Comment: Don't fight the market

Wednesday 11 April 2018

While some are calling for the States to ensure commercial rents are brought down The Fool thinks exactly the opposite. In this month's column, in Connect magazine, he argues that if businesses can't pay their rent, the issue is not in the market, but with the business itself.

"A news item crossed the desk this week which reminded me of one of the most well-known investing maxims: “The market can remain irrational longer than you can remain solvent”

"The news item in question detailed the plight of an individual, whose “dream” of opening a shop in St. Helier was thwarted by their inability to find premises from which they could afford to run the business. (The bad guys, just in case the obvious requires pointing out, being those damn landlords recklessly seeking some sort of return on the investment of their capital, who were apparently unwilling to offer suitable premises at a suitable price, because greedy etc.). And, as is so regularly suggested by those with somewhat of a tenuous grasp of reality, something apparently “ought to be done.”

"Now, with the exception of certain politicians kindly offering to favour us with their presence at the forthcoming elections, nobody wants to see somebody else’s dreams end in tatters. But let’s consider the facts of the matter.

"Somebody has had a business idea, which will consist of them selling stuff to other people. The person concerned presumably has an idea of how much stuff they are likely to sell, and how much it’s going to cost to sell that stuff. If the value of the goods sold is greater than all of the costs involved in running the business (cost of stock, wages, taxes, rent etc.), the business will make a profit. If not, the business is likely to make a loss, probably isn’t viable, and, unless one is looking to give away money, probably shouldn’t be started. (This isn’t taxpayer’s money we are talking about for a change).

Pictured: If a business can't afford rents it probably shouldn't start says the Fool.

"Thankfully for the person concerned, the reality of their situation appears to have become apparent before they put pen to paper. What is odd, however, is that this person’s dreams, according to the report, have been shattered not by a defective business plan (the likelihood of sales not covering costs), but because of ‘greedy landlords.’ Excuse me?

"Back on planet earth, the last time I looked, a landlord was under no compulsion to offer somebody a rent that they or their business could ‘afford’, or at a level which will render an unviable business viable. The rents charged for property in the private sector, thankfully, remain a good old-fashioned, unconstrained, free market. A landlord spends their own money purchasing and maintaining a property, and on the basis that they would prefer to receive a lower rent than no rent at all, prices
will be dictated by present demand and present supply.

"If demand is falling (or supply is increasing), rents will fall; if demand is rising (or supply is falling), rents will rise. If we are close to what we term ‘equilibrium’ and those landlords are already happily renting their properties at a rate above that which a new business can afford to pay, that dream business is unlikely to cover its costs, and is probably going to turn to be less a dream, and more a nightmare. If new businesses are searching for somebody to blame for that sad state of affairs, here’s a clue. It’s not the landlord.

Pictured: Should the state should intervene to make people's dreams come true, "make unviable businesses viable, presumably along with free unicorn rides and prizes for finishing in eighth place?" The Fool says no.

"The suggestion, however, which seems so symptomatic of our times when somebody isn’t able to get what they want, is that “something ought to be done” about the situation (the “something” in this case, being that rents ought to be capped). That of course is as idiotic as it is invidious, and suggests, presumably, that the state should intervene in the free market to make peoples’ dreams come true. (Translation: make unviable businesses viable, presumably along with free unicorn rides and prizes for finishing in eighth place).

"I realise that people who call for “something” to be done often haven’t thought through the implications of their suggestions. However, given that rents presently appear to be above that level at which everyone’s dreams can be fulfilled, what is ultimately being suggested is that the state should intervene to ensure that landlords accept less for their properties than their EXISTING CLIENTS are presently willing to pay them. I’m not a property expert, but that would seem to have some sort of profound implications for property values, and the future demand and supply of suitable properties on the market.

"The high street retail sector is presently undergoing fundamental change, with some large names having gone bankrupt in recent years. Rents in Jersey remain high because, for the most part, levels of discretionary spending are relatively high, and shops can still turn a profit. That may well be irrational; but it’s you cupcake, not taxpayers, who’ll need the deep pockets to wait out the market correction you believe is coming."

You can read the Fool's column every month in Connect magazine, here.