The biggest changes to business rates for a generation are set to arrive in spring, with London expected to bear the brunt of the increases. What are FMs doing to prepare for these changes? Could this prompt a move out of the capital, or pressurise businesses into reducing the size of their estate?
The new business rates are “manifestly unfair and a breach of natural justice”, according to Jerry Schurder, industry expert and head of business rates at London-based surveyors Gerald Eve. But what is the impact for occupiers, and what should facilities managers and others do to prepare for the likely bad news?
On the upside, small businesses will not be liable for any rates at all up to £12,000 rateable value – and the government claims that over 600,000 small businesses will pay no rates from 2017.
But many companies will be affected. Offices in ‘city fringe’ locations such as Shoreditch, Farringdon and Clerkenwell have been hardest hit by the business rates revaluation, with average increases of over 50 per cent and some properties seeing a doubling or even trebling of their liabilities.
It appears that areas of London that were hitherto rather untrendy and not where you would choose to work but which were cheap have become more expensive, leaving their rating valuation to fall behind. The new regulations seek to balance the books, which means these areas will become disproportionately expensive – causing some market confusion. Another Gerald Eve expert, Richard Nice, points out that some central London retail sites are particularly badly hit, Oxford Street and Covent Garden being two quoted examples. King Street in Covent Garden has seen one location receive a 205 per cent rate rise.
The rate rises will start in April, be payable monthly, and will be phased in over five years with an annual cap on increases starting at 42 per cent. But they will inevitably represent a substantial gap in a company’s finances. So how can it be plugged?
There is the option of downsizing or moving location to areas that now seem relatively good value, with a more balanced approach to rates linked to value. In extreme cases companies may choose to move out of London, while others may decide against moving into London in the first place, opting for out of town locations such as East Croydon or even further afield. Some regions will see cheaper commercial accommodation; Liverpool, for example, will see a reduction in rates.
I consider the business rate as somewhat like a service charge on a retail or multi-let property – when it’s too high, FM service providers come under pressure to work their magic and reduce operational costs so that the total cost of occupation becomes more acceptable.
I suggest that FMs and property managers adopt a four-point action plan. First, challenge the revaluation using the new ‘check, challenge, appeal’ (CCA) process (England only – Scotland may have a different approach). Second, consider your estates strategy – is it feasible to move? Third, rebalance the total occupier cost, through more sales, for example, or lower cost of occupation. Finally, work with an FM consultant to devise an alternative lower cost service delivery model.
Remember, as a benchmark – your rates equal roughly 50 per cent of your current rent.
The rate increases or ‘revaluation’ will be carried out on rental value from the year 2015, which just so happened to be the year that rental values increased rapidly in London. Previous to this, the last review was in 2008 and the changes were then implemented in 2010.
In my opinion, this revaluation will see business rates significantly increase and penalise those who have properties in more sought after areas. Which seems troublesome as businesses fundamentally seek to find a good location that can add value to their brand, while attracting and retaining the best talent.
Due to the significant increase, which is believed in some cases to be as much as circa 40 per cent, businesses will need to find ways to ensure they stay competitive. Unfortunately, I foresee SME’s suffering the most, with large corporations having greater leverage to find ways to offset the changes, if location remains paramount.
As a result of all this, businesses may therefore be looking to reduce service levels for building and maintenance up keep, possible site relocations, or reduction in internal headcount. Unfortunately, the aforementioned could have negative impacts on the economy. At a time when we are negotiating our way out of Brexit, our UK businesses should be incentivised to invest and expand and not have to find ways to retreat or cut back in order to absorb these unreasonable and extortionate penalties for success.