Are Central London restaurant rents spiralling out of control?

All this sounds great if you are a restaurateur going into business; high volumes of potential customers with a wide variety of tastes to satisfy. Well maybe not. With this popularity comes a price, and the price is profit.

At Christie + Co we have been watching rents in London spiral upwards for a number of years. Measured on a rent per square foot basis they have gone from an average of £30 to £45 to £65 and in some cases can be nudging £100 per square foot, a level equal to some prime retail rents. Well you might say, its market demand, and you would be right, but whilst a retail unit will be prepared to pay such high sums for ground floor, a restaurant maybe spread over ground, first and basement floors making use of otherwise “empty space” and what should be a bonus for any landlord.

The argument is that with all this demand restaurants can afford to pay these rents. However the reality is that, according to Hardens latest report, although 148 central London restaurants opened in 2014, 47 closed. And whilst many may not close, they are being sold to new buyers who believe, or hope, their new concept will be twice as good as the site previous incumbent, in many cases paying a handsome premium for the privilege despite its loss making past.

And it’s not just rents, the new rating valuations that are due to be carried out and come into effect in 2017 will also see some rates bills double. This is because they are calculated on rental values, not turnover as in public houses, so it’s a double whammy, if your rent is high your rateable value may equal it! This combined with the staff costs due to housing costs and the minimum wage make balancing the books a major problem going forward for London restaurants.

So what of the future, have we reached the tipping point now?

Well you just have to look at the economics. A typical London restaurant may be around 2,500 square feet in size and 5 years ago been paying £75,000 in rent, after a rent review and another round the corner they could see the rent demanded by the landlord go to £160,000. The landlord can demand this if he has comparable evidence of newly agreed rents so if a new restaurant tenant has moved in nearby and agreed to pay a high rent, this becomes the benchmark. This combined with rates payable of maybe £40,000 means the restaurant may have to produce gross sales of £7,500 per week just to use the premises and three quarters of a million a year in order to break even! Looked at another way that’s £25 per cover, every day of the year….

Of course many of London’s most popular restaurants easily achieve this and more, but for many operators it’s a case of having to suffer a “showcase” loss leader in their estate to build brand awareness or getting out quick before the pain increases.

If we want to keep London as a vibrant restaurant destination all parties will need to see reason and before committing to a new lease, “do the math” as they say. Let’s not let the chilli foam bubble burst just yet.