How private equity revamped a London high street

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Christmas shopping in Marylebone High Street provides insight into the internalisation of externalities and the relationship between corporate governance and business strategy.

It is particularly pleasant at this time of year to pass the festive windows of Marylebone High Street. My local shopping area has become one of the most popular destinations in London. I ignore the new age retailers and any shop with the word “holistic” in the window – there are a lot of these. But there are also outstanding food shops that sell fresh fish and bread, aged meat and a better selection of cheeses than I can find in France. There is a cool Scandinavian furniture shop, an inviting but overpriced kitchen equipment emporium, several clothes boutiques and a wonderful bookshop that specialises in travel. There are three patisseries and a choice of cuisine, from designer soups and sandwiches to New Zealand fusion.

Twenty years ago, when I first lived nearby, the street was lined with charity shops and shuttered windows. What is now a Conran store and restaurant was a tyre depot. The upgrading has not only contributed to my quality of life, but added to the value of my house.

This effect on property values is crucial. Marylebone High Street is part of the de Walden estate. The de Waldens, an old landed family, owns much of the surrounding property, including a large part of the adjoining medical district centred on Harley Street. The estate appointed an enterprising property manager, Andrew Ashenden, who conceived the strategy of deliberately attracting stylish tenants. The breadth of the de Walden interests meant that the estate could afford to accept less than the best rent available on each individual unit if the improvement in the perceptions of the area raised the commercial rents on other properties and the value of the houses and flats in the neighbourhood. Or that was the calculation, and it has proved to be correct.

The success of Marylebone High Street has attracted both attention and misconceptions. One such misconception is that it pays to let to nice tenants rather than profitable tenants. It doesn’t. A coffee shop chain or mobile phone distributor is usually the highest bidder for a small unit in a prime location and would almost certainly pay a handsome premium tomorrow for a spot in Marylebone High Street. If I owned a typical shop in Marylebone High Street, I would let it to them.

But the de Walden estate owns so much property in the surrounding area that it can make a different assessment. Almost the whole financial gain from the upgraded image is internalised and only a small part flows to undeserving beneficiaries like me. The maxim that good business is profitable business has much more truth for the business community as a whole than for individual business decisions: a lesson with relevance far beyond Marylebone High Street.

The story of the street also illustrates the potential benefits of patient private equity. The de Walden estate is a private business. Neither obliged to issue quarterly figures nor planning an initial public offering in three years, it can wait to benefit from the gradual rise in rents in the area.

So Marylebone High Street has Waitrose as a flagship store but has rejected approaches from other big chains – although Tesco sneaked in by buying an established convenience store and Boots has been there for decades. But the chain retailers that are ubiquitous in every other town centre are largely absent from Marylebone High Street. So do the Christmas crowds illustrate that small shops, not chains, are what the public really wants?

I don’t think so. If you are a nurse or a porter in Harley Street, rather than a consultant, you will find these branches of Tesco and Boots are the only stores to offer competitive prices. There is a large difference between the cost of Tesco’s potatoes and those of the Natural Kitchen – but probably not one to which anyone who can afford to own or rent a property between Marble Arch and Regent’s Park is sensitive. If you want Gap or Debenhams, then Oxford Street, with almost every chain retailer in the world, is less than 10 minutes’ walk away. Marylebone High Street is successful because it is unique, not because it is a general model. But its special flavour contributes to the joy of Christmas.

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