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Empty property rates will not achieve government objectives, new study reveals

A new study has revealed that introducing full business rates on empty commercial properties will not achieve government’s objectives.

The government claimed that the imposition of empty rates would encourage landlords to reduce rent levels on their empty commercial properties and bring them back into use.

However, an analysis undertaken for the British Property Federation clearly demonstrates that the empty rate tax has little, if any, bearing on the rents charged by landlords. These are driven mainly by the local demand for property.

Current rent levels are plummeting, not because of empty rates, but because of the extreme drop in demand for property, which is also resulting in soaring vacancy rates. Loss of rental income combined with empty property rates now threatens to push businesses over the edge.

In addition, empty property rates have resulted in a slowdown in regeneration schemes and the premature demolition of existing older buildings, from which partial rents can no longer cover the increased rates bills on the empty units.

The research supports the industry’s widespread belief that the government introduced empty rates simply as a means to collect revenue. Its claim that the move would lower rents and bring empty properties back into use was merely a post-rationalised excuse to justify the measure.

The research was presented personally to John Healey, minister for local government, at a recent meeting attended by BPF president Francis Salway, chief executive Liz Peace CBE, and Julian Lyon of General Motors.

Speaking following the meeting, Liz Peace said:

“The research shows that the government’s justifications for the introduction of the rates were entirely wrong. Empty property rates simply won’t drive down rents in the way government claimed, and they are adding costs to both owners and occupiers at a time when they are least able to bear them.

“Their introduction clearly shows that government either doesn’t understand, or chose to disregard, the fundamentals of the commercial property business.”

According to the analysis, rent levels are dependent upon demand rather than short term carrying costs, such as empty rates.

Empty rates were imposed on the property industry in April 2008. The unprecedented collapse in demand that followed is the main reason rents are dropping and vacancies rising.
Debating the introduction of empty rates in June 2007 in the House of Commons, the then financial secretary to the Treasury John Healey said:

“[Empty rates] create a greater incentive to ensure that vacancy rates are lower rather than higher,” and went on to say, “Our assessment and modelling of the macro-impact of the measure… suggest[s] that rents are likely to come down.”

The study also reveals that the three and six month grace periods currently available to non-industrial and industrial empty properties respectively, are wholly inadequate, with the average vacancy period between normal lettings standing at 15 months, even in a healthy market. In contrast, 2008 saw UK commercial property prices fall their furthest since the 1920’s[1].

The government, however, has continued to pat itself on the back for providing these grace periods. Secretary of State for Communities and Local Government, Hazel Blears, recently said in a Commons debate:

“I am very aware of the impact on commercial and industrial properties. There is a three month full exemption for non-industrial premises, and a six month full exemption for industrial premises… We have a done great deal to help on empty property rates.”[2]


NOTES

From April 2008, business rate relief for empty commercial property was removed. Before that, offices and shops received 50 per cent relief after three months grace, while industrial property was permanently exempt. The change was expected to raise around £950m from 2008 to 09 and £900m from 2009 to 10.

The chancellor announced in the Pre Budget Report in December 2008 that properties with a rateable value below £15,000 (meaning they’re worth around £250,000) would be exempt from paying empty rates between April 2009 and 2010. This move is expected to cost the Exchequer approximately £185m – only one fifth of the anticipated total empty rates revenue for 2009 to 2010.

The 2007 legislation that removed relief for empty property generally included a power for the government to reintroduce it at up to 50 per cent. Government explicitly stated that this was to “ensure that, in the future, the government has the flexibility to respond to prevailing conditions in the property market”[3].

Despite the worst 12 month fall in UK commercial property prices since the 1920s, this power remains unused. (Source: Scott (1921-1970), IPD Annual Index (1971-2007), IPD Monthly Index (2008))

[1] Scott (1921-1970), IPD Annual Index (1971-2007), IPD Monthly Index (2008)
[1] Hansard, 18 November 2008, Small Business Rate Relief Debate, House of Commons.
[1] CLG, July 2007, Modernising Empty Property Relief: A Consultation Paper, para. 1.2.1.

CONTACT

Andrew Panting
BPF
020 7802 0106
apanting@bpf.org.uk

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BPF emty rates research paper