Research from property consultants JLL examining how circa 1,000 retail locations in the UK have been affected by the delay in Business Rates Revaluation has shown 40 per cent are suffering as a result with areas including East of England, Yorkshire and the North East some of the worst affected.
The Treasury’s deferral of a rating revaluation of the tax from 2015 to 2017 will mean businesses continuing paying rates based on pre-crisis rents which, according to JLL’s analysis, has generated short-term winners and losers. Winners are defined as those retail locations currently benefiting from a deferred revaluation – in other words those locations that would have seen uplift in their business rates in 2015 and therefore benefit from a postponement. Conversely, those that would have benefitted from a 2015 revaluation by a reduction in rates paid are losing out with many paying business rates based on pre-crisis rents.
JLL’s analysis shows 32 per cent of locations would have remained broadly unaffected by a 2015 revaluation; 28 per cent are short-term winners, but 40 per cent are losing out as a result of the postponement. Hardest-hit is East England, where 63 per cent were currently paying more than they should and in Yorkshire 54 percent are paying more.
Paul Davinson, Director of Rating in JLL’s Leeds office, said: “The Government conducts revaluations every five years to align business rates with property value movements. In 2013 it decided to push the next revaluation back two years, citing that it would help businesses delay any business rate changes that occur at the point of revaluation. However the property market has changed considerably since 2008, the valuation date for business rates since 2010 and which will remain until the next revaluation. Our findings show that the over half of retail sites in Yorkshire are paying excessive business rates based upon current property values, making it clear the Government’s controversial decision to delay the revaluation by another two years is further compounding the challenges many retailers in the region are facing in an increasingly competitive sector.
“Our research shows that high streets in poorer areas are the real losers. Some retail locations have been hammered by both cyclical headwinds and changing requirements for space from retailers grappling with structural change. In some instances business rates are the millstone dragging high streets under. Winners are areas that least needed help — predominantly London and southeast England.”
Paul Davinson also highlighted that within Yorkshire the disproportionate level of business rates compared to rental levels is causing much difficulty to businesses and a marked effect to demand levels and potential occupier’s feasibility when considering new occupations.
The sting in the tail; short term winners will feel the pinch in 2017…
According to JLL’s analysis, the clearest current winner is London, registering the greatest proportion of retail locations benefitting in the short-term from the postponement (52 per cent). But whilst benefitting in the short-term, a number of prime locations will see considerable upward adjustments in rates in 2017, assuming the current model is maintained and revaluations trigger uplifts in rates payable, especially those locations that have seen significant rental growth since 2008 and where rental growth momentum continues.
The effects of polarisation …
Locations that saw unsustainable rental growth to 2008 then significant subsequent rental declines are hardest hit, as rates are currently being paid on 2008 Estimated Rental Values, despite in some instances rents having fallen by over 50 per cent. In some smaller regional retail locations, rents never saw the dizzy heights, so any subsequent rental falls have been marginal. In some instances towns and cities will have both winners and losers, whereby polarisation has driven rents in the core, prime locations, whilst weaker secondary has continued to deteriorate.
Tim Vallance, Head of UK Retail and Leisure at JLL, concluded: “The system isn’t flawed; it is just lagging changes in market values. Further damage to the UK high street is inevitable if revaluations are deferred. We need to bring forward valuations and to ensure future valuations are undertaken on a more frequent basis; structural change is playing out and the retail landscape is changing before us. Changes in market rents will move with changing demand for space, business rates should also. Retailers should be careful what they wish for when talking about a sales tax alternative, this would create another layer of complexity and retailers with stronger brands might be penalised.”
