Edinburgh, Bubble set to Burst?

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 4,500 sqft 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, 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 side 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 a bubbles n 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, Gaucho in St Andrew’s Square.  Their rent was circa £330,000 per annum and their rates are £242,000.  This means they have fixed costs, before paying for food & beverage, staff, light, heat, power, water, advertising, and all the other standard business costs, of £452,452 per annum or £8,701 per week.  That means the first 200 people a week they serve 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 1,000 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’s 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 10 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.  Gaucho are not the only unit on St Andrew’s 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, but 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 golden bullet to fix all the high street’s issues.


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