Elsewhere: Is it time for a sale on the high street?

In October 2001, Topland, a privately held property company controlled by two Israeli-born brothers, won a fierce bidding round to buy a portfolio of about 80 properties from Marks and Spencer.

The portfolio is understood to have included some of the company's best properties and it signed 25-year leases to remain as occupants.

Topland paid ?348m. Two years later, Topland refinanced the portfolio for ?450m, scoring a ?100m profit. Such is the potential value of M&S's property.

With Marks and Spencer under pressure to improve returns for shareholders, its property portfolio, long considered one of the best held by any UK retailer, is on the radar screen.

Property consultants and developers say that it is likely the company will look to unlock some of the value inherent in its portfolio that has not been formally revalued since 1988, the peak of the last real estate boom.

If Marks and Spencer wants to sell its property and continue to occupy it on long leases, there is no shortage of potential buyers, says Joe Valente, head of research at DTZ Debenham Tie Leung: "Retail has been the best performer in real estate since the stock market began to fall in 2000."

However, that strategy offers significant dangers for M&S, as it has for too many other retailers over the past decade. Indeed, the potential value of the company's property portfolio illustrates the symbiotic relationship that has drawn the entire retail ing industry into property. According to data from Cushman & Wakefield Healey & Baker, as much as 80 per cent of the net book value of some retailing chains is tied up in property assets. Although this gives them far greater control of the environment, it forces them to tie up significant amounts of capital in bricks and mortar, arguably lower yielding activities than retailing itself.

To raise finance, retail chains have been driven to sell properties to investors and occupy them on the long-term leases traditional in the UK. For most, that has meant 25-year leases with rents that are revised upwards every five years and can never fall, even when the location ceases to be attractive for trading.

Tenants need a landlord's permission whenever they want to re-model the premises - an event viewed by most landlords as an opportunity to raise rents - and cannot sub-let to another occupier without the landlord's permission.

That has meant that retailers pay a high price for realising the value in their property portfolios, a cost M&S has been reluctant to bear.

Indeed, Philip Green, who is stalking the chain, has ruled out any such portfolio restructuring. However, retail property specialists note that M&S has many options.

Mr Valente points out that although the chain operates from many types of premises, it is the high street outlets that generate the lowest ratios of sales per square foot. In M&S's case, its high street shops are typically larger than average, at 12,000 to 15,000 sq ft against the 2,000 to 3,000 sq ft that is typical.

Edmund Camerer-Cuss, director of Pulborough-based Property Information Project, a retail property research specialist, notes that high street shops - and smaller ones in particular - have turned in a strong relative performance recently.

Indeed, he says, canny property developers snapped up large high street units that supermarket chains abandoned in the 1980s and enriched themselves mightily by carving these up into smaller units.

Over the last five years, smaller stores with under 1,100 sq ft have risen in value at an annualised rate of 4.6 per cent against stores of more than 1,000 sq ft that have risen by a more modest 1.5 per cent per annum.

"One can see some of the M&S units doing quite nicely if they were not occupied by M&S," says Mr Camerer-Cuss.

Financial Times