Main street rents – are they sustainable?

In the Chamber’s recently published annual report, it was noted how important the retail sector is for ‘Gibraltar PLC’.

The report stated “Main Street is a very visible indicator of how well the local community and economy is performing. It is recognised as an important hub of social interaction and provider of employment and local commerce. If increases in property costs continue their current trend, the existence of some of our shops may be called into question. If our retail offering is reduced, the wider economy would suffer in terms of tourism generally and from fewer day trippers across the border.”

The report suggested that Gibraltar may wish to adopt the zoning methodology of comparing retail rents between different shop units as a basis for valuing rents going forward.

The principle of zoning is common sense i.e. the front of a shop is worth more than the back. A shop that has 14 metres of frontage and a depth of 7 metres should have a higher rental value than a shop with a 7 metre frontage and 14 metre depth. Equally a shop of 50 sq m on the ground floor and 50 sq m on the first floor will have a lower rental than a 100 sq m ground floor retail premises.

The Valuation Office in the UK, which uses zoning as part of its rateable valuation methodology, defines zoning as follows:

“Zoning is a standard method of measuring retail premises for valuation purposes. It is used by both public and private sector surveyors to calculate the value of retail premises. It recognises that the most valuable part of the premises is the front part nearest the window.

A shop or retail premises is divided into a number of zones. Each zone has a depth of 6.1 metres (20 feet). The front part, nearest the window, is zone A. The next 6.1 metres becomes zone B, and the next is zone C. The zones will continue until the entire depth of the retail area is allocated to a zone. Anything after zone C is defined as the remainder, normally zone D. Zone D generally encompasses first floors, basements, and other more restrictive areas.

Surveyors look at evidence of actual rents being paid in the area and break them down into a price per square metre for each zone. Each zone is generally considered to be worth half as much as the previous zone.”

In this way, one can compare shops of different shapes and sizes in relation to how the space is distributed.

Any valuation would then take into account the many other relevant factors, for example age of the building, accessibility, whether a corner plot or dual access, car parking, premises specification, condition, construction quality etc.

Could this be applied to Main Street? Yes, quite easily, and perhaps a combination of market forces and surveying sophistication may force its adoption. It would be an interesting exercise to compare rent and rates paid using the zoning method of measurement. Shops with only Zone A space would be demonstrably more valuable whilst those with space in zones B, C and D would have a good case to make at rent review time.

However, regardless of what technique one applies, rents are based on comparable evidence, and if other retailers are willing to pay the increasing rents, this will have an impact on everyone else, zoning or no zoning.

The Chamber will bring this up with the Small Business Board over the coming months.

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