Luke Johnson: Calling time on landlords

Our serial entrepreneur says it's time to get out of retail property before everyone else does.

by Luke Johnson
Last Updated: 29 Jul 2016

The tectonic plates are shifting in the retail property market, but I'm not convinced landlords have woken up to the consequences.

Online is now around 17% of all retail spending in the UK, and growing by as much as 25% per annum. Almost all major retailers will have to shrink their store portfolios in the coming years - some dramatically. The enormous costs of rents, rates, staff, insurance, service charges, utilities, security and so forth are crushing many operators. This applies across almost all sectors - entertainment, electronics, clothes, furniture and the rest. The answer for every player is to go digital as fast as it can, and migrate sales away from physical showrooms and towards the internet. And the successful ones, like Argos, are doing this in a very major way.

Yet most institutional property owners and their agents act as if nothing has changed. They continue to insist on inflexible leases with upwards-only rent reviews and quarterly rent in advance, and generally treat tenants as if they are amateurs to be exploited at every turn. But, as if in the grip of a remorseless blight, more and more sites are becoming vacant, and many secondary high streets and malls are starting to become unlettable. Over time the disease will spread to posher shopping centres and more prime locations.

As the structural changes become apparent, I predict that many tens of billions will be permanently wiped off investment values in the property industry. Assumptions on growth, yields and returns will all be demolished. Lenders too will gradually wake up to the impaired security they hold. And, frankly, I will shed no tears for the lot of them. For it seems to me that they create almost no jobs, produce no exports, divert far too much capital into real estate and away from productive industry, and thanks to scarcity of land have had things their own way for far too long. Commercial landlords will be yet another batch of victims of the digital revolution.

I have never understood why certain highly profitable industries are so straightforward and why other, much more difficult and technical sectors are less lucrative.

For example, hedge fund management appears to make more money, more rapidly than almost anything else. At heart it is a fancy form of stock picking. Yet manufacturing involves issues such as capital expenditure, research and development, work-in-progress, product warranties, environmental impacts, labour forces and hundreds of other complex concerns that hedge fund managers never need to worry about. Yet manufacturing generally is not an especially high margin, high return business. It should by rights be more financially rewarding.

Moreover, in many respects, manufacturing adds far more value. It provides skilled jobs, generates tangible exports and cultivates a supplier network.

Economists should be able to provide an explanation for this conundrum. It would help entrepreneurs and policy makers who want to shift our dependence away from high finance and towards goods makers. I do not believe it is healthy to be increasingly reliant upon China and other manufacturing nations for almost everything. If they have the resources to make things, then they will soon invent and design them, and we will then not even retain our edge in innovation.

Unfortunately, in my experience, economists are far too theoretical and the best ones too rarely apply their intelligence to the real practical challenges we face. Hardly any of them know what makes entrepreneurs tick, or how enterprises actually work. They should all spend more time helping to run companies, and then they would have a better insight into how jobs and wealth are created. And they could perhaps show us how to make manufacturing more attractive to investors and entrepreneurs in order to re-balance our economy in a constructive way.

The King's Speech reminded me of several highly successful entrepreneurs I have met over the years who stammer. Quite a few others have been dyslexic; and still others lost their fathers when young. Can these early tragedies and disadvantages provoke a steely determination to succeed, and train someone to overcome difficulties? I rather suspect so.

It has always seemed to me that the single most important ingredient that leads to achievement is not intelligence, or charm, or brilliant genes - although all three can help the cause - but, rather, sheer self-discipline. Willpower is the essential attribute for anyone who wants to reach for the stars. Ambition without it only leads to misery; for if you are not prepared to work hard over many years, and make serious sacrifices, then you cannot expect to win the glittering prizes.

The same applies in a business itself: a visionary strategy is certainly helpful, but what really matters is execution. A marvellous plan is worthless unless the operations of the company are carried out efficiently.

Such comments are obvious really. In our hearts we know what makes the difference between the winners and the endless show-offs. Despite that, it is surprising how often people can be taken in by a charismatic promoter waving a flashy prospectus, those charlatans who lack follow-through and possess no underlying practical experience or track record. What would probably make more sense than being taken in by a snake oil salesman would be to look out for someone who has surmounted real obstacles with quiet and relentless fortitude.

Luke Johnson is chairman of Risk Capital Partners

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