The first of April is a day set aside for having fun at the expense of others. Whether or not this is why the Government chose that date to bring in the changes to the empty property rate relief laws is unclear, but if it is there are few in the property industry who see the funny side.
Affecting both landlords and retailers, the retail property fraternity feels that the decision to start to charge business rates on empty shops is a joke on them.
The Government has been accused of imposing a new tax to generate millions of pounds quickly without considering the potential adverse, unintended effects on both retail and regeneration, just at a time when landlords and retailers are starting to feel the heat.
Landlords are facing falling demand, with masses of space coming onto the market and retailers that own the freehold on their buildings will, from April 1, have to pay an extra tax on properties that they were trying to shift.
With landlords facing even greater financial distress, the danger is that they could panic. Tenant mix, particularly in shopping centres, may fall down landlords’ priorities when they start to feel the pain of paying rates on vacant units and seek to get them filled at any cost. The solution that many landlords are likely to take – filling the gaps with temporary retailers – could prove to be a quick fix that isn’t in anyone’s best interest.
“It’s just another stealth tax,” says Crabtree & Evelyn property director Phillip Jenkins. “It adds yet more cost to something that was already a problem to us and I don’t think it serves the purpose that the Government had intended.”
Jenkins is fully aware of just how serious the issue is. Crabtree & Evelyn is facing an extra hit of£60,000 from April onwards for a distribution centre in Oxfordshire that the retailer has left empty. The site has been a problem to Jenkins for some time, who says that it has been hard to dispose of. The changes to rate relief will have, overnight, turned a headache that has been hard to shake off into a particularly nasty migraine.
Many landlords will have already had their first bills under the new relief system and it is likely to have been a sobering experience. Historically, retail landlords and tenants were granted 100 per cent relief in the first three months of a property being vacant and 50 per cent thereafter. As of Tuesday this will no longer be the case and the full price of leaving a property unoccupied will come home to roost for both landlords and retailers.
According to the Government the thinking behind the revision of the system is to put landlords off leaving their properties vacant, thereby boosting retail areas and keeping competition high. A document produced by the Department of Communities and Local Government (DCLG) called Modernising Empty Property Relief cites the Government’s objectives as being to increase competitiveness, efficiency and fairness in British commerce. But it is not clear how the new system will do this and to the people most affected – retailers and landlords – this has caused resentment across the board.
The revenue generated from the changes to the law will add up to about£1 billion a year for the Government. This, many say, is the crux of the issue and the Government’s chief aim. Savills head of rating David Parker explains: “Business rates are supposed to be self-funding. The Government should really be giving that back to ratepayers through reducing the rate in the pound, but there’s not even a hint of that happening, which is very disappointing.”
The Royal Institute of Chartered Surveyors (RICS) says that, rather than creating incentives to fill property, changing the law could have the opposite effect to some of the objectives laid out in the DCLG document. It believes that the Government risks discouraging new development and forcing costs for developers skyward, having a negative impact on regeneration schemes and damaging the sector as a whole.
RICS policy officer Nadia Nath-Varma says: “We do not consider that further taxation will encourage property owners to make better use of their premises. The reduction in relief will limit the time available for owners to market their premises to find the right tenant.”
With the total retail property market valued at£38 billion and an estimated 7 per cent of this being vacant, there is£2.5 billion worth of retail property lying idle. Retailers and landlords say the last thing they want to do is to hang on to unoccupied property and that, if they do, there are very good reasons. The fundamental flaw in the Government’s case is that they have overlooked a basic premise: property is not left vacant deliberately and it isn’t in retailers’ interests to do so.
For retailers in shopping centres there is another danger. Under pressure to escape the rising rates, it is possible that some landlords will explore all alternatives, including ones that could jeopardise the tenant mix of their centres. This has already proved to be a solution in centres across the country that are struggling to fill their units.
But, while it does fix the problem in the short term, letting to temporary retailers has its downsides and can be unpopular with existing tenants. Tenant mix, which is so valuable to both landlords and retailers, is compromised by the presence of temporary stores, which often stock lesser quality goods and undercut their permanent neighbours.
While tenant mix is crucial to a centre and its retailers, so is having stores trading. Having a temporary retailer as a neighbour is far from ideal, but when the other option is a vacant unit, it may be the lesser of two evils.
“Most retailers would prefer shops around them to be occupied,” explains Cushman & Wakefield head of retail lease advisory team Chris Osmond. “One advantage is that it will encourage landlords not to leave their units empty.”
Empty property is not a new problem for retailers and landlords, but now many are frustrated at the Government for fanning the flames. Rather than encourage developers to fill empty units, the end of relief could cause problems earlier in the process. With the only alternative being a costly bill, developers might be tempted to leave schemes incomplete or even deliberately damage their own buildings. According to Parker there could be a rise in the use of so-called constructive vandalism; the practice of rendering a property unfit for occupation thereby avoiding paying rates on it. While this is not a new practice, it could well become more common with the extra rates bills.
But, while the changes to the law are likely to prove costly, there could be an upside for retailers. With landlords under pressure, retailers can take advantage and push for better lease terms and with the softer deals likely to be available this might prove to be the silver lining.
Another plus, according to Osmond, is the strengthened position retailers could find themselves in when rent reviews come round. He says: “Landlords might be tempted to do much softer deals that might not otherwise have been done. This might have a positive effect on existing tenants because landlords will feel more pressure to do deals.”
Overall, however, the end of property rate relief will be costly and damaging to retailers at a time when there is enough to be thinking about, while landlords are facing their toughest period for many years. Some fear that developments under construction could grind to a halt to keep them off the ratings list and it could further hit confidence in already reeling property companies.
Empty properties are an inevitable function of the market, but these changes have achieved the rare feat of uniting the retailer and landlord communities in condemnation. While the market will adapt, it is yet another headache it could do without.