Are business rates more a retail deal breaker than rents?
Business Rate costs are becoming a bigger issue than rents in many sector deals – particularly retail – and are increasingly affecting businesses considering new leases and scuppering deals, according to rating experts at Colliers the global property agency and consulting business.
According to John Webber, Head of Business Rates at Colliers potential occupiers of properties are looking even more carefully at their business rates liabilities, given the100% rates holiday for retail and leisure businesses has now come to an end. As of July 1st although smaller retailers will still receive some reliefs- up to two thirds of their rates bill -many of the larger players in the sectors are now back to paying virtually full rates, due to the £2m cap on any relief for the following nine months of the year.
Research from Colliers just published in its Midsummer Retail report reveals the shocking state of the retail market where rents have fallen by as much as 50% since their peak in the noughties. In what it describes as a “brutal transition”, it estimates that around 1-in-3 shops in the UK are either vacant, not income-producing or occupied on very short-term arrangements.
In such a market and with rents at a low ebb, most retail landlords have been prepared to do deals to keep their properties occupied; and rent frees, short leases and turnover rents are increasingly being agreed with tenants. Rental levels have been approaching their new true level.
But this is not the case with rates.
Unlike rents, business rates cannot be negotiated down on the grounds of current market conditions since they are set by the Government and paid to local authorities over a five-year period at a fixed amount.
“Not only do retailers pay an unfair proportion of the business rates burden ( between a quarter and a third – or £7.6 billion of the £26 billion net collected), but these rates are still tied to higher rental levels in 2015, given the lack of a revaluation since 2017. As a result, they are ridiculously high and totally out of touch with the market we are seeing now.”
Colliers cite examples of where potential occupiers were going to sign new leases based on negotiating great rental deals only to rescind when they looked at their potential rates bills.
John Webber says: “We had a client looking at an ex-Debenhams store where they were able to negotiate a rent of £100,000 a year. However, the property had a rateable value of £700,000 which equates to a rate bill of £350,000 a year. Not surprising it was a deal breaker for the potential occupier.”
“The government needs to bark up the right tree,” says Webber. “Unless it gets its business rates strategy right, space will not be re-occupied. It’s why we’ve got so many voids. Gap has just announced it is closing all its 81 stores in the UK and Ireland. Two of those stores ( Canada Place and Westfield) pay rates of over £500,000 a year- that’s a big liability for another retailer to take on. That’s why we’ve been calling for an extension to the business rates holiday for the retail and hospitality sectors by at least three months and for proper reform of the antiquated rates system.”
The Government response to the consultation on business rates reform is due to report in September. “This won’t come at a moment too soon,” says Webber. “We really do need to rebase the multiplier to something sensible and reform the system. And we need to do it now. How many retailers that are able to limp through until then is yet to be seen,”