Hybrid management contracts – another leasing model to explore
Recently London-based Grosvenor broke some new ground in the UK when it announced the arrival of new restaurant operators - atis in Ecclestone Yards, Belgravia and JKS-backed Bibi on North Audley Street. What stands out about the transactions is that they both included financial support to the operator through Grosvenor’s new Tenant Investment Fund. Here Grosvenor has eschewed a traditional leasing arrangement and has effectively combined elements of it with those of a management contract.
As the restaurant/food sector begins to embrace management-style contracts is it possible that other property sectors might follow? While some flexible workspace providers, such as London-based x+why, are looking to move in this direction, we can’t see mainstream office developers embracing it.
Management contracts – where the investor provides fitted out space at its own or as a shared cost, contracting it out to an occupier for a fixed term, with both parties splitting the profits from the occupier’s business – are an established model in the hotel sector. Why? Because in the competitive hospitality market, where consumer preferences change quickly and brands evolve at a similar pace, they offer hugely valuable flexibility for both sides.
As many of the factors influencing hotel operation are also true for restaurants, we’re surprised that management contracts haven’t been more widely adopted in the restaurant sector. Operators unable to finance the high capital expenditure involved in fitting out a restaurant from scratch are able to focus their efforts solely on their cuisine, while investors are able to choose fresh, dynamic operations most suited to their asset.
There are limited examples where it is happening already: opulent restaurant fit-outs in the Middle East have been financed this way for some time, and the practice isn’t uncommon in some US cities, for example, Peak at Hudson Yards in New York. But in the UK – and much of mainland Europe – traditional leasing models have held sway in the restaurant sector. Until now.
Covid-19 has led to a re-think as operators have struggled with the loss, month after month, of indoor dining and investors have focused on how to extract maximum value from their real estate. So, in the last 18 months we have seen a tentative shift towards management contract-style transactions in the restaurant sector. Some, such as The Ned at Soho House, More & Mead at 151 City Road (both in London), White Rabbit at Rusacks St Andrews and SUSHISAMBA at St James Quarter, Edinburgh have hotel affiliations.
But the Grosvenor deals, which the investor is keen to stress are done on an individual basis, indicate a willingness to take the concept away from a hotel environment and place it in a wider real estate context. As we have previously noted the pandemic has helped investors and occupiers align mutual interests.
Management contracts or hybrid variants offer investors an innovative way of furthering those interests and we see significant potential in this kind of arrangement. They are likely to be most relevant in larger towns and cities, where toppy property values and steep fit-out costs for high-end restaurants will be most attractive to potential investors. Even in smaller High Street locations, those leading major regeneration schemes may find that a management-style contract is a useful way of securing a mini anchor, to act as a catalyst for further development.
The evolution of food halls into F-hubs also opens up new possibilities for management contracts – many of the first-generation food halls operated largely/exclusively on this basis.
It is worth noting that Time Out Markets, one of the leaders in the sector, has announced that in future it will only occupy space on a management contract basis.
As the restaurant/food sector begins to embrace management-style contracts is it possible that other property sectors might follow? While some flexible workspace providers, such as London-based x+why, are looking to move in this direction, we can’t see mainstream office developers embracing it.
Retail is a potentially more logical fit, though again we think wide-scale adoption is unlikely, not least because a shift towards shorter leases (another unexpected consequence of the pandemic) is already helping investors to keep their occupier mix fresh. However, we wouldn’t rule it out completely. Yorkshire-based Dransfield Properties, for example, has partnered with family-owned independent department store Sandersons. For investors who have the capital to invest in the vibrancy of their properties, management-style contracts could be an exciting new way of attracting the latest brands.
Article by Thomas Rose, Co-founder & Kate Sadler, Director, P-THREE
Photo credits: Soho House
