That empty feeling
Annual bills running into hundreds of thousands for empty sheds? Landlords deliberately allowing their property to be vandalised? Can a small change in the rates rules really cause all this? Sam Metcalf investigates.
The warehousing market finds itself in something approaching a crisis.
Not because landlords and developers aren't shifting sheds hand over fist - they are - but because of the abolition of rates relief for empty properties that was slashed in the last Budget and comes into force in April 2008.
Most empty properties receive 100 per cent relief for the first three months of vacancy and 50 per cent of relief thereafter, although empty factories, warehouses and listed buildings receive 100 per cent relief at all times.
But, following the Budget announcement, there will be just three months free of rates for most properties and six months for factories and warehouses, but full rates will become payable thereafter.
The government estimates that this will lead to an additional £3950m of rates revenue in 2008-9.
But industry insiders are furious at the way the bill has been rushed through Parliament.
Jerry Schurder, head of rating at chartered surveyor and property consultancy Gerald Eve and president of the Rating Surveyors' Association, says: "The government has not permitted any real debate on the appropriate length of time during which empty buildings should be exempt from paying rates - either during the bill itself or now in the consultation paper.
"Even though these periods will be covered in the regulations, they don't get a mention in the consultation paper. The government has not asked for anyone's views on this fundamental issue."
Landlords have already been factoring into rent prices the effect this new legislation will have, or simply slashing rents altogether.
Owning a 250,000 sq ft shed with a rental price of £35.25 per sq ft could land any owner with an annual bill of £3575,000, should it remain empty.
Tim Richardson, associate at the Derby office of Innes England, says: "To a certain extent the revision will and already is forcing landlords to review their strategy in relation to empty industrial properties in order to obtain occupiers and remove the empty rates burden.
"We have seen some lowering of quoting rents on poorer quality second- hand space which has been vacant for some time. In some cases the strategy may involve bringing forward refurbishment plans to bring the buildings into a lettable condition.
"In terms of good quality accommodation, we have not as yet seen much change in the strategy by property owners.
Any quality property in a good location should secure a tenant within six months. So far, the only difference with such properties is that the landlords put more pressure on their agents to secure a tenant quickly."
The key to avoiding the new rates, it seems, is to make sure you build good quality warehousing accommodation. But how much of there is that on the market? Well, plenty.
In one of the biggest developments in the Midlands, Birmingham's Stoford Developments has started the building work on a new £310m warehousing and distribution scheme in Leicestershire.
The development has been pre-sold to Prupim, one of the UK's leading real estate investment management companies.
The speculative scheme, being constructed by Laser Build on ten acres acquired from Leicestershire County Council, is scheduled for completion in December 2007.
Stoford director Dan Gallagher says: "This first-class warehouse facility is being built at one of the few prime sites to have become available in the area over the past few years. With its outstanding location close to major motorways and a high-quality supply of labour, we are confident that it will generate strong demand."
Stoford is obviously confident that its new development will not fall foul of the new rates decision, but Schurder believes such schemes could become ever rarer as the impact on investment and property values could cause speculative development to dry up.
Far from creating a readier supply of property and lower rents, as the government intends, the opposite is likely to be the case, especially in non-prime locations.
Schurder says: "Instead of focusing on the core issue for most businesses, a large part of the 46-page consultation document is devoted to anti-avoidance measures. These include the suggestion that if, for example, the roof of a property is removed with the intention of avoiding any rates assessment, the law might be changed so that instead of valuing the property in its actual physical state, as has always been required, it will be valued in its condition before those works were carried out."
Gerald Eve has been working with its clients to try and ensure that they will not be hit hard come April 2008.
But the head of UK public policy at the Royal Institute of Chartered Surveyors, Brian Berry, is worried that the new law might mean that some landlords take drastic action.
He says: "The restriction of rate relief on vacant industrial property from April 2008 could lead to owners deliberately damaging buildings to remove them from the ratings list and exempt them from the empty rate. "It's history repeating itself, as in the 1970s an empty rate relief was introduced as a penal rating surcharge. Instead of creating new lettings it led to the deliberate vandalism to avoid rate liability." Richardson, however, does not take quite such a fatalistic view.
He believes landlords and developers can ride out any costs incurred by factoring them into their original estimates.
He says: "Developers will expect the property to be vacant for a short while following practical completion of the building and this has already been built into their cost appraisals.
The risk element is factored into both the time taken to let the building and the rent achieved.
"Developers will realign their appraisals to incorporate that risk and the potential additional cost can be countered by adjustments to rental terms, land values or even slowing down construction during the latter stages while an occupier is found."
The government's intention seems to be clear: it expects that the measure will reduce the level of vacant commercial property rates - which have reached up to ten per cent in London - through removing a perceived incentive for property owners to ignore their undesirable and unoccupied properties.
It believes that increasing the availability of business premises will help to reduce commercial property rents.
Whether this is borne out by the market can only be speculated, but clearly for property owners the message is clear: make sure you warehousing is attractive to occupiers or face the bill.
