Gorgeous Gordon scraps rate relief for empty offices

[Gerrard Winstanley]

Spiteful demolitions, by vandals in suits

Big changes are afoot in the commercial property market. From 1st
April 2008 the government is charging all commercial landlords who
leave their buildings empty full business rate. Previously owners of
these vast empties had been able to claim 'business rate relief',
effectively subsidising them to keep their buildings empty, create
artificial scarcity of office space and inflate rents. Rents in this
cartel 'market' have therefore been on a ratchet system, only allowed
to go up, not down. 

Gorgeous Gordon failed to cave in under pressure from the British
Property Federation (BPF) to keep the scheme. The BPF are not used to
being thwarted by Westminster. They condemned the move as
'irresponsible and likely to impose a severe burden on businesses at
the worst possible time'. The businesses the BPF refer to are probably
all their own members, since all other businesses would benefit from a
real market in office rent which can go down as more offices become
available to rent.

But rather than allow empty buildings to be populated and rents to
drop, the most mean-spirited commercial property owners are
demolishing their buildings. Demolishion balls began to smash up the
massive 9 storey Clerical Medical building on Temple Way in Bristol
just days after business rate relief was withdrawn.

Some people are scared to death that rents will fall. Why? Because
many businesses would go bancrupt if the true value of an empty office
block they own, valued as if it was rented out, were known. If the
building is really rented out it's value may fall by up to 50%!
 


End of business rate relief is kicking commercial property when it is
down 
http://thescotsman.scotsman.com/business/End-of-business-rate-relief.3936519.jp
Published Date: 02 April 2008
By George Kerevan

WELCOME to the last week of the old tax year – the new one begins on
Sunday, 6 April. Why habitually start the financial year on such an
odd date? Back in 1752, when we switched from the Julian to the
Gregorian calendar, we actually lost 11 whole days – 2 September was
followed by 14 September. But in order not to lose 11 days' tax
revenue, the cunning Treasury tacked the missing days on at the end,
which meant moving the beginning of the tax year from 25 March
(originally New Year's Day) to 6 April. It just proves the taxman will
always get you in the end.

Once you have got over contemplating the fact that the upper earnings
limit for national insurance contributions has increased, and that the
small companies' rate of corporation tax has jumped to 22 per cent,
spare a thought for the commercial property sector.

As of yesterday, business rate relief on empty commercial property in
England and Wales was abolished. This controversial move was
introduced in the 2007 Budget. It comes just at the right time to help
plunge the already wobbly commercial property market into a thorough
recession.

Regular readers of this column will know that I remain bemused and
perplexed by the lack of political or media interest in the woes of
the commercial property sector – the folk who provide us with the
offices and factories that we need to run the economy. Besides,
commercial property and the rentals provide underpin for much of our
pension funds. We are all in this together, which is why you should be
worried about the abolition of that business rate relief.

Here is the new tax situation down south (I'll come on to Scotland
shortly). Previously, owners of industrial property obtained 100 per
cent relief from business rates while buildings were unoccupied, while
owners of empty shops or offices got 100 per cent relief for the first
three months and 50 per cent relief thereafter. But now empty retail
and office premises will pay the full whack after the initial first
three months, and industrial and warehouse premises will only get six
months' relief.

This change should net the Treasury a cool £1.3 billion, based on an
estimated 7 per cent of English and Welsh commercial property being
vacant. Other estimates go as high as £3bn. That is a hefty charge to
lay on an industry that is in serious difficulties and it adds to the
perception that Gordon Brown's new administration is less and less
friendly to business.

The UK commercial property sector has been hard hit by rising interest
rates then the onset of the international credit crunch – the first
part of the "real" economy to suffer.

As the banks have become reluctant to lend, funding for the
speculative commercial property market has virtually vanished. Which
means new property development won't go ahead unless there is a
pre-let. And how many pre-lets are there going to be in the current
economic situation – especially from the financial sector itself?

In addition, were it not for some high-profile infrastructure work –
the London Olympics – the construction industry would be in for a
hammering as the developers stop building.

Funds holding large amounts of commercial property are also affected.
A lot of commercial property investment is highly leveraged.
Uncertainty about interest rates, credit availability, property prices
and rents clobbered the market last year, cutting the value of the big
property stocks by a third. The capital value of a lot of commercial
property investments is predicted to fall over the next couple of
years – a prospect not aided by the decision of the banking sector to
try to unload property assets in a bid to boost liquidity.

Now, as if all this was not bad enough, the government has imposed
this new "tax" on un-let commercial property. The Treasury defends the
changes by arguing the tax will act as an incentive to re-let property
more quickly.

However, even well-managed pension or property funds inevitably have
empty units within shopping centres, office blocks or industrial
estates. Void periods are necessary to allow landlords to refurbish
buildings when a tenant leaves. If a tenant goes bust – and we are
moving into that economic territory – it can take months for a
landlord to get the property back from the administrator. Imagining
that one can re-let an office block or shopping centre in three months
is naive.

And only the Treasury could imagine that most property owners
deliberately sit around with empty shops and offices.

How will the property sector react? There is some talk of bulldozing
empty buildings to remove them from the ratings list. More likely
there will be an increased number of rating appeals and valuation
tribunal cases challenging rental values on redundant premises. Many
English local authorities are also worried about the impact on local
regeneration as developers demolish old buildings rather than pay the
new levy.

But I'm more worried by the loss to net rental income of property
owned by pension funds, which could be £150 million a year or more.
This will automatically affect the market value of the property, which
is calculated on the amount of net income they produce as investments.

Here in Scotland, the position is more liberal. For offices and
retail, relief is available for the first three months before a 50 per
cent charge applies – in England they will now pay the full rate.
Industrial properties can still obtain full exemption (though the
number of empty factories lying around can't be that many). This
regime may cushion local companies to a degree but the cold sweeping
the UK property sector will still be felt north of the Border.

My advice to the government is to keep a watching brief on this
unhelpful tax change. If it was going to be introduced, it should have
been years ago at the top of the property boom and not just when
things were going sour.





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