Industry faces £1bn annual empty rates bill

IT has been described as one of the biggest threats to the property industry in recent years.

At present owners of industrial property obtain 100% rate relief when buildings are unoccupied. Owners of other commercial property, shops and offices, obtain 100% relief for the first three months and 50% relief after that.

However, from today (April 1) new legislation will see industrial property owners obtain 100% relief for only the first six months that a building is vacant. All other empty commercial properties will have three months' rates relief and then incur the full amount.

Where a property has stood empty for the relevant period prior to April 1 it will become immediately liable for the full rate.

The legislation, announced in the 2007 Budget, is expected to generate an additional £1bn in business rates from buildings that are unoccupied over the next 12 months.

The Government has come under heavy fire from the commercial property industry, which has called for the moves to be scrapped, but it has remained unrepentent.

The campaign to force the Chancellor to re-think the changes is being led by the British Property Federation, which represents companies involved in property ownership and investment.

Last week, local government minister John Healey said the Government would crack down on property owners who tried to dodge the new rates by deliberately vandalising their buildings.

Andrew Gent, of Leeds-based property agents Gent Visick, said the legislation was being introduced following a period of strong economic growth and low interest rates and that the Government had realised there was a danger that demand for land was outstripping supply.

Therefore, said Mr Gent, the Government believes the reforms to the rating legislation are required to incentivise UK business to re-use, redevelop or sub-let vacant property, thus increasing the availability of commercial premises, leading to lower rents and reducing the need for further development on greenfield sites.

“For the distribution and manufacturing sectors the new legislation will have far reaching and unintended consequences,” says Mr Gent. “Admittedly there has been a softening of rents and an increase in incentives offered by landlords to prospective tenants as the owners and tenants of vacant premises seek to secure an occupier to offset this new liability.

“To put this into context, a 160,000 sq ft warehouse built in the late 1980s located off a motorway corridor in the Yorkshire region has a rateable value of £540,000. The 2008/2009 Uniform Business Rate is 46.2p in the pound. The annual cost of the rate liability is £ 249,480. This is only one building.

“This ignores the cost of having to insure an empty building, to provide security, maintain the property and actively promote the marketing of the premises to try and secure a tenant and also ignores any interest payable on monies borrowed to acquire the property or, in the case of a tenant, ignores the liability to pay rent occupied or not.

“The global credit crunch has already severely impacted upon the availability of finance for companies to undertake speculative development. The imposition of empty rates liability will further act as a deterrent to future speculative development even if, in the short term, land values fall.”

Dave Robinson, associate director of industrial and logistics at Jones Lang LaSalle's Leeds office, said: “The impact of legislation could see Yorkshire's industrial market being hardest hit, especially since the speculative industrial market has been particularly buoyant over the last few years.

“Our estimates suggest that currently there's around 10m sq ft of vacant industrial space across the region, however once existing stock is exhausted, a slowdown in development will mean a lack of suitable product which could lead to a rise in rents.

“With industrial developers less likely to build speculative buildings, occupiers may suffer and be forced to consider unsuitable buildings at inflated rents.”

According to Robin Ellis, a director and head of the rating team at CB Richard Ellis in Yorkshire, the legislation couldn't come at a worse time.

He said: “We are in the middle of a global credit crunch and a slowdown in the national economy. The abolition of rating relief on empty property is another blow.

“It's in landlords' and developers' own interests to ensure that their properties are let. The reality is that, in the current climate, some properties will remain vacant. For those developers who build speculatively, rates charges will add further cost and additional risk.

“For those involved in regeneration, where the margins are often lower, the risk is even higher. It is conceivable that the new policy will actually threaten regeneration.”

Claire Murphy, a property partner at law firm hlw in Leeds, believes the decision will add further pressure to an already strained development sector.

“Whilst it may lead to a short-term fall in rents as property owners rush to fill vacant space, the abolition of empty rates relief will undoubtedly add to the financial risk of speculative developments.”

However, Ms Murphy argues that canny developers may exploit a loophole to avoid the rates hike.

She added: “If a property is occupied for six weeks and then becomes vacant again, it reverts back to the standard three or six month 100% rate relief.

“Therefore, short-term lets, and or businesses parachuting in parts of their own operation for six-week periods, will allow them to get round the legislation. This loophole can be exploited any number of times at present.”

Steven Turton, rating team leader for national property consultants Atisreal, agrees that there are ways to minimise the effects of the legislation.

“Empty Rates can only be charged if there is an entry for the property in the rating list, deletion of an entry or postponing entry of new buildings into the rating list will therefore bring savings,” he said.

“Existing buildings which are not capable of occupation should not be entered in the rating list. Constructive vandalism, such as the removal of roofs from industrial buildings, a practice which was commonplace in the 1980s, would achieve such a result.

“Lesser acts, such as the removal of services or finishes, might prima facie appear to achieve the stated aim, but may well fall foul of the 'repair assumption' included in rating legislation.”

He said that although the Government has consulted on anti-avoidance measures in anticipation of acts of constructive vandalism, it has adopted a 'wait and see' approach.

Mr Turton added: “In relation to new buildings, again assessment and therefore liability can prima facie be frustrated by not completing the property; the floor could not be laid or key elements omitted. Lurking in the background however are the powers of local billing authorities to serve completion notices, which effectively assume completion for rating purposes. Nevertheless this an option to explore which may at least buy time.”

But he warns: “Apart from complete demolition there is no panacea for the predicament which such an increasing number of owners and investors will face come April this year. As always the best tactic is to seek professional advice and formulate the most positive plan possible in what is a pretty difficult situation for all involved.”

Mr Gent said that the Government had “overlooked the principle of a willing seller and as most landowners are aware that land is indeed a scarce resource, unless forced to sell by financial necessity, most landowners will simply sit tight”.

He said he expected a scarcity of supply to begin to affect the market which would reduce choice and force occupiers to compete for buildings.

He added: “The fact that the legislation has been brought in without consultation again shows the disregard the Government has for the sector and the desperate need to raise additional taxes through so called 'stealth' means.

“The average person in the street is unlikely to consider this tax as having an impact upon them and as projected this could raise £1bn for local authorities which the Government would otherwise have had to resource.

“The legislation will, however, affect individuals pensions as the majority of large scale commercial developments are funded by pension companies whose returns will now be reduced.”

The legislation will see complete exemption given to listed buildings and properties held by charities and community amateur sports clubs.