Retail rentals show why and how capitalism is broken

One of the most important factors for many struggling Scottish businesses is never mentioned, which should raise concern. The retail and hospitality sectors have complained relentlessly about increasing payroll taxes and rising business rates, and not without reason. The increased payroll taxes in particular are an explicit decision to trade the wellbeing of high streets for the wellbeing of the City of London.

Indeed, right-wing commentators have focussed relentlessly on 'public good' issues like tax and have ignored issues to do with capitalist markets. We can see this with news today that the value of a shopping mall which is for sale has collapsed and yet the background noise of hospitality businesses going bankrupt in part because of high rents is continuous.

Today it is being reported that Perth's St John Centre, built at a cost of £20 million in 1988 and last sold for £31 million in 2001, is now being listed for a cut-price £2.5 million. The logic of this is apparent enough; when this shopping mall was last sold, the proportion of UK retail done online was about eight per cent. A couple of years earlier when the sale was presumably being prepared it was more like four per cent.

It is now about 28 per cent. Nearly a third of the high street's business has left in under 20 years and the impacts are now as visible in many city centres as has become familiar in town high streets. One of the early suggestions about how this would be mitigated was that the retail space would be taken up more by hospitality businesses and personal services.

This concept was based on the idea that everyone was getting wealthier, efficient online retailers were reducing the cost of shopping and so people would have more spare money which they would spend on services rather than shopping.

None of this happened. Online sales did not stay cheap but instead became a 'trap' where they became virtually monopoly providers who used discounting to lure people into a 'walled garden' and then increased prices once alternative options started to close down. The 'hospitality replacement theory' also failed to anticipate algorithmic social media and its ability to harvest any additional household income through new models like subscription services and gambling.

The outcome is that while in-person retail has lost nearly a third of its market, pubs (as an indicator for hospitality) have seen a quarter close since 2000. Both these forms of demand on city and town centre commercial properties are in decline. And then the home working phenomenon took off, city centre office space became increasingly empty and businesses serving those offices (like sandwich shops) face knock-on pressures.

All demand appeared to be declining. Thankfully there is supposed to be a mechanism built in to capitalism that will help to resolve this problem; supply and demand are supposed to level out. Really simply, if the business renting retail space can't make a profit any more, the rental costs ought to drop, along with the capital value of commercial properties.

That is not what is happening. In fact at the end of last year, retail rental prices were actually rising. This is not a linear trend; it is an increasingly polarised market with prime sites increasing in value rapidly while other values decline. The latter is what is happening in Perth, but average prices were still rising six months ago (they are declining slightly now in the face of the Iran War).

This polarisation is also caused by polarisation in the economy. While many people are struggling, there is now a 'global elite-adjacent' just below the actual global elite. This is best represented not by billionaires but by the top ten per cent of earners in the US who now constitute 50 per cent of all spending. They are getting wealthier.

That is why the pubs are closing but Scotland's hotel sector is making record profits. The world is becoming a service sector for the top ten per cent while the infrastructure the rest of us rely on is declining. But how is this top ten per cent making its money?

The wealthiest 10 per cent of Americans generate the vast majority of their income through investments, business ownership and asset appreciation rather than traditional wages. What are the assets that are appreciating and giving them their wealth? Among them is the ownership of commercial property portfolios.

The reason the cost of commercial rental remains so high is that they are not primarily elements of the real economy but rather elements of the financial economy, assets that are traded. They cannot be allowed to reduce. They must stay high. As the pubs close down these assets are being converted into student flats to keep their value artificially high. When the student market reduces (as it is certain to do), they will become something else that can gouge prices from renters.

So either you're in an upwards-trending area and you are priced out or you are in a downwards-trending area and your local economy is falling apart. Meanwhile retail rental in the UK continues to rise, remains comfortably the most expensive in Europe and is simultaneously destroying local economies (by pricing them out) and social cohesion (by taking all the wealth).

Yet no-one talks about this and no action is being taken to bring down commercial rentals. Scotland has to stop letting financial speculators design our towns and cities to their own specification. We need proper place planning, zones with rent caps for businesses, greater taxation on speculative profits and a major crackdown on corrosive online trade - people aren’t going to the pub because they are spending all their money gambling online.

We do not have to allow our society to become a service sector for ten per cent of the global population. But someone has to recognise the problem first.