FOOD FOR THOUGHT?

London Restaurants... Food For Thought?

2013 was a year of transition across the board, exacerbated by the preceding 3-4 years of relative economic stagnation.  The doom and gloom that followed the global financial crisis of 2008 and 2009 finally began to lift and the green shoots of genuine recovery are finally visible.  The Chancellor, George Osborne, last week announced that the UK economy grew by 1.9% in 2013, the strongest rate since 2007.  Unemployment is also down and there are positive noises emanating from the City around headcount growth and graduate opportunities.  For the first time in years, tenants in all sectors are planning for growth rather than further cutbacks.

Positive economic indicators are, however, a double-edged sword for restaurant operators in London.  The paper below outlines our views of what potential risks and opportunities may present themselves over the coming 12 months.

London Restaurant Rental Outlook

Restaurant rents are intrinsically linked to prevailing retail rents.  Indeed, the rent review provisions in most restaurant leases allows the rent to be reviewed to the higher of retail or restaurant use.  This is an area where restaurant operators need to be increasingly careful in the lease drafting stage – where there was little difference between restaurant and retail rents 5 or 6 years ago, the demand for high-end retail in prime submarkets like South Kensington and Mayfair, has seen the chasm between retail and restaurant rates widen significantly – open retail rents can now be as much as three times higher than the rent on premises that are solely devoted to restaurant use.

The table below shows the rents that are now being commanded in a selection of central London submarkets. These are the market prices payable per sq ft per annum, for Zone A – the most expensive tranche of any retail store.

Key indicators show that the economy will continue to improve over the next 12 months, at least.  Consumer confidence and spending is increasing and, particularly in central London, one of the knock-on effects will be for prime retail (and, by association, restaurant) rents will continue to rise.

London Restaurant Business Outlook

2013 saw London continue to thrive as a global restaurant hotspot.  Sales increased across the restaurant spectrum and the number of new restaurant openings increased by 11% compared to 2012.  The attractiveness of the sector for investors was also buoyed by the significant influx of private equity into the sector.  This level of private equity investment has not been seen since pre-recession 2008.

Christie & Co., a business broker and advisor, recently published their outlook for 2014, which provides a number of interesting predictions for the London restaurant market for 2014 and beyond:

A new generation of ‘fast-casual’ dining to rival McDonalds, Burger King and KFC;

Celebrity chefs will focus increasingly on maintaining high quality sites rather than expanding brands;

Restaurant offerings will become increasingly specialised, with new brands emerging at the fringes of established cuisine types;

Brandless, tired and dated independent restaurants will come under increasing pressure from higher quality pub chains.

We are ready to continue adding value to all of our clients through 2014, which is already gearing up to be a busy and exciting 12 months for restaurant operators as well as other tenants of commercial space in London.