Tinkering with business rates could backfire

Copyright: David Lawson

First published: Property Week March 2008

From April 2008 business rates will be imposed on offices empty for more than three months and industrial for more than six months.

Ministers have developed a fatal dislike of their feet and small firms. That may seem a strange combination but both have suffered from a volley of blunderbuss policies which could also cut a swathe through managed space operators. The latest round of tax reforms aimed at fat City cats and lazy landlords have once again blasted the government in the feet by eroding hard-won goodwill built up with the business community.

   Changes in capital gains tax meant to curb hedge fund plutocrats have caused long-established small businesses to sell up rather than face hefty penalties. Meanwhile, tinkering with business rates to penalise landlords who leave space empty could backfire by making it more difficult for start-ups to find a home.Small firms may lack the power and charisma of multi-nationals but when banks wobble and credit crunches, they quietly get carry the country through recession.  Politicians realise this when doling out grants and encouraging regeneration but their blunderbuss approach could destroy much of that good work.

   Business centres offering small offices and workshops on flexible leases are crucial for start ups and small firms unable or unwilling to commit to conventional leases. Yet moves to shorten the period before imposing rates on empty space could be a hammer blow to operators.  By their nature, some space is always vacant, as short-term tenants come and go. Successful centres will not suffer, as vacancies are unlikely to break the time limit set for rates exemption. Marginal ones may wobble into the red, however, and they are in the very areas the government wants to encourage economic revival.

  The biggest losers will be new centres, as it can take a year to fill even good locations around the south east. In less buoyant regions, breakeven can take twice as long.  Refurbishment of old buildings will also face rate increases while work is underway, which will be another blow to regeneration.  Evans Easyspace has already decided to cut development plans by half, citing extra costs of £500,000 a year. Two new centres in Merseyside and Staffordshire worth £6m with capacity for 400 jobs have been postponed.

   Not everyone is opposed to business rate changes. The Business Centre Association accepts that the new policy could stimulate the sector as landlords and occupiers seek help to fill their surplus space.   But it estimates that the extra financial burden on the sector could reach around £12.5m.  Evans Easyspace managing director Tom Stokes says ministers have failed to realise that if the private sector stops providing flexible space, the government will have to take over.  Or, more accurately, the taxpayer will have to fork out amounts which could be well in excess of those saved by cutting the time limit when empty space is exempt from rates.

  ‘Why should we be penalised for offering space on the terms small businesses want and which allows them to grow and prosper?’ he says.  ‘For our 1,500 clients flexibility is essential to support their business growth and this results in constant movement and churn.  And, by encouraging local business development, we always maintain a vacancy rate of approximately 10% which the government now wants to charge us for.’

   Areas likely to be most affected will be those that most need the seeds of new business and entrepreneurialism, he adds.  These are the areas where buildings take most time to be fully occupied.      The extra burden will be a huge disincentive for companies like Evans which specialise in development in areas with weaker economies. The BCA says the new legislation has not taken into account recent changes in the economic climate.  In the worst effected regions rent levels will not sustain new build

Rather than prohibiting expansion and having a negative impact, online agency Officebroker believes that the new Rating Act will have a positive effect on the serviced sector.   The company predicts that the abolition or reduction of rate relief on dormant commercial properties will result in many investors looking to fill up their empty buildings quickly.  Many will consider turning this into serviced office space, either independently or through an established operator.

  Many serviced office companies run business centres under operating and management agreements in partnership with landlords. These agreements normally mean the landlord picks up the majority of the property costs and the serviced office operator focuses on filling the building and running the business centre in return for a share of the profit.  Jennifer Brooke, Business Centre Association executive director, says managed space providers are well placed to take advantage of the increased number of enquiries from the corporate sector seeking alternatives to conventional leases in favour of the flexibility and inclusive services offered by serviced office providers.  The sector is further encouraged with the increasing number of traditional property landlords who are in negotiations with serviced operators to manage a percentage of their surplus space.