period of time. High Street Rental Auctions to allow councils auction off leases for empty commercial properties.
In an attempt to transform failing high streets the powers granted to local authorities will be used, in an attempt to revitalise high streets in England, to force rental auctions on shop owners who fail to re-let.
High street rental auctions will allow councils to auction leases for commercial properties that have been vacant for long periods and in this regard several town councils have agreed to trial the system, including these eight recent council applicants and early adopters: Barnsley, Broxtowe, Camden, Hillingdon, Lichfield, North Northamptonshire, North Somerset, and Westminster, have joined the programme, bringing the total to 11, with Bassetlaw, Darlington, and Mansfield.
Eligibility Criteria for Properties
For a property to be eligible for a high street rental auction, it must meet specific criteria:
Participating local authorities will determine which properties qualify, and landlords will have the opportunity to bring forward proposals to use their properties before an auction is enforced.
Having identified a suitable unit to be auctioned the council concerned will be obliged to follow several key steps:
This process is designed to ensure that the commercial properties do not remain vacant, and that fair market competition determines the lease terms.
Propertymark said in its July 2023 consultation response that it supports the scheme but recommended that local authorities should have the flexibility to design and implement auctions based on their own area.
The industry body for residential and commercial agents also urged councils to set reserve prices to safeguard market values and cover mortgage costs.
Michael Sears, a member of the NAEA Propertymark Commercial Advisory Panel, has said:
“The UK Government needs to consider the main unintended consequence of these measures.
“In areas where there are high numbers of vacancies, by auctioning off property where supply outstrips demand, this could only result in rents being driven down further, and investment in town centres where returns would be low would cease.
“The effect of this would be negative towards regeneration and inward investment.”
“When a commercial rent review is due, are the results of high street auctions going to be used as evidence of market price by tenants’ surveyors?
“In which case commercial property investment and lending on commercial property could become problematic, given the heightened risk.
“There needs to be protections in place to avoid this downward spiral,” Mr Sears has said.
The idea of high street rental auctions represents a bold step toward tackling commercial property vacancies and rejuvenating town centres.
Experts have warned of the dangers of unqualified officials becoming involved in re-letting commercial properties, and the unintended consequences of mishandling the process.
Others say the initiative has strong potential. But its effectiveness will depend on market conditions, landlord cooperation, and the ability of small businesses to sustain occupancy.
Time will tell. An ongoing review and adaptation of the policy will be essential in ensuring that the scheme achieves its intended goals.
Links:
UK Government (2023). Levelling Up and Regeneration Act 2023: https://www.gov.uk/government/publications/levelling-up-and-regeneration-act-2023
Centre for Cities (2024). Revitalizing High Streets: Policy and Practice: https://www.centreforcities.org
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