Retail has had a tough year, and the year ahead looks even tougher. As the lynch pin of a significant number of property assets, the retail occupier market is crucial to property investment. With HMV back in the limelight having had its credit terms reviewed and loan covenants needing to be met in March, it brings back memories of the struggles of many high street retailers over the past two or three years, and reminds us that retailers continue to operate in testing conditions. There are too many vacant retail units up and down the country - 50% of former Woolworths stores still lie empty. There is no doubt that the retail market continues to be challenging and particularly so for large retailers in Scotland, with hazards like the recently proposed "Tesco Tax" to contend with.

Challenges ahead

We have entered 2011 with a fragile economy. We have a new coalition government who are starting to make their austerity measures felt, with changes that we are told are needed to improve the UK economy in the long term. In Scotland this means a reduced budget, which, amongst other things, has led to a proposal for a large retailer levy which the Scottish Government tells us will raise £30 million in public funds. There are likely public sector job cuts on the horizon, and a fear of unemployment which will impact on individual decisions to buy. Interest rates were held at 0.5% last month, the same rate since March 2009 but there is undoubted anxiety about the prospect of an increase at some point, particularly with the current upward trend of inflation. VAT has risen by 2.5% to 20% on 4 January 2011 so big ticket items are already becoming more expensive in real terms for consumers. Retailers are entering these trading conditions in 2011 after difficult trading over the Christmas period was exacerbated by the bad weather. The challenges faced by the retail sector are highlighted in Begbies Traynor's "Red Flag Alert" which showed a 20% increase in companies with "significant" or "critical" financial problems in the last quarter of 2010.

Supermarket levy

Large retailers have recently been presented with a further challenge in Scotland: the Scottish Government's proposals for new levels of business rates included a new levy on larger retailers, intended to affect supermarkets and out-of-town centres, but also impacting on many large high street stores. These proposals sparked a fervent debate, centring on the risks to the Scottish economy of fewer large stores opening and fewer large stores expanding as a consequence of such a levy, weighed against the tax revenue which would be generated. Retailers already contribute a quarter of all business rates in Scotland, more than any other sector and argue that this additional levy would add to an already disproportionate burden on the sector. The retail market makes a large contribution to the Scottish economy. Retailers contribute significantly to the creation and maintenance of jobs in Scotland and the Scottish Retail Consortium have confirmed that around 250,000 people are employed in the retail sector currently: one in nine of the Scottish workforce. Additionally the retail market provides a significant occupier market for property investment and development. It is unsurprising that a number of high profile retailers and investment landlords made written representations to the Holyrood committee that was considering the proposal. A large UK property investor pointed out in their representations to the committee that in addition to the direct difficulties caused for retailers, the proposal to increase business rates threatens to reduce the attractiveness of Scotland to investors in retail, at a crucial time when private sector investment is expected to fill the gap left by anticipated public sector cuts.

What next?

The Local Government and Communities Committee rejected the proposals for the tax this week, making it almost certain to be rejected by the Scottish Parliament. This is good news for retailers affected by the large retailer levy, however it leaves a gap in the budget that will require to be plugged. Retailers wait, with some anxiety, to see what further proposals will be put forward in the Scottish Government's plans to balance the books.