In April 2017 business rates will be based on the first revaluation for seven years
Fletcher King’s specialist rating team advise national clients on all aspects of business rates. Contact Bob Dickman for more information.
Business rates are based on a property’s rateable value (RV) A new Rating List is now in effect based on an estimate of rental value by the Valuation Office Agency. With effect from 1st April 2017, following a revaluation, the RV will be based on 2015 rental values. Much has happened in the intervening years to both the economy and the commercial property market.
In the wake of the global banking crisis, the UK economy suffered the worst recession since the 1930’s Depression and the slowest recovery since the end of the First World War. Even today some regions and strategic parts of the economy have still not recovered their pre-recession levels.
After suffering a sharp downturn, London was the first of the UK’s regions to recover. It’s strong growth since 2010 has benefited the neighbouring South East and East of England but the recovery of the Midlands and Northern economies has been lacklustre.
Since the peak of the last economic cycle in 2007, every region of the UK has under-performed the UK average with the exceptions of London and the South East. Economic output in Yorkshire and Humberside is still below its 2007 level.
The fastest growing city economies have been Guildford, Cambridge, Reading, Bristol and Manchester. Birmingham’s economy is just 1% larger than it was in 2007. But the economies of Leeds, Liverpool and Sheffield remain smaller than they were in 2007.
The dominant service sector was the first part of the economy to recover. Manufacturing and construction, however, have struggled to regain the output lost in 2008 and 2009. Manufacturing is still 4.7% below its pre-recession level, construction is just 0.2% higher, however, the service sector is 11.3% higher.
Internet shopping from desktops, laptops and handheld devices now accounts for 14% of all shopping. Some retailers who were slow to adapt to the new retail landscape are no longer trading. Across the UK vacancy rates are high and alternative uses have yet to be found for shops peripheral to town centres. Shops, Retail Warehouses and Shopping Centres have all suffered from on-line competition. More particularly, while retailing in Central London and across the UK’s regional centres has thrived since 2008, retailing in many sub-regional centres and market towns has struggled.
To fulfill the ever-increasing web orders, retailers and logistics operators have expanded their distribution operations. Since 2008 demand for large high bay national and regional distribution warehouses together with smaller local facilities on the edge of conurbations has grown strongly.
These macro-economic trends have been reflected in the UK’s commercial property market. Retail rents have largely stagnated. City of London and West End offices now command rents greater than those prevailing before the onset of the Great Recession. Office rents have also reached new highs in Birmingham, Manchester, Bristol and Leeds. Demand from occupiers and investors has driven the development of new “sheds” especially in the regional hubs and near centres of population.
Consequently, the 2017 rating revaluation has seen RVs across all property sectors in England increase by 9.6% but decrease by 2.9% in Wales. In London RVs grew by 23.7%. The revaluation also reflects the economic strength of the South East here values grew by 9.6%. However, across the North West and Yorkshire there was no overall increase in values and in the North East values in the 2017 rating list are -0.9% lower than the 2010 list.
The business rates payable by each occupier are a factor of the RV and the uniform business rate or multiplier. The multiplier for 2016/17 is 49.7%. The multiplier is usually increased each April in line with the annual RPI as at the previous September. In previous revaluation years such as 2010 and 2005, however, the multiplier was adjusted so that average bills increased at the point of revaluation in line with RPI inflation. The 2017/18 multiplier has yet to be announced but indications from Government are that it may reduce to 48.0%. The overall net effects of these changes are shown in Table 1 for various key centres.
The Government has also yet to announce the transitional arrangements but has published two options for consultation.
In the first year of the proposed transition arrangements, large occupiers with a RV greater than £100,000 will have a 4% collar applied to any downward adjustment to their business rate liability whereas the cap on any upwards adjustment will be between 33% and 45%. A small occupier with an RV less than £28,000 in London and £20,000 in the rest of the UK will have a 20% collar applied to any downward adjustment to their business rate liability and a 5% cap on any upwards adjustment.
It is clear that the impact if not the intention will be to tilt the burden of the tax towards large occupiers in London and the South East (see table 2) which are best placed to pay bearing in mind the nature of the economic recovery.
The implications of the 2017 re-valuation for the investment performance of commercial property in England & Wales are uncertain. Rationally it might be expected that a sharp and uncontrollable increase in the business rate would lead to a decrease in rental values and vice versa. But occupational costs in the form of rents, rates and service charges are not a zero sum game.
Some occupiers demand to be in a particular location almost regardless of cost. Luxury goods retailers in Bond Street are prepared to pay £2,500 per sq. ft. Zone A as a marketing tool and to have a presence on one of the most chic pieces of real estate in Western Europe. Hedge fund managers are prepared to pay £140 per sq. ft. for office space in St James’s and the City of London is a magnet for insurance companies, banks, asset managers and many others.
Furthermore, the impact of an increase in business rates on the overheads of a business will vary from organization to organization. For many real estate costs are limited compared to personnel costs.
It is impossible to draw any lessons from the previous revaluation in 2010 due to the background noise of the Great Recession. Likewise it may be difficult to draw any conclusions regarding the impact of the 2017 re-valuation if the uncertainties caused by Brexit result in weaker macro-economic growth, a loss of London’s passporting rights and a structural dislocation of Central London’s commercial property market.