There’s a lot more to acquiring a new restaurant than simply waiting for another to close. While this remains a workable approach in some quarters of the industry, expanding restaurant
groups need to be considerably more proactive these days. As a result, they are developing increasingly sophisticated toolkits to help them achieve their expansion targets.
This zeal for growth and change of tack is being driven largely by two linked factors: the public’s seemingly insatiable appetite for eating out and the downturn in the bricks and mortar retail sector, a result of consumer belt-tightening and intense competition from online.
“There’s been a major institutional shift in recent years. Restaurants are no longer viewed as a poor cousin to the retail sector but as a vibrant industry in growth,” says Nick Weir, joint managing director at property agency Shelley Sandzer. “There has been – and continues to be – a huge amount of investment and, consequently, the demand for sites is at an all-time high.”
This shift of emphasis and value from A1 retail sites to A3 (restaurants) and A4 (pubs and bars) has ushered in a boom in new hospitality-focused property agencies as former retail agents jump ship to work in the on-trade space.
As well as his role on the agency side of Shelley Sandzer, Weir is involved with the Restaurant Property Advisors Society (RPAS), which has seen a jump in membership of roughly 30 per cent over the past five years.
Unfortunately, restaurant operators cannot simply set up shop in defunct retail units. A1 is, for the moment at least, still considered something of a sacred cow: local councils have a mandate passed down from Whitehall to keep the ratio at around 75 per cent A1 versus other use classes. “In most cases councils aren’t trying to limit the numbers of restaurants on the high street, they’re simply trying to protect A1,” says Brandon Stephens, founder of fast-expanding burrito group Tortilla.
As such, many of the property-securing strategies used by growing restaurant groups are concerned with either changing the use class of properties or taking advantage of a number of planning loopholes that allow certain types of concept to trade from A1. Stephens is making some minor operational tweaks to his brand to allow him to set up in A1 sites without applying for change of use and some of his competitors in the fast-casual Mexican space are already trading from retail units.
National sandwich chain Pret A Manger was the first to exploit the huge potential of A1 when the property use classes legislation was introduced in 1987 and other counter-service operators have followed in its wake, including direct competition Eat and Subway as well as London-based sushi specialists Itsu and Wasabi.
Along with a requirement for focusing on takeaway sales and limited seating, the key disadvantage with A1 is that no proper cooking is allowed on-site – just reheating – hence the current dominance of sandwiches and sushi in the space.
Change of use
However, more recently, the limits of the retail use class system are being pushed to the max, with A1 operators offering everything from the aforementioned burritos to pie and mash, and even pizza.
A1 is attractive because it offers a greater availability of sites in high-footfall locations and requires significantly less investment versus A3 and A4 in most cases. Rents tend to be marginally cheaper than restaurants, pubs and bars because the supply is relatively free-flowing. In most locations premiums are far lower – often even non-existent. Landlords are beginning to cotton on to this and are applying for planning permission to turn tricky A1 real estate into more easily shiftable A3 and A4.
But clued-up restaurateurs are also applying for change of use. At Loungers – the fast-expanding neighbourhood café-bar brand headed by Alex Reilley – approximately 75 per cent of the estate has been
obtained through change of use, including former supermarkets, council buildings and even an old art college. Reilley tends to target unglamorous or secondary suburban areas, which usually have a high number of vacant premises. This strategy has proved extraordinarily effective with Loungers currently trading from 42 locations and likely to open at least another 10 sites this year.
Unsurprisingly, considering the high demand for A3 and A4 sites, supply is restricted and prices are high in key areas – in fact, many expanding restaurant groups have expressed grave concern about the lack of suitable bricks and mortar.
The financial turmoil that began in 2007 barely broke the central London restaurant property market’s stride, with restaurateurs now willing to pay often preposterous sums for prime sites in exclusive locations. Multi-million pound premiums are increasingly common and sites in key areas in the West End rarely change hands for less than £200,000, a sum that very few of the smaller players can afford.
“Overseas investment is pushing prices up and shows no sign of slowing down. We’ve had two calls from New York this morning,” says Shelley Sandzer’s Weir. “London has a magnetic appeal to the rest of the world and that’s pushing up both premiums and rental values in the very exclusive areas. In fact, we’ve seen rents double over the past five years in some cases.”
But – fortuitously for smaller outfits with a bit of buzz about them – there is another way into prime locations, with larger London landlords increasingly targeting restaurant start-ups to add interest to their holdings. Kate Taylor is part of the development leasing team at Davis Coffer Lyons and works with property owners to find the right leisure concepts for their estates. As such, she spends much of her time scouting talent and is regularly courted by smaller players looking for a break.
“The deals we do tend to be in high-footfall locations and are nil-premium, so competition to secure space is high,” says Taylor, whose clients include Shaftesbury PLC, which owns big chunks of the West End, and shopping-centre giant Westfield. “Food is becoming an increasingly important component of any mixed-use holding because it supports retail, attracts people and is an amenity for office tenants.
“Landlords are very open to working with new concepts because it instantly creates a point of difference – for example, Shaftesbury’s strategy in the Carnaby area [on the western edge of Soho] is to create an interesting, quirky destination and it’s obviously not possible to do that by filling it with things that people can find elsewhere.”
Over the past few years Taylor has helped a number of street-food traders make the transition from stalls and vans to prime bricks and mortar including Homeslice – now based in Covent Garden’s Neal’s Yard development – and Pitt Cue Co. Taylor noticed the snaking queues at the latter’s regular spot on the South Bank and helped founders Tom Adams and Jamie Berger bag a site just off Carnaby Street on Newburgh Street.
But what about those without a booming street-food business? Clearly one needs a solid concept and business plan, as well as some capital, but what else? Taylor suggests that those with limited restaurant experience find a good mentor, but her primary piece of advice is to research prospective locations properly.
“If you want to appeal to a specific landlord you need to get to grips with their destination and understand what they’ve tried to create there,” she says. “It’s also helpful to have a USP and some sort of following. This is why street-food vendors and supperclub runners have been so successful in making the transition to bricks and mortar – they bring with them a ready-made customer base.”
Both in and out of London, smaller landlords are often less receptive to new concepts, choosing covenant strength – the property industry’s term for financial clout – over originality. “Larger landlords are more concerned with driving footfall and creating a destination, and can also spread the risk with a mix of newcomers and established
brands. Smaller players are usually after the most rent from the strongest tenant,” says Shelley Sandzer’s Weir.
If rents from private landlords are too steep, keep an eye on council properties. As the public sector continues to tighten its belt, a number of prime central buildings are becoming available at nil premium.
“Councils often want revenues rather than space and, best of all, the council will obviously be overseeing the planning application so you’re at a huge advantage if it likes what you do,” says an industry insider who specialises in finding properties for fast-expanding restaurant groups.
“When trying to woo councils think local benefits: stress job creation and agree to hang local art, provide space for community events and support local suppliers,” he adds.
Several property agencies are predicting a gold rush to the regions: restaurant brands will turn their attention to the country’s more affluent towns and cities as competition for sites and customers in the capital intensifies. Christie+Co believes most of the growth in the branded restaurant group space will take place in the regions over the coming years, while Jones Lang LaSalle tips Brighton, Oxford, Colchester, Edinburgh, Bath and Winchester as places that will enjoy strong demand.
In tougher, less affluent areas there are certainly bargains to be had. However, those looking to open in desirable regional locations will still have to pay up as supply is still comparatively low – although prices for the most part at least are certainly far less inflated than central London.
In the face of unaffordable premiums, high rents and poor availability, some operators with suitable concepts are going ‘off-pitch’, essentially taking sites in low-footfall, non-central or other non obvious
locations. Generally speaking, such a strategy works best for destination restaurants that already have some profile.
MeatLiquor – Scott Collins’ and Yianni Papoutsis’ irreverent casual-dining restaurant – is perhaps one of the industry’s best off-pitch success stories and has, to some extent, popularised the idea.
Having operated a burger van and then a successful pop-up in a pub in New Cross, London, the pair took a run-down site on a relatively quiet street behind the Oxford Street Debenhams.
Such was the fledgling brand’s reputation the restaurant was an instant success with customers queuing around the block at peak times. Collins and Papoutsis have adopted a similar property strategy for further openings.
The chatter in the restaurant property world tends to be focused on what’s going on in the branded space because that’s where the real action happens – the big deals, the land grabs and the disposals. But what can those new to the industry or looking to make the jump from one to two locations learn from the exploits of bigger and perhaps more high-profile players?
“Cast your net far and wide when looking for properties. Ringing a few local agencies isn’t going to cut it if you want something fresh that hasn’t been rejected by everyone else,” says one property insider. “It’s worth building a relationship with agents where possible – if you can convince someone you’re a credible player you might even get offered an off-market deal.”
Size not everything
With big private equity-backed brands proliferating quickly around the country the property world can feel daunting for smaller outfits with limited backing. But being small can be an advantage. Some big players – such as Côte and Bill’s – are good at making swift decisions and completing deals quickly, but many other big branded groups are not.
“Protracted boardroom discussions are the enemy of property deals; the little guys are more agile so should be able to move on deals faster in some cases,” adds the insider. “Smaller players should target locations that won’t be of much interest to the big boys, who tend to avoid anything with less than 80 covers and generally shy away from unusual layouts and locations. Former pubs, which often have awkward configurations, are always worth a look and are comparatively inexpensive.”
From April some bolder operators with understanding landlords will start to take advantage of a loophole that allows restaurateurs to trade from A1 for two years before needing consent for change of use. They’ll still need to go down the normal planning routes if extraction is required and must apply for a licence if they intend to serve alcohol, but the amendment to use class legislation could still have a marked impact on the branded and independent sectors.
Though the approach is perhaps best suited to pop-ups because of the uncertainty over whether councils will grant a change of use retrospectively, several restaurateurs in the West End are understood to be poised to exploit the new legislation with a view to operating restaurants on a permanent basis.
“Clearly it’s a risky strategy because if the council doesn’t agree the change of use after the two years is up it’s game over,” says one of our insiders.
“When start-up costs are taken into account most restaurants are unlikely to turn a profit in two years so they’re putting their faith in the hands of councils.”
Some in the industry suspect that the loophole is a Trojan horse that Whitehall will use to further relax planning regulations in the face of dwindling retail take-up in some areas. “It’s a nice way in for smaller operators with low set-up costs that want to see if their concept will work,” adds the insider.
“It will be interesting to see what happens two years down the line. I can’t see many councils effectively closing well-run restaurants but there is always a chance that some of the stricter councils will do so to avoid setting a precedent.”
Council attitudes are changing too, particularly in areas being regenerated. Forward-thinking planners recognise the shift in emphasis from retail to restaurants and would rather have a source of business rates than unsightly empty shops. They’re starting to wake up to the fact that good restaurants can draw people back to struggling retail areas. Things look set to become a little easier, but bagging the perfect site will always require a little legwork and a sprinkling of luck.